Research Affiliates: 1% ... The New Normal Growth Rate?

November 16, 2012

Unless we change our policies to encourage immigration, employment and investment, our new normal growth rate will be 1%.


In 1981 David Stockman, the Director of the Office of Management and Budget for newly elected President Ronald Reagan, published a budget using such an optimistic set of assumptions that it was derisively nicknamed Rosy Scenario. In Stockman’s 1986 book, The Triumph of Politics, he explained in vivid detail his disillusionment with the politics that thwarted the spending reforms that were supposed to accompany Reagan’s tax cuts. He also expressed his fear for the county’s future, given the explosion in deficits and accumulation of debt. While dreading the consequences of the deficits and debt of the 1980s seems quaint from today’s perspective, and memories of the Reagan era are fading into history, Rosy Scenario lives on.

Too many of today’s fiscal projections extrapolate past growth trends without adjusting for the dramatic deterioration in our future growth outlook. The 2.5% long-term potential growth assumptions for the U.S. economy held out by the White House and Congressional Budget Office are wildly optimistic; indeed, the White House forecast centers on 4% real growth during the proposed recovery years of 2014–2017. While we wouldn’t challenge the idea that such growth is possible, even the White House concedes that these are aggressive assumptions. Rosy Scenario indeed.

The Rosy forecasts are far too tightly anchored to past growth rates, during a demographic “sweet spot” for the developed world. They ignore the headwinds that have been central to our research in the past few years—the “3-D Hurricane” of deficits, debt, and demography. Specifically, the challenges to a Rosy Scenario arise in three core areas: population growth, employment rate growth, and productivity.

Population Growth
Our population growth has slowed and will continue to slow. Data from the U.S. Census Bureau shows that the annual growth of the U.S. population declined from an average of 1.8% in the 1950s to 1.0% by the 1970s and then down to 0.9% in recent years. This waning growth of our population should not be a surprise; population growth rates have already dropped to zero or less in Japan and much of Europe. The Census Bureau (Ortman and Guarneri, 2009) projects in their low immigration scenario that our population growth rate will decline to 0.8% in the next two decades.

Even these census projections do not take account of the possible demographic impact of the worst economic environment since the Great Depression. We don’t yet know the full effect of the Great Recession on our population growth, but the experience of the 1930s is instructive. During the first two decades of the 20th century, the U.S. population grew by an average of 1.5% per year. Then, population growth dropped by more than half to only 0.7% per year during the 1930s.

We have strong evidence that a similar drop in population growth is occurring now. The household formation rate has plummeted and with it the fertility rate. The Centers for Disease Control reports: “The 2011 preliminary number of U.S. births was 3,953,593, 1% less (or 45,793 fewer) births than in 2010; the general fertility rate (63.2 per 1,000 women age 15–44 years) declined to the lowest rate ever reported for the United States.



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