November 30, 2017
The Washington Post proudly told readers that the economy had reached potential GDP in the third quarter of 2017 and therefore future GDP growth will have to be far slower than in the recent past, averaging just 1.8 percent over the next decade. While this is true based on the projections of the Congressional Budget Office (CBO) and most independent forecasters, it would have been worth noting that these projections have been very far from the mark frequently in the past.
CBO and other forecasters completely missed the economic crash caused by the collapse of the housing bubble. At the time, they projected potential productivity growth of 1.9 percent annually, rather than the roughly 1.0 percent rate we have seen over the last decade. CBO also completely missed the upturn in productivity growth that began in 1995. They had thought the slowdown rate of roughly 1.4 percent would continue indefinitely, instead productivity growth increased to close to a 3.0 percent annual rate over the next decade.
It is highly misleading to imply that these productivity growth projections are hard and fast numbers, given the dismal track record of the recent past. In this respect, it is worth noting that productivity growth was over 3.0 percent in the third quarter. If fourth quarter GDP is in line with the most recent projections, it will be well over 2.0 percent for the fourth quarter as well. While it is far too early to say that we are on a higher productivity track, it is certainly a possibility given these numbers.
If productivity growth remains over 2.0 percent, then 3.0 percent is perfectly plausible growth target for reasons that have nothing to do with the proposed tax cut. The rise in productivity growth is more likely due to a tightening of the labor market leading businesses to make greater efforts to economize on their use of labor. This means both that the least productive jobs go unfilled (e.g. greeters at Walmart and the midnight shift at convenience stores) and firms invest more in labor saving technology.
It is also worth noting that the “robots taking our jobs” folks have to believe that the Washington Post is spewing nonsense in this piece. Robots taking our jobs is a story of very rapid productivity growth. The Post is giving us a story of extremely slow productivity growth. Rapid is the opposite of slow — but many of our leading public intellectuals have not yet been able to grasp this fact.
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