Thursday, February 5, 2015

Declining Unemployment and Slow Economic Growth Explained ... The Combination of Productivity Gains Plus Population Growth Will Inevitably Determine Potential Real Economic Growth

Why is our economy growing so slowly? Well, existing and future debt levels are one huge reason. And that's due to the fact that we have already borrowed to spend on lots of things. These burdensome debt obligations will need to be repaid down the road.

And as those debt servicing payments (interest plus principal) accumulate, future economic growth will be restrained as future earnings are used in large part to pay the interest on and retire existing debt. That's just simple math.

But there's another and generally misunderstood huge issue which will limit future economic growth as well. Lagging productivity gains coupled with a slow growing population will cause slow economic growth well into the future, absent an unexpected upswing in private sector investment.

And as the government takes more money from its citizens in the form of taxes, the private part of the economy will necessarily be less of a contributor to future growth than historically has been the case.

U.S. growth may sputter with productivity and population growth so low has the sad story:

"The latest report from the Labor Department showed that productivity fell 1.8% in the fourth quarter. For the year, productivity grew just 0.8%.

That’s not a new trend. Since the recession’s end, productivity hasn’t surpassed a meager 1% in any year. There are different theories around to explain this phenomenon, including the lack of investment. Also see: The third industrial revolution is basically dead

A quick estimate of the growth potential of the U.S. economy is just the sum of productivity growth plus the growth in working-age population.

As the chart shows, it’s not much.

Even more sobering is the fact that the working-age population growth is set to decline — from roughly 0.5% right now, to just 0.2% in 10 years’ time.

In 2000 — the last year, incidentally, that there was growth of over 4% for the U.S. economy — the working age population grew 2.1%."

Summing Up

Because of both low productivity and a slow growing population, we are experiencing concurrently both a declining unemployment rate and historically slow economic growth.

It's not a pretty picture, but it seems to be an accurate one.

We need to stop looking to government  programs as the solution to our economic woes, including employment increases as well as wage gains, and start looking to the private sector as the engine of future economic growth. Because it is.

That's my take.

Thanks. Bob.

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