SUMMARY - Fully Grown_ Why a Stagnant Economy Is a Sign of Success - Dietrich Vollrath



Here is a summary of the key points:

  • Economic growth has slowed significantly since the early 2000s, with GDP per capita growth declining from around 2.5% per year to just 1% per year.

  • Slower growth in physical capital (buildings, equipment, etc) explains only about 0.2 percentage points of this decline.

  • Slower growth in human capital (skills, education, hours worked) explains around 0.8 percentage points of the decline.

  • Together, slower human and physical capital growth account for only about 1 percentage point of the 1.5 percentage point slowdown.

  • There must be other factors beyond human and physical capital responsible for the remainder of the growth slowdown.

  • These residual factors are tentatively attributed to slower productivity growth, which could be due to things like less dynamism/competition, regulation, or measurement issues.

  • Further analysis is needed to quantify the relative importance of these residual productivity factors compared to demographics and capital inputs in explaining the post-2000 growth slowdown.

    Here is a summary of the key points about how structural shifts in the economy contributed to slower productivity growth:

  • The shift from manufacturing to services reduced aggregate productivity growth, since manufacturing has historically had higher productivity growth than many service industries. Manufacturing's share of employment fell from 25% in 1950 to 8% today.

  • Similarly, the declining share of goods production and increasing share of services slowed growth. Goods can be more easily substituted, automated and traded than services.

  • The rise of low-productivity industries like healthcare and education put downward pressure on overall productivity growth, as more resources went to these sectors with intrinsically lower productivity growth.

  • Information and communications technology fueled rapid productivity growth in durable goods manufacturing in the 1990s and 2000s. But much service sector productivity relies on hard-to-automate tasks.

  • Increased regulation may have allocated more labor and capital to low-productivity comply with rules rather than higher-value production. This composition effect depressed measured productivity growth.

In summary, the shift in economic activity from high-productivity growth goods production like manufacturing toward slower-growing service industries appears to explain a sizable portion of the productivity growth slowdown. Compositional shifts in economic activity provide a compelling partial explanation.

Here is a summary of the key points:

  • Productivity growth has slowed down in recent decades, declining from 1.51% per year in the 20th century to 1.26% in the 21st century.

  • There has been a shift in the composition of GDP from goods-producing industries like manufacturing to service industries like healthcare.

  • Goods industries tend to have higher productivity growth than service industries. Calculations suggest if industry shares remained at 1980 levels, productivity growth would have been 0.2 percentage points higher from 2000-2015, explaining most of the slowdown.

  • The shift to services lowered productivity growth because service industries intrinsically have lower productivity growth rates compared to manufacturing. For example, manufacturing productivity grew 1.36% per year while healthcare productivity declined -0.23% per year from 2000-2015.

  • The shift to services reflects economic success and rising incomes, as demand grows for services when basic material needs are met.

  • So while the service shift contributed to slower productivity growth, it was a natural consequence of economic progress rather than a sign of failure or decline.

    Here is a summary of the key points on whether government policies caused the slowdown in economic growth:

  • Tax rates and regulatory burden increased substantially from the 1970s to the 2000s, which some argue suppressed growth. However, the evidence is mixed.

  • The top marginal income tax rate did fall from 70% in the 1970s to 28% by 1988. However, the effective tax rate paid by the top 1% has changed little since the 1960s. This suggests tax changes are unlikely to explain much of the slowdown.

  • Regulatory restrictions have increased over time in areas like occupational licensing, land use regulation, and environmental regulation. This increased burden could negatively impact productivity.

  • However, the timing of when growth slowed does not match clearly with changes in regulation and taxes. Growth was strong in the 1980s despite high marginal tax rates. The productivity slowdown started in the 1970s before major regulatory expansions.

  • Government spending on social programs like Medicare and Medicaid has increased substantially. This could potentially crowd out private investment and reduce growth. But the empirical evidence on crowding out is mixed.

  • The data suggests changes in taxes, spending and regulation do not account for a majority of the slowdown in economic growth. Other factors like slowing innovation, decreased competition, and reduced worker mobility seem to play larger roles.

In summary, while government policies may create some drag on growth at the margins, they do not appear to be the primary driver of the broad-based slowdown in productivity and economic growth observed in recent decades. The causes likely stem more from private sector forces like market power and slowed innovation.

Here is a summary of the key points from Table 17.1:

  • Demographic shifts such as declining fertility rates and the aging population accounted for about 0.4 percentage points of the 1.0 percentage point slowdown in output per person. These shifts are partly a result of economic success and rising living standards.

  • The shift from goods to services production accounted for about 0.2 percentage points of the slowdown. This shift is natural as incomes rise and does not indicate failure.

  • Rising inequality, changes in taxes and regulation, and trade with China combined accounted for only about 0.1 percentage points of the slowdown based on empirical estimates.

  • The remaining 0.3 percentage points of the slowdown is attributed to decreased dynamism and reduced human capital growth. These factors could potentially reflect economic policy failures.

  • Overall, the evidence indicates much of the growth slowdown stemmed from the unintended consequences of economic success and rising living standards, rather than major policy failures. Reversing the slowdown would require rolling back advances in standards of living that few would support.

    Here is a summary of the key points on market power, productivity, and investment:

  • Market concentration and profit margins have increased in many industries since the 1980s, indicating rising market power of firms.

  • Higher markups can artificially raise measured productivity growth if output shifts toward high markup sectors, even though total value added is unchanged.

  • However, market power reduces incentives for firms to invest and innovate to gain market share. This may explain some of the slowdown in capital investment since the early 2000s.

  • The rise of "superstar" firms with high profits shows market power enables winners to take most gains rather than spreading evenly.

  • Market power can also slow reallocation of resources toward more productive firms. Lack of competitive pressure allows inefficient firms to survive.

  • Some degree of market power is inevitable. Antitrust policy should aim for balance between incentives and competition.

  • Effects of market power on productivity statistics make it an unreliable metric for progress. Broader measures of economic performance and welfare are needed.

  • Policies to address market power should focus on barriers to competition and enabling mobility of resources, rather than narrow productivity metrics.

In summary, the links between market power, productivity, investment, and progress are complex. While rising market power may distort productivity statistics, the broader economic and welfare implications are more important. Policy should aim to balance incentives and competition.

Here is a summary of the key points I gathered from the provided index:

  • Productivity growth has slowed in recent decades despite technological progress. There are differences between productivity and technology.

  • Labor force participation and human capital accumulation are important historical drivers of growth.

  • Physical capital investment affects productivity. Market power can reduce investment incentives.

  • Regulation and trade influence productivity through impacts on reallocation and competition.

  • The shift from goods to services has affected measured productivity growth. How to accurately measure services output is debated.

  • Market power has increased in many industries, possibly dampening growth. Causes and policy implications are disputed.

  • Inequality has risen with slowing productivity growth but the relationship is complex. Theories exist on influence in both directions.

  • Understanding local and sectoral differences can provide insights into the productivity slowdown. Metro areas and industries show varying trends.

  • Multiple factors are likely involved in declining growth, including demographics, capital investment, regulation, trade, and market power. Their interactions and measurement are active research areas.

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