An NYT Economix blognote discussed a new paper by two economists (James Stock and Mark Watson) that purports to give us the bad news that we are likely to see a permanent slowdown in growth. Stock and Watson attribute this slowdown to a slower rate of growth of the labor force.
Before anyone gets too upset about the prospect of slower growth, it is worth reflecting for a moment on the different possible causes of slower growth. There are essentially four:
1) slower productivity growth;
2) higher unemployment or underemployment (involuntary);
3) slower population growth;
4) reduced labor force participation or hours worked.
The first two of these causes of slower growth are unambiguously bad. If productivity growth slows, then we are seeing less improvement in living standard for each hour we work. That is definitely bad news. However, nothing in the Stock and Watson paper suggests that productivity growth has slowed or will anytime soon.
I'll come back to reason 2, but let's look at reason 3 and 4 for a moment. Reason 3 is clearly true. Our population growth is slowing, as people are having fewer kids than they did in the 40s, 50s, and 60s. This means that we will have slower overall growth. However this could be associated with faster per capita growth. Each worker will now have more capital to work with, which could mean that they are more productive. Fewer people also means that there will be less strain on the infrastructure and the environment. In other words, if this is the reason why growth is slowing, there is no obvious cause for concern.
Reason 4 is a similar story but from a slightly different angle. Suppose people choose to retire early, take longer vacations, or have shorter workweeks. All of these practices would lead to slower growth, but it is hard to see anything negative in this picture. If people decide that they would rather work 10 percent less and have 10 percent less income, there is no reason that economists or anyone else should be upset. This also has the same benefits for the infrastructure and environment as the slower population growth noted above.
In short, if growth is expected to slow for reasons 3 and 4, as Stock and Watson argue in their paper, there is no obvious reason for anyone to be concerned. This is certainly not bad news. In fact it is arguable it is good news given the problem of global warming and other environmental concerns.
Finally, we have reason number 2, where growth slows because workers can't get work. This is undeniably bad news, especially in a country like the United States where the support system for the unemployed is minimal. In fact, contrary to Stock and Watson, this is the main reason that growth has slowed since the downturn in 2007. There have been sharp declines in the overall employment to population ratio, but this drop has been concentrated among younger workers. These are not people who we could plausibly believe had opted to drop out of the workforce voluntarily.
The good part of the story is that we know how to restore growth to its former trend in this case: spend more money to create demand. Unfortunately, the politics are such that we are not likely to see this happen anytime soon.