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Work and prosperity
14 December 2012

Heresy of the week: What if a return to full economic growth isn’t possible?

Keynesians and Hayekians don’t agree on the content of economic policy, but they do agree that economic policy is terribly important.

But what if it isn’t? What if the forces determining our growth prospects are largely beyond the control of policy makers?

Jeremy Grantham, investment guru and lead author of the GMO Quarterly Newsletter, argues that external factors are indeed in the driving seat and that most of them point in the wrong direction: 

  • "The US GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. 
  • "Yet most business people (and the Fed) assume that economic growth will recover to its old rates. Going forward, GDP growth (conventionally measured) for the US is likely to be about only 1.4% a year, and adjusted growth about 0.9%." 

So what is it that’s holding us back? Grantham identifies a range of factors, beginning with demographics: 

  • "Population growth that peaked in the US at over 1.5% a year in the 1970s will bob along at less than half a percent. This is pretty much baked into the demographic pie. 
  • "After adjusting for fewer hours worked per person, man-hours worked annually are likely to be growing at only 0.2% a year." 

That’s a downer, to be sure – but increases in productivity will make up for the missing man-hours, won’t they? Er, well, on that front there’s good news and bad news, with the emphasis on the bad: 

  • "Productivity in manufacturing has been high and is expected to stay high, but manufacturing is now only 9% of the US economy, down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or so. There is a limit as to how much this small segment can add to total productivity. 
  • "Growth in service productivity in contrast is low and declining. Total productivity is calculated to be just 1.3% through 2030, if we use current accounting methods." 

It gets worse. For most of the 20th century, economic growth was sped along by cheap energy – especially oil. Grantham argues that (shale gas aside) the world is all out of the cheap stuff, with knock-on consequences for growth.

Of course, predictions of resource shortages are nothing new. They’ve been made before and they’ve been wrong. But not, it seems, this time: 

  • "Measuring the non-resource balance of the economy… The share of resource costs rose by an astonishing 4% of total GDP between 2002 and today. 
  • "It thus reduced the growth of the nonresource part of GDP by fully 0.4% a year. Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify." 

If Grantham is right and the developed world has to get used to much lower levels of growth, how does one explain the relatively high levels of growth we were seeing as recently as the credit crunch in 2007? The clue, of course, is in the question.

It was borrowing that kept growth rates up in the previous decade, but when the money ran out, the truth was revealed.

Some people call this a crisis of capitalism. In fact, a permanent state of low growth is a crisis for all those who think that we can continue running the economy on debt.


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