The Slowdown we Wanted?
More reflections of Fully Grown by Dietrich Vollrath
|Matt Clancy||Jan 30|
Last week I wrote about Dietrich Vollrath’s new book, Fully Grown: Why a Stagnant Economy is a Sign of Success. That week, I focused on it’s argument that the 21st century decline in real GDP per capita growth has little need for a hypothesis that technological progress has stalled. This week, I want to turn to the argument in the book’s subtitle - that the actual causes of the growth slowdown are mostly desirable.
This is a nuanced point. It’s not that slower economic growth is good in and of itself. Instead, it’s more that the things that have caused the growth slowdown are not the result of something breaking that we now need to fix. Essentially, we’ve traded slower growth for something else valuable. That doesn’t mean we can’t offset the slowdown with policies that boost growth through other channels. But any such policies were always worth doing anyway.
It’s an interesting reframing. I normally see the slowdown presented as an emerging problem that needs to be solved or else we should be worried about the future. Vollrath spins this around and says, more or less, that maybe we don’t have so much to worry about in the future because we’ve solved some problems in the past. I thought this was an interesting perspective to take, so this week I’ll try to give you the same experience by presenting the slowdown in the best light I can.
The Slowdown We Chose
First, the biggest chunk of the growth slowdown is directly derived from our own choices. We wanted smaller families and that’s what we’re getting - annual births per 1,000 people has fallen from about 30 to 15 between 1960 and 2020. We wanted to work less, and between 1965 and 2017 weekly hours worked declined from 39 to 34. We decided we wanted more education, and so we got the majority of the working age population a high school education. Women wanted to work, and when social, political, cultural, and technological factors changed to make it easier to enter the workforce, they did. Now they’re here and we no longer have a very large group of people denied the opportunity to work.
Taken together, these all slowed the growth of the national stock of human capital and this directly accounts for 0.80pp of the 1.25% slowdown in real GDP per capita growth. But this may understate the full impact of our choices. Vollrath attributes a further 0.15pp of the real GDP per capita slowdown to a reduction in firm entry and exit. Why has there been a reduction in new firm entry? Hopenhayn, Neira, and Singhania (2018) argue this too is ultimately caused by slowing population growth. Slower population growth reduces the supply of labor, which makes it easier for the existing set of firms to absorb labor through expansion. There is less free labor around for new firms to take advantage of, which reduces the entry of these new firms. If that’s the case, then the full impact of slower human capital formation might be closer to 0.95pp.
Why might that be good? Mainly because decisions around work, education, and family are some of the most important ones people make and economists trust people to make the choices that are best for themselves. Prosperity, political changes, and technology have drastically reduced the constraints on these choices over the 20th century and it appears those constraints were binding, since people are changing their behavior when able to do so.
As noted last week, Vollrath attributes another 0.1pp of the slowdown to a reduction in geographic mobility. Whether this is good or bad hinges on why people are less likely to move. One explanation is that housing policy has locked people out of cities they want to move to. Another is that Americans have become complacent. But a more optimistic possibility is that people are forming deeper attachments to where they live and just don’t want to move.
Patrick Coate and Kyle Mangum have a recent working paper arguing that the decline in US mobility is largely a result of people forming deeper ties to the previously new cities of the West and Southwest (e.g., Phoenix, LA, Las Vegas). For example, in 1960, only 20% of the US-born population of Los Angeles was born in California. Lacking deep ties to the city, the other 80% was much more likely to move around the country. In contrast, by 2010, 71% of the US-born population of Los Angeles was born in California. With deeper connection to the region, they have less desire to move. Coate and Magnum argue the increasingly deep roots of the inhabitants of “new” cities out west accounts for about 2/3 of the decline in geographic mobility. The aging population (a consequence of lower fertility) accounts for much of the rest.
All told, maybe 1.05pp of the 1.25pp slowdown in real GDP per capita growth stems from people optimally choosing what’s best for them. We wouldn’t serve them well by reversing their choices and getting back high growth. Other policies boost growth and leave their choices be are still worth doing - but that was always true.
The Decline of Stuff
The last chunk of the slowdown in TFP growth can be attributed to the shift in spending away from goods and towards services. Services tend to have slower productivity growth, so this has pulled down economy-wide TFP growth. So it is a bad thing that we’ve shifted our spending towards slow-productivity growth sectors?
Maybe not. You can think of it as a sign of victory. We’ve gotten so good at producing stuff at high quality and low prices that we don’t really need more of it. I mean, yes, we would usually take more if we could get it - we’re not enlightened. But in economist speak, the marginal utility we get from more stuff has gotten really small. Nice job scientists and engineers! We’re now using the savings from lower prices and higher quality to consume more of the things that still have very high marginal utility, namely services.
(By the way, innovation in services can be great. Speaking for myself, I would rather have 140 characters than a flying car.)
The shift from stuff to services should also make environmentalists worried about “infinite growth on a finite planet” happy. As Andrew McAfee highlights in his recent book More from Less, the shift away from spending on goods has also manifested as an absolute reduction in our use of physical resources. In the figure below I plot US consumption of energy, US carbon emissions, consumption of steel, concrete, and timber over 1900-2017 (McAfee highlights many additional reductions in resource use). In all cases, consumption increased fairly steadily before it stopped or reversed in the 21st century, which is also when we’ve experienced our growth slowdown.
(figures from data on More from Less website)
Another argument against de-emphasizing innovation in “stuff” is that it’s short-sighted. For example, Dan Wang argues US outsourcing of manufacturing has been a mistake. According to this argument, much of manufacturing knowledge is tacit and acquired via learning-by-doing. In the long-run, we will lose the ability to innovate in the production of physical goods because it’s not possible to outsource production and retain manufacturing research and design capabilities. The countries we outsourced too (for example, China), will skill up and become future leaders in the production of physical stuff.
I think this argument is likely true (although it’s important to note the US still does a lot of the most complex manufacturing here). But what if it’s actually a good decision to cede innovation in the goods sector to other countries, because the future of what people want is not goods but services? Maybe the USA is actually putting itself in a position to lead the future by specializing in services innovation?
Although TFP growth in services has traditionally been slow, that doesn’t mean innovation doesn’t happen. Artificial intelligence, for example, seems poised to take over many of the jobs that currently require human attention. And even if it’s very hard to squeeze more attention out of workers (given, well, the nature of time) that doesn’t mean we can’t innovate on the quality of that attention. I think of how my daycare still requires a similar number of workers, but now they send photos, videos, and all sorts of information about how my kids spend their days to me via an app.
Lastly, it’s important to note all of this is just a matter of degree. It’s not that we don’t want to have children anymore - we just want fewer. It’s not that we don’t want to move for work anymore - just not as much. It’s not that growth in producing goods has ground to a halt - it just accounts for less of the economy. If the human race survives, we’ll still get to whatever science fiction future is waiting for us. It’ll just take longer. But maybe that’s ok because we’ll be happier on the way.
So that’s my attempt at the best case scenario for the growth slowdown. Vollrath’s take is more nuanced than what’s presented here (he’s not actually sure all of these changes stem from good causes) and mine is too. But I also think what I’ve written above is part of the story, even if it might not be the whole story.