For those who don’t know the President’s Economic Report, it is published annually by the White House Council of Economic Advisers. In turn, the CEA is run by academics, who are appointed by the president but usually plan to return to their ivory towers in a few years. Thus, they are clearly a partisan and pro-administration group, but they also have reason to be concerned about their own reputation for expertise and relatively unbiased analysis. This tension is found every year in the report.
I’m not interested in the parts of the ERP that offer a partisan defense of the president every year, no matter who the president is, because of how those defenses tend to be one-sided and superficial. Of course, if you’re looking for talking points in support of the Biden administration’s economic policies or want to take targeted action against those policies, you may be drawn to these parts of the report. But each year, the report also includes facts and nuggets about the US economy and its trends and patterns that have emerged from discussions by thoughtful scholars, and some of them may be worth passing on. Here is one from the first chapter of President’s 2023 Economic Reportshowing the long-term average of US economic growth dating back to 1790.
The chart breaks down overall economic growth into three components: population growth (meaning more workers and consumers), changes in labor force participation (the share of the adult labor force that is employed or who is looking for a job) and output per worker, which changes with improvements in human capital (education and skills), physical capital available to workers, and “total factor productivity”, which is the economic expression of productivity improvements. Here are some reactions to the figure:
1) The slowdown in overall economic growth in the 2000s is evident. But from a broad historical perspective, it is also evident that much of this slowdown is due to a slower rate of population growth (shorter dark blue bars) and also a decline in labor force participation due to part of the aging and retirement of the baby boomers born in the 15 years following the end of the Second World War (the light blue bars in negative territory on the graph). At least over the past decade, output per worker has not grown at a particularly slow pace.
2) For political scientists and those interested in world politics, the sheer size of the US economy is important – the total height of these bars. But for economists, what matters most is a gradual increase in the standard of living for the average person, which is roughly captured over time by the gain in output per worker.
3) The future of US economic growth is unlikely to come from population growth; instead, it will have to be generated by higher output per worker. The American economy saw a massive expansion in secondary education from about 1910 to 1940, and a massive expansion in higher education after World War II, but no massive expansion in education since then. American capital investment seems fine, but much of the thinking around this issue revolves around assigning economic value to information technology and internet access, which is not not easy to do. Productivity gains are calculated as the residual of what remains, unexplained, by forces such as labor force growth, human capital, and physical capital – and by this measure, the U.S. economy will not not doing particularly well since the early 2000s.
4) The 1870s appear on the chart as a period of rapid growth. I confess that I do not understand this. The report points out that the 1870s were a time of railroad and telegraph expansion, as well as new inventions. However, the standard dating of American economic cycles suggests that the US economy was in the “Long Depression” from October 1873 to March 1879. Maybe it was just a truly extraordinary economic boom in the early 1870s in the aftermath of the Civil War?
5) From the perspective of decade averages, the Great Depression of the 1930s appears less “big,” in the sense that overall growth in the decade of the 1930s was similar to that of the 1910s and 1920s. is probably due in part to the fact that we tend to underestimate the multiple deep recessions of those previous decades, including three recessions in the 1910s and three more in the 1920s, as well as to underestimate how the he US economy recovered from the Great Depression in the latter part. of the 1930s (but with a recession in 1937-1938). It may seem odd that labor force participation did not drop noticeably in the 1930s, given the ultra-high unemployment rates of the time. However, the unemployed are counted as “participating” in the labor market – to be outside the labor force participation rate, you must not be looking for work (e.g. retired or work from home preferred).
6) In the 1970s and 1980s, you can see that a notable part of overall economic growth was the increase in labor force participation, primarily due to the increasing participation of women in the (paid) labor force .
There is a remarkable economic story behind every bar and line on this chart.