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A Better Way to Measure Growth

October 8, 2013 by Ike Brannon

One of the ostensible reasons the Fed gave for its recent decision to hold off on the taper is that the economic data haven’t been that great. Chairman Ben Bernanke specifically pointed to the moribund economic growth rates of late as an example of the economy’s doldrums. But while GDP growth is the most salient statistic that exists to tell us how the economy is doing, we might not be reading it correctly — and I include our esteemed Fed Chairman in that royal “we.”

One point that no one seems to get is that since the labor force isn't growing (it's barely growing in the U.S., and isn't growing at all in Europe), the 2% growth of today is akin to 3% growth of the past, when the labor market was growing at a brisk 1% rate and we maintained an average productivity growth rate of 2%. Per capita GDP is a better statistical measure to use for making such comparisons over time, but no one bothers to do so.

More growth would be great, and we do, in fact, have a recessionary gap, with unemployed workers and underused capital sitting on the sideline. So we ought to be able to have economic growth above productivity growth for a while — even for a couple or three years. But without more workers, productivity is the binding constraint on growth, unless people are going to work more hours, or put off retirement, or take less vacation — and even these improvements cannot be maintained forever.

We may need to start ratcheting expectations down a bit, or else (my solution) spend more time paying attention to the factors that would lead to more productivity growth.

And while we’re talking about productivity, let’s remember we may not be measuring it right. The economist Michael Mandel at the Progressive Policy Institute has done some interesting work showing that a fair amount of the (historically high) productivity growth numbers of the last decade were artifacts of how international trade's contribution to this gets mis-measured. Mandel makes the case that if a company outsources more, it can look like fewer workers in the U.S. are getting more done, when in reality it is just substituting labor abroad for domestic labor. The Bureau of Economic Analysis essentially agreed with his research and has taken steps to correct this problem.

Ken Rogoff and Carmen Reinhardt famously predicted that economic recoveries are slow after financial collapses, and gave a number of compelling reasons why that might be the case. But slowing labor force growth and remedying a flawed statistical input may be the real reasons why GDP growth has consistently disappointed the last three years.

That, and the fact that no one in government seems terribly interested in taking steps to encourage productivity improvements in the economy.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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