The Good News About Our Bad Economy

How population growth rules economic growth.

Morgan Housel
Morgan Housel
Jun 17, 2015 at 4:11PM

"There's not a reason in the world we can't grow at 4 percent a year," presidential candidate Jeb Bush said this week, "and that will be my goal as president."

There are, in fact, plenty of reasons.

I sincerely doubt the economy will sustainably grow 4% per year -- about what we achieved in the two decades after World War II --  any time in the coming decades, no matter who is president or what party they come from. 

There are two ways to grow an economy: 

  • Increase the population. 
  • Increase the productivity of that population. 

That's it. All real (after-inflation) economic growth comes from those two factors. 

Four-percent economic growth was feasible after World War II because the population was surging. There was a baby boom, plus millions of former soldiers joining the workforce. 

That's not the case anymore. Population growth is less than half today what it was in the 1950s. And it's projected to get even worse: 

Laborforce growth looks the same. Today's trend is way below where it was in the 1960s and 1970s, which was pushed up by baby boomers and more women entering the laborforce: 

With our current 0.75% population growth, we'd have to increase productivity (how much stuff people produce per unit of labor) by at least 3.25% a year for the economy to grow 4%. I'm an optimistic guy, but that has never happened in modern history:

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Frankly, none of this is very depressing.

Nobody really cares how the economy is doing. They care about how people are doing. So what matters isn't economic growth, but economic growth per person

When Japan, which has terrible demographics, grows 2%, it's a booming, prosperous miracle. When China, where hundreds of millions entered the laborforce in recent years, grows 7%, it's a near-recession. 

You can't compare economic growth rates between countries -- or in the same country over time -- without factoring in changes in population growth. 

The good news is that, given the decline in our population growth, 2% economic growth today is about the same in per-capita terms as 4% growth was 50 years ago. 

Per-capita growth over the last five years is below the long-term average -- we had an insane recession, of course -- but it's closer to normal than most people think: 

"I don't think the U.S. should settle for anything less than 4 percent growth a year," Bush said earlier this year. 

Honestly, I think we should. That's not giving up. It's just realistic. 

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