Economic Growth

The Cumulative Effect of Small Changes in Economic Growth

Jeremy HorpedahlLeave a comment

A recent post from the blogger (Substacker?) Cremieux called Rich Country, Poor Country showed how small differences in economic growth add up over time. Because he used nominal GDP growth rates, I don’t think that post is exactly the right way to analyze the question, but I still think it’s a very important one. So in this post I will offer, not necessarily a critique of that post, but perhaps a better way of looking at the data.

For the data, I will use the Maddison Project Database, which attempts to create comparable GDP per capita estimates for countries going back as far as possible… for some, back thousands of years, but for most countries at least the last 100 years. And the estimates are stated in modern, purchasing power adjusted dollars, so they should be roughly comparable over time (if you think these estimates are a bit ambitious, please note that they are scaled back significantly from Angus Maddison’s original data, which had an estimate for every country going back to the year 1 AD). The most recent year in the data is currently 2022, so if I slip up in this post and say “today,” I mean 2022, or roughly today in the long sweep of history.

Like Cremieux’s post, I am interested in how much slightly lower economic growth rates can add up over time. Or even not so slightly lower growth rates, like 1 percentage point less per year — this is a huge number, because the compound annual average growth rate for the US from 1800 to 2022 is 1.42%. So let’s look at the data way back to 1800 (the first year the MPD gives us continuous annual estimates for the US) to see how changes in growth rates affect long-term growth.

It probably won’t surprise you that if our 1.42% growth rate had been 1 percentage point lower, the US would be much poorer today, but to put a precise number on it, we would be about where Bolivia is today (that is, ranked 116th out of the 169 countries in the MP Database). Note: I’m using a logarithmic scale, both so it’s easier to see the differences and because this is standard for showing long-run growth rates.

What is very interesting, I think, is that if our growth rate had been just 0.25 percentage points lower per year since 1800, we would be about where Spain is. Now, Spain is certainly a fine, modern developed country (they rank 34th of the 169 MPD countries). But Spain’s growth has not been spectacular lately. Average income in Spain is almost half of the US today (purchasing power adjusted!), which is another way to say that just 0.25 percentage points lower over 222 years reduces your growth rate by half.

That’s the power of economic growth.

And if our growth rate had been 0.5 percentage points lower, we’d be about where the big former Communist countries are today (both China and the former countries of the USSR are about equal today — about 1/3 of the income of the US).

What if we perform the same analysis for a shorter time horizon? If we go back 50 years to 1972, the effects are not quite as dramatic, but still visible.

Our cumulative annual growth rate since 1972 has been a bit higher than the long-run average, around 1.68%. Under these four alternative growth scenarios since 1972, the comparable countries don’t sound so bad. It probably wouldn’t be a huge deal if we were only at Australia’s level, losing just about a decade of economic growth. But it would be a huge failure if we were only at Italy’s current level of development. Under that 1 percentage point lower growth scenario, we would have had no net growth since about year 2000, which has roughly been the case for Italy.

All of these alternative scenarios show the power of economic growth to add up over time, but they do so in pessimistic way: what if growth had been slower. What if we look at the opposite: what if growth had been faster over some time horizon. Sticking with the 1972 medium-run example, if real growth rates had been 1 percentage point higher, our income today would be almost double what it actually is, about $95,000 compared with the current $58,000 (the MPD data is stated in 2011 dollars, so that sounds lower than it actually is now: over $80,000).

What if we went back even further? If our economic growth rate since 1800 had been 1 percentage point higher every year, our average income in 2022 would be an astonishing $517,000 — almost 10 times what it actually was in 2022. That’s a dizzying number to think about, and maybe that’s not a realistic alternative scenario.

But what if it had only been 0.25 percentage points higher since 1800 — that probably is a world that was possible. In that case, GDP per capita would be about double what it actually was in 2022, at over $100,000 (again, stated in 2011 dollars).

Economic Growth in 2024 and Beyond

Jeremy Horpedahl1 Comment

To kick off 2024, I’m just going to give you a chart to think about:

Notice that in 1990, Poland had about half the average income of Portugal, as did South Korea compared to the UK. By about 2021, those gaps had been completely closed. And while the 2021 data is a bit uncertain given the pandemic, IMF estimates for 2024 suggest that both Poland and South Korea have now pulled slightly ahead of Portugal and the UK.

You can find many other examples like this. Why have some countries grown rapidly while others have slowed or stagnated? In some sense, this is an age-old question in economics, and at least as far back as Adam Smith economists have been trying to answer that question.

But it’s actually a bit different now. In Smith’s day, the big question was why some countries had started on their path of economic growth, while others hadn’t started at all. Today, nearly all countries have started economic growth, but some of the early leaders in growth seem to have slowed down. But there isn’t some global reason for this that affects all countries: Poland and South Korea will likely keep growing for a while, and eventually there will be a big gap between them and Portugal and the UK.

The answer to this question is not, of course, just One Big Thing. But for countries like Portugal and the UK (and Japan and Spain and Italy and etc. etc.), the key to their economic future is figuring out what Many Little Things these economic miracles are doing right so that they can return to a path of high economic growth. And this isn’t just a race to see who wins: all countries can be winners! But without continued growth, solving economic, political, and social problems will be a huge challenge.

Maybe 2024 is when they will start to figure it out.

How the Economy is Doing vs. How People Think the Economy is Doing

Jeremy Horpedahl5 Comments

Lately many journalists and folks on X/Twitter have pointed out a seeming disconnect: by almost any normal indicator, the US economy is doing just fine (possibly good or great). But Americans still seem dissatisfied with the economy. I wanted to put all the data showing this disconnect into one post.

In particular, let’s make a comparison between November 2019 and November 2023 economic data (in some cases 2019q3 and 2023q3) to see how much things have changed. Or haven’t changed. For many indicators, it’s remarkable how similar things are to probably the last month before anyone most normal people ever heard the word “coronavirus.”

First, let’s start with “how people think the economy is doing.” Here’s two surveys that go back far enough:

The University of Michigan survey of Consumer Sentiment is a very long running survey, going back to the 1950s. In November 2019 it was at roughly the highest it had ever been, with the exception of the late 1990s. The reading for 2023 is much, much lower. A reading close to 60 is something you almost never see outside of recessions.

The Civiqs survey doesn’t go back as far as the Michigan survey, but it does provide very detailed, real-time assessments of what Americans are thinking about the economy. And they think it’s much worse than November 2019. More Americans rate the economy as “very bad” (about 40%) than the sum of “fairly good” and “very good” (33%). The two surveys are very much in alignment, and others show the same thing.

But what about the economic data?

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Median Family Income in US States, 2022

Jeremy HorpedahlLeave a comment

Last week I wrote about median income in the US, and how it had declined since 2019 and 2021 through 2022 (inflation adjusted, of course). The big story is that median income (both for households and families) has been falling in recent years. While there are some silver linings when looking at subgroups, such as Black families, the overall data isn’t good.

But while that is true for the US overall, it’s not true for every state. In fact, it’s not even true for most states! From 2019 to 2022, there were 29 states that saw their median family incomes rise! That’s adjusted for inflation (I’m using the C-CPI-U, which is Census’s preferred inflation measure for this data). The income data in this post all comes from the Census ACS 1-year estimates.

Here’s a map showing the states that had increases in median family income (green) and those that had decreases (in red). (This is my first time experimenting with Datawrapper maps, feedback appreciated!)

Some states had pretty robust growth, with New Mexico and Arizona leading the way with around 5 percent growth. There is substantial variation across US states, including with big declines like Wyoming at -5 percent, and Oklahoma and Illinois are -3 percent.

A few weeks ago I also wrote about the richest and poorest MSAs in the US. But what about the richest and poorest states in the US? The following map shows that data.

The immediate fact which will jump out at you is that the lowest income US states are almost all located in the South. This will probably not surprise most of us, although it probably is a bit surprising since the data is adjusted for differences in the cost of living (using the BEA RPP data). Even after making these adjustments, the South is still clearly the poorest region (and it definitely was the poorest without the adjustments).

Among the higher income states, they are distributed pretty well across the rest of the non-South. There are 16 states (plus DC) that have median family incomes over $100,000 (again, cost of living adjusted), and while many of these are in New England and the Mid-Atlantic, there area still a few in the Midwest, Great Plains, and the West. Utah and New Jersey have similar incomes, as do Virginia and Rhode Island.

The highest income states are Massachusetts and Connecticut, with over $112,000 in median family income, while the lowest are Mississippi and West Virginia, both under $78,000. Median family income in Massachusetts is 46 percent higher than Mississippi. And that’s after adjusting for differences in the cost of living.

Economic Growth in the United States

Jeremy Horpedahl1 Comment

The United States has problems and always had. But the historical record of the United States as an economic powerhouse is unrivaled. The US had a bit of a head start on economic growth, being a direct descendant of the country that really kicked of the Industrial Revolution. But we took that head start and really ran with it, now being by far the highest income large country, and the highest income country that does not derive a significant part of its GDP from fossil fuels or being a tax haven.

The average American has, as best as we are able to measure it, a standard of living that is at least 20 times greater than Americans when this country began.

Source: the indispensable Our World in Data

The Growing Irrelevance of the Federal Minimum Wage

Jeremy HorpedahlLeave a comment

70,000: that’s the number of adults (age 25 and older) in the US that earned the federal minimum wage of $7.25 per hour in 2021.

Another 538,000 adults reported earning below the minimum wage, but these are likely to be workers that earn tips, which aren’t reported in their hourly wages. Legally, they must make at least $7.25 including their tips, though many of them earn more. The data comes from a 2022 report by BLS using CPS data (hopefully the 2023 report is coming out soon).

If we include all workers 16 and older, there are about 1.1 million people earning the federal minimum wage or less. That’s just 1.4% of hourly wage earners, and only 0.8% of all workers (including salaried workers). Crucially, this number has declined dramatically over time from a high of 15.1% of hourly wage earners (8.9% of all workers) in 1981. It has even declined significantly since 2010, the first full year that the $7.25 federal minimum was in effect, when 6% of hourly wage earners (3.5% of all workers) earned $7.25 or lower.

Perhaps, though, a big part of this decline is because most states (and even some cities and counties) now have minimum wages that are above the federal level, in some cases significantly above. Today, only 20 states use the federal minimum wage. No doubt this is important!

However, even if we focus just on those 20 states that use $7.25 per hour as the minimum, there were also large declines in the percent of hourly wage earners that earned $7.25 or less. Some states declined by 7 percentage points or more from 2010 to 2021, though all declined by at least 3 percentage points.

But maybe what’s going on is that employers are just providing wage increases that keep up with price inflation. So while fewer workers are earning the federal minimum wage, maybe they are no better off. We can address that possibility using BLS’s occupational wage data, which allows us to look at wages at the 10th percentile (these aren’t exactly minimum wage earners, but they are close). Real wage declines did happen in a few states (Alabama, Louisiana, and Mississippi), but most of these states experienced clear real wage growth from 2010 to 2021 at the 10th percentile of earners.

Here are the changes in percentage terms (once again, adjusted for CPI inflation).

Some might look at this growing irrelevance of the minimum wage as a reason to increase the federal minimum wage. But as the data from most states suggests, there are clear increases in wages happening already, suggesting that these are competitive labor markets. The case for raising the legal minimum wage in a competitive labor market is weak (it is stronger in a monopsony labor market).

Inflation and GDP Growth in the G7 Revisited

Jeremy HorpedahlLeave a comment

In August 2022, I wrote a post showing that among G7 nations, the US had the highest inflation during the pandemic, but also the highest rate of real economic growth. But since the economic situation is evolving rapidly, I wanted to update that data from mid-2022 (I also use core inflation, but I’ll use total inflation in this post).

Here’s how inflation has looked during the pandemic:

While the US had the most cumulative inflation for much of the pandemic, the cooling of inflation in the US and the acceleration in Europe has changed things a bit. By late 2022, the UK and Italy had caught up to the US, and Germany is closing in too. These countries have cumulative inflation of between 15 and 17 percent since January 2020.

Japan looks to be the winner here. But wait, we don’t only care about low and stable inflation. We also want economic growth. Here’s the data through the 4th quarter of 2022 (we’ll start to get 2023q1 data from countries next week):

By this measure, the US comes out as the clear winner, with real GDP being about 5 percent higher than the end of 2019. That might not sound impressive for 3 years of growth, until you realize that 5 of the 7 nations had growth below 2 percent, with Germany and the UK actually still smaller than the end of 2019! And this doesn’t take account of the cumulative losses. Notice that the US had the second smallest dip in 2020q2 as well.

It’s hard to know exactly what the right non-COVID counterfactual would be, since these countries all had different rates of growth before the pandemic. But adding up the GDP scaled to 100 before the pandemic, the US is the only G7 country where these 12 quarters of data add up to more than 1,200. The other countries haven’t even had enough growth since the 2020 recession to make up for the losses during the recession, to say nothing of what their potential growth would have been. Japan comes the closest to making up the losses, while the UK stands out as the worst.

Here’s the figures for all the G7 countries, with 100% meaning they have had enough growth to offset the losses from the 2020 recession:

US: 100.8%

Japan: 99.3%

Canada: 98.6%

Germany: 98.0%

France: 97.1%

Italy: 96.9%

UK: 94.5%

“Superabundance” Review

Jeremy Horpedahl7 Comments

Are resources becoming scarcer as world population increases and per capita consumption increases? Are basic goods becoming more expensive relative to wages in the face of potential resource shortages? These are some of the main questions that are addressed in the just released book Superabundance by Marian Tupy and Gale Pooley. The authors were kind enough to provide me with an advance copy, which is why I’m already able to review this book on its release date (I’m not really that fast of a reader).

The author take a very optimistic view of the issues surrounding those opening questions. Properly measured (one of the key tasks of their work), resources are becoming more abundant, not more scarce. And properly measured, almost all consumer goods are becoming cheaper relative to wages.

The authors use the approach of “time prices” throughout the book. They are not the first to use this approach. Julian Simon (their inspiration for this project) used it in various places in his work. William Nordhaus famously used it is in paper on the history of the price of lighting. And Michael Cox and Richard Alm have used the time-price approach in many of their writings, from the 1997 Dallas Fed annual report, to a full-length book a few years later, as well as updates to the original 1997 report. And if you follow me on Twitter, I like to use this approach too.

In short, “time prices” tell us how many hours of work it takes to purchase a given good or service at different points in time. How many hours would you have to work to buy a pound of ground beef? A square foot of housing? An hour of college tuition? It’s the superior method when you are looking at the price of a particular good or service over time, compared with a naïve inflation adjustment, which only tells you if the price of that good/service rose faster or slower than goods or services in general, not if it’s become more affordable. Inflation adjustments are really only useful when you are trying to compare income or wages to all prices, to see if and how much incomes have increased over time. Of course, which wage series you choose is important (and you need to have a consistent series over time, or at least the end points), but as the authors point out (which they learned from me!), if you looking at wages after 1973, the wage series you use doesn’t matter much. Median wages, average wages, wages of the “unskilled” — these all give you the same trend since 1973. We don’t have all of these back earlier (especially median wages), but there’s not much reason to believe they’ve diverged that much. And the authors also present their data using multiple wage series in many of the charts and tables.

What do the authors find?

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Aging Populations = Inevitable Slow GDP Growth?

Scott Buchanan3 Comments

Last month Eric Basmajian published “Why Demographics Matter More Than Anything (For The Long Term)” on the financial site Seeking Alpha. He predicts that that the developed world plus China face a future of low economic growth (regardless of policy machinations) due simply to demographics. His key points:

Demographics are the most important factor for long-term analysis.

The young and old age cohorts negatively impact economic growth.

The prime-age population (25-64) drives the bulk of economic activity.

The world’s major economies are suffering from lower population growth and an older population.

Over the long run, the world’s major economies will have worse economic growth, which will negatively impact pro-cyclical asset prices (like stocks).

I will paste in some of his supporting charts. First, the labor force is more or less proportional to the 25-64 age cohort (U.S. data shown) :

…and GDP growth trends with labor force growth:

Also, on the consumption side, that is highest with the 25-54 age group:

And so,

Younger people are a drag on economic growth and older people are a drag on economic growth… The prime-age population is the segment that drives economic activity, so if the share of population that is 25-54 is shrinking, which it is, then you’re going to have more people that are a negative force than a positive force:

Once the working-age population growth flips negative, an economy is doomed…. Working age population growth in Japan flipped negative in the 1990s, and they moved to negative interest rates, QE, and they have never been able to stop. The economy is too weak.

After 2009, the working-age population in Europe flipped negative, and they moved to negative rates and QE, and they haven’t been able to stop. Even now, as the US is raising rates, Europe is struggling to catch up and has already abandoned most of its tightening plans.

In 2015, China’s working-age population flipped negative, and they’ve had problems ever since. They devalued their currency in 2015 and tried one more time to inflate a property bubble, but it didn’t work, and now they’re having to manage the deflation of an asset bubble that the population cannot support.

The US is in better shape than everyone else, but we’re not looking at robust growth levels in this prime-age population.

In conclusion, “ The real growth rate in most developed nations is collapsing because of those two factors, worsening demographics, and increased debt burdens.    In the US, as a result of the demographic trends I just outlined plus a rising debt burden, real GDP per capita can barely sustain 1% increases over the long run compared to 2.5% in the 60s, 70s, and 80s.”

That is pretty much where Basmajian leaves it. No actionable advice (besides subscribing to his financial newsletter). What isn’t addressed is whether productivity (production per worker) can somehow be accelerated. Also, one of his charts (which I did not copy here) showed a big trend down in 25-64 age fraction in the US population in the 1950’s-1960’s (as hangover from the Depression?), and yet these were decades of strong GDP growth. So these demographic trends are not the whole story, but his analysis is sobering.

The Transition to a Market Economy: Did Former Soviet Republics Fail?

Jeremy Horpedahl1 Comment

This semester I am participating in a reading group with undergraduate students that focuses on the history and prospects for capitalism and socialism. Lately we have been reading Joseph Stiglitz, who has long argued that China’s transition to a market economy has gone much better than the former Soviet Union. Gradual transition is superior to “shock therapy,” according to Stiglitz.

There’s an extent to which this is true. If we just look at economic growth rates since, say, 1995, China has clearly outpaced Russia.

Source: Our World in Data

It’s hard to know exactly what year to start, since GDP figures for former planned economies immediately after transition aren’t reliable, but the start date is mostly irrelevant for everything I’ll say here (please play around with the start year in the charts to see if I’m cherry-picking years). 1995 seems a reasonable enough year to start for reliable post-transition starting point.

As we see above, while Russia has had a rough doubling of GDP per capita since 1995 (respectable, and yes, it’s all adjusted for inflation!), China has soared almost 600%. Wow! But this is something of a cheat. Despite all that growth, average income in China is still lower than Russia: only about 60% of Russia in 2020. China started from a much lower level, meaning that faster growth, while not guaranteed, is at least easier to achieve. In fact, if we go back to 1978, when China’s first reforms began, GDP per capita in the Former USSR was about 6 times as high as China (that’s according to the latest Maddison Project estimates, which will always be speculative for non-market economies, but are the best we have).

Furthermore, Russia hasn’t really transitioned to a democracy either. China clearly hasn’t, but no one doubts that. But despite having the outward symbols of democracy (elections, a legislature, etc.), Russia still scores low on most indexes of democracy and civil liberties. For example, Freedom House scores them at 19/100, a little better than China (9/100), but nothing like Western Europe.

So, did the quick transition to market economies fail? Not so fast. While it did fail in Russia, in most of Eastern Europe and the eastern part of the former USSR seems to have been a major success. Take a look at this chart, which shows the former Soviet Republics in and near Europe (I exclude Central Asian FSRs).

Source: Our World in Data
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