May 05, 2005

America's Natural Rate of Growth

For decades, the natural rate of growth of the US economy was 3%. In a decidedly mixed article The Economist pegs it at 3.5%-4%. This is a huge difference. At 3%, the US started surpassing western Europe as their soft socialism sclerotized their national economies. If we're truly entering an era where our economy naturally grows even faster, the gap will not only persist, will not only keep growing, the gap's growth will accelerate.

I do wonder if this natural growth rate estimate is real. The Economist's pessimists would have nothing to hang their hat on regarding the most recent quarter's growth. At 3.1% it is slightly above the decades long postwar consensus on the US' natural rate of growth. It's only against this new, higher estimate that it falls somewhat short. The preceding quarter's growth figure, which was preliminarily estimated at the same 3.1% generated similar concerns until it was revised to 3.8% as better data came in.

So, is the US economy just in an unusual growth spurt that will settle back to the old 3% figure over the long haul? We're certainly in an era of longer cycles. I recall earlier articles in the conservative press worrying that we were headed toward an era of 2.5% long term growth. Those overly pessimistic articles might be matched by overly optimistic estimates today. In any case, it's useful to keep the long-term history in mind when reading the latest "are we falling behind" article.

Posted by TMLutas at May 5, 2005 07:59 AM