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Speed Limit 2.2

03/25/2015

When I was a young economics student in the last century, a GDP growth rate of 4% was good but not extraordinary.  It was at this rate the economy could grow without igniting inflation.  By the beginning of the Global Financial Crisis (GFC) in 2008, that maximum growth rate was close to 2.8%.  Today, it is probably only 2.2%.

So, why has this maximum safe speed continued to drop, especially since the recovery began in 2009?  One primary reason is that state and local government spending decreased significantly since the GFC and is now just getting back to 2008 levels.  Another reason is that consumers have worked hard on reducing debt by spending less (good in the long run but bad in the short run).  Also, our exports have suffered as the dollar rose against the currency of most other nations.

But, enough attention has not been paid to our aging workforce   The current inflow of new workers is not replacing the outflow of baby boomers retiring or just dying.  The workforce used to grow at 0.9% per year but is now growing at only 0.6% a year — sounds small but actually makes a big difference.  Productivity per worker used to grow at 1.9% per year but is now expected to grow at only 1.6% going forward, as the benefits of the computer revolution fade into diminishing returns.

Why didn’t Japan benefit as much as the U.S. from the computer revolution?  It doesn’t matter how much your productivity gains are if your workforce is decreasing.

In 1970, just 9.9% of our population was over the age of 65.  By 2010, that had increased to 13.0% and is expected to reach 16.8% by 2020.  We’re getting old!  The baby bust since 1970 is hurting us.  Forget Paul Ehrlich’s classic best-seller The Population Bomb in 1968.  We baby boomers should have been making more babies instead of just making love.  That chicken has come home!

While I religiously avoid inflammatory rhetoric, I must ignore my nationalistic leanings to express my gratitude for those brave undocumented workers who come great distances to help their young families and to help our old ones.  We need you!

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