Short summary
The decline in growth in per capita real GDP since the turn of the century is mainly attributable to demographic change, as baby boomers retire. A fall in the growth residual is the remaining significant contributor, which is mainly caused by a shift to consumption of services, which experience lower productivity growth. Demographic change and a shift to services are features of high living standards, which suggests that the growth slowdown is a sign of success. Other factors played a very small or no role in the slowdown. A decline in the reallocation of firms and workers and a decline in geographic mobility played a minor roles in the slowdown, and these contributors are not really signs of success. Other explanations such as inequality, the rise of China and taxation and regulation had no apparent role, or an ambiguous role in the case of market power, in the slowdown, but may have had distributional consequences. Immigration is a means of slowing the slowdown, while other policies may pertain more to distribution than growth.
Longer summary
Fully Grown is a fantastic introduction to and explanation of the two-decade period of slow growth in the US economy.
Fully Grown starts with the recognition of a slowdown in per capita real GDP, which is a concern because it suggests living standards are growing less quickly than if growth had remained on its 1950-2000 path of 2.25% per person. Instead, real GDP per capita has grown at about 1% per year over the last two decades, a substantial slowdown, resulting in living standards being lower by 25% compared to the 1950-2000 path. The issue isn’t a fall in living standards, or falling behind other countries, but a lost opportunity. The book clinically examines the reasons for this slowdown.
Importantly, the author, Dietrich Vollrath, chooses to define the slowdown in terms of growth in living standards (real GDP per capita), instead of productivity per worker. He does this because ultimately we care more about the former than the latter. This choice is critical because it leads to different explanations of the slowdown.
In defining the slowdown as the reduction in real GDP per capita, or living standards, Vollrath is considering how production is spread across the population, not across workers. This allows demographics to play a major role in the explanation of the slowdown. By having slower growth in, or even less, human capital (less work hours and/or less skill) employed relative to the population, per capita production may grow more slowly or fall. Vollrath finds that a reduction in human capital contributes 1.11 percentage points (pp) of the 1.25 pp fall in growth in real GDP per capita in the period 2000-2016 – it explains almost all of the slowdown. The residual explains 0.25 pp, while physical capital actually contributes 0.1pp per year to growth.
The major driver of the reduction in human capital is the demographic change from changes in family size, which are the result of increased living standards and reproductive control – signs of success. Of the 1.11 pp that human capital contributed to the 1.25 pp fall in real GDP per capita growth, 0.4pp was from a fall in the growth rate of the educational level of the average worker, and 0.8pp from a reduction in the growth rate of workers per capita, as the baby boomers retired. The growth rate of the average experience level and number of hours worked per person actually rose slightly in the period 2000-2016 and therefore contributed positively to growth in real GDP per capita.
With human capital contributing much of the slowdown in economic growth per capita, it was a fall in fertility rates and therefore family size that explains this fall. The decline in fertility and family size is seen across all populations as living standards rise and is therefore a symptom of success. It has an economic rationale. Vollrath invokes Gary Becker’s work on the economics of the family. As family income rises, the opportunity cost of having kids rises. Families choose family size in a way that equates the marginal utility of a child with the marginal utility of income. The optimal family size is found where the marginal utilities are equal. As income increases, families have fewer children. Therefore, the decline in fertility is a function of economic growth and therefore a symptom of success.
Similarly, labour-saving devices raised the cost of having children because it facilitated the movement of women into the workforce. This also made it easier to remain single (as women become more financially independent), which reduces fertility. Women also gained greater control over their fertility through better contraception, which is associated with growth in human capital in women.
These changes and decisions change the demographics of the future. Human capital lead to a 1.11 pp reduction in economic growth, and Vollrath is willing to attribute, at minimum, 0.8 pp directly to population ageing and smaller families (he subtracts 0.31 pp because the changes in education and hours worked per person may not relate strictly to population ageing). Therefore, population ageing accounts for 0.8 pp of the 1.25 pp fall in growth in real GDP per capita, or about two-thirds.
Of the remainder of the fall in growth in real GDP per capita, the residual, or productivity, accounts for 0.25 pp, or about one-fifth. This is the bucket in which anything not related to human capital or physical capital accumulation, sits. Vollrath considers whether slower growth in the residual could be due to mismeasuring GDP, but he seems to lean against that argument. He considers whether innovation – a major cause of productivity growth – is getting harder, and while showing that it is, this doesn’t mean that less innovation is occurring, and indeed, there is evidence that innovation continues apace. He instead finds some contribution to the slowdown from the shift from consuming goods to consuming services, a sign of an advanced economy and therefore a sign of success. He finds some contribution from reallocating resources between uses, such as workers switching jobs, and capital being redeployed in new business ventures and old business ventures exiting the market. Geographic mobility is also a small factor. What does not contribute to the slowdown is inequality, competition from China, or increased taxation or regulation. Market power’s role is ambiguous. Market power has increased since the 1980s, and while it can lead to inefficiency, it can also see production shift to more efficient firms. And indeed, market power is required for innovation to occur. Housing restrictions can have an impact and slow the reallocation of resources to more productive cities. Vollrath labels the lack of mobility of resources as ‘failures’, while the shift to services is a success. The shift to services is also the largest contributor to the fall in residual growth, which adds to his thesis that most of the slowdown is a symptom of success.
Vollrath provides final numbers for the contributors to the slowdown:
Successes
-0.8pp — Effects of ageing and smaller family sizes
-0.2pp — The shift from goods to services
Failures
-0.15pp — The decline in reallocation of workers and firms
-0.1pp — The decline in geographic mobility
0 — Taxation and regulation, increased inequality, trade with China
When subtracted from the longer-run growth rate of 2.25% for real GDP per capita, the above numbers show a 1% growth rate for the period 2000-2016.
There were many interesting and useful technical and empirical points made about the components making up the residual. I’ve only mentioned their role briefly because they play such a small role in the overall explanation for the slowdown. However, these make up a substantial part of the book, and I may write about these at a later date.