September 26, 2016

At 2 Percent Growth Rate, It Would Take 35 Years to Double the Size of the US Economy

The Congressional Budget Office (CBO) recently released its 2016 Long-Term Budget Outlook about our worrisome fiscal situation. In all the data, no trend is more striking than the projection of an upper bound on real economic growth in the United States of 2.2 percent over the next 30 years. The average projected annual growth rate over the next decade, between 2016 and 2026, is projected to be even lower at 1.9 percent—and that unrealistically assumes that there will be no recession or slowdown. The slower growth means that incomes grow more slowly and efforts to reduce poverty become much harder.

The payoff of higher and sustained economic growth in our lives is hard to overstate. The following figure illustrates this point:

At the end of 2015, the US gross domestic product (GDP) stood at $18.3 trillion. If the economy were to grow from that point on at a long-term, inflation-adjusted rate of just 2 percent per year, then it would take 35 years before the size of the economy doubles.

If the economy were to grow at a sustained average rate of 3 percent per year, it would take 23.5 years to double—that’s 11.5 fewer years than the scenario above—and 47 years to quadruple America’s GDP. And, if the economy were to grow at a sustained average rate of 4 percent, it would take only 17.7 years to double and 35.4 years to quadruple. At rollicking 5 percent growth rate, the US economy would double in 14.2 years and quadruple in 28.4 years. 

In other words, at a growth rate of 2 percent, the economy would double in a little less than two generations, and at 5 percent, it would double in much less than a generation.

As tables 1 and 2 show, when growth rates are higher, people are not only getting rich faster; they are also getting richer. When the economy grows at a rate of 5 percent, the GDP is spread across a smaller number of people by the time it quadruples in 28 years, such that the per-person average is higher, at $189,000, than when the economy grows more slowly at a rate of 2 percent. At this lower growth rate, GDP quadruples in 70 years, which means the population is much bigger by the time quadrupling of GDP occurs. That, in turn, results in a lower per-person GDP of $156,000. 

Faster economic growth is also likely to engender greater benefits to the bottom 50 percent, which includes young people just starting their careers, retirees trying to stretch their fixed incomes with part-time work, and those populations that are caught in intergenerational cycles of poverty.*

According to the Census Bureau, median household income today remains significantly below its 2007 level, the year the US economy peaked before falling into recession. The median household had an income of $53,657 in 2014 (the most recent year available). In 2007, however, household income stood at $57,357 (see US Bureau of the Census, “Income and Poverty in the United States: 2014,” September 2015, table A-1). The same story can be told for median family income, which stood at $62,611 at the beginning of the recession and is not even close to recovering that level today (data from the National Association of Realtors and Haver Analytics are available upon request).

This nearly $4,000 decline in household income is perhaps due to the poor shape of the US labor market. It has taken 8 years for total employment to return to its prerecession level, as opposed to the more typical 2–3 years following the onset of recession. For instance, it took only 26 months for total employment to recover from the 1981 depression.

Income from work constitutes a far larger percentage of family income in the bottom half of the income distribution than in the top half, where investment income and noncash compensation far more frequently supplement wages and salaries. As such, those in the bottom half feel the effects of slower economic growth right where it hurts the most—in the income they have to spend on today’s necessities and tomorrow’s requirements (education, health care, and retirement).

Slow growth too often finds company in increasing poverty. Thus, the best antipoverty measure policymakers can put in place is faster economic growth. The good news is that nations that take to heart Adam Smith’s prescription of “peace, easy taxes, and a tolerable administration of justice”  enjoy higher growth rates, higher levels of entrepreneurship and innovation, and—most important—lower poverty rates than do countries with less economic freedom.

Small boosts to growth result in a more rapid doubling and quadrupling of the size of the economy and the well-being of people for whom substantial increases in income are truly transformative.

* This nearly self-evident point is borne out by the historical record. For instance, slow growth in the United States from 1979 to 1983 resulted in a 5 percent fall in the average real income in the bottom 20 percent of the income distribution. The more rapid growth from 1984 to 1988, however, resulted in a 6 percent increase in the real income of the same quintile. The differences for the bottom 50 percent over the same period were even more dramatic. Real incomes (2015 dollars) fell by 5.7 percent between 1979 and 1983 and grew by 7.6 percent between 1984 and 1988 (US Census Bureau, “Income and Poverty in the United States: 2015,” table A-2, and the authors’ calculations). A broader view on the association between low-income growth and the pace of economic activity can be found in this 2001 World Bank study: David Dollar and Aart Kray, “Growth Is Good for the Poor” (Policy Research Working Paper No. 2587, World Bank, Washington, DC, April 2001).

Data note: The authors made their estimates of the number of years to double and quadruple the size of the US economy following the “rule of 69.3.” That rule, compared with the more familiar rule of 72, provides slightly more accurate estimates of doubling when continuous compounding is involved, as it is in our examples. We adjusted the results from the compounding using the Eckart-McHale second order rule for refining the estimates for small growth rates.

The starting point for our estimates of GDP, at different rates of growth, was the first quarter of 2016, when annual GDP was $18.3 trillion. (See US Department of Commerce, Bureau of Economic Analysis, “Gross Domestic Product, First Quarter 2016 (Third Estimate),” June 28, 2016, table 3, at http://www.bea.gov/newsreleases/national/gdp/2016/pdf/gdp1q16_3rd.pdf.) This estimate and the estimates calculated based on compound growth were divided by the total US population for the appropriate current or future year of the estimate. The population projections used to create per capita GDP come from the US Census Bureau and from extrapolations beyond 2060 made by the authors. (See US Bureau of the Census, “2014 National Population Projections, 2015–2060,” table 1, at http://www.census.gov/population/projections/data/national/2014/summarytables.html. Authors’ estimates available upon request.)