For those not familiar with the Economic Report of the President, it is published each year by the White House Council of Economic Advisers. In turn, the CEA is led by academics, who are appointed by the president but typically plan to head back to their ivory towers in a few years. Thus, they are clearly a partisan and pro-administration group, but they also have reason to care about their own reputation for expertise and for relatively dispassionate analysis. This tension plays itself out each year in the report.
The parts of the ERP each year that offer a partisan defense of the president aren’t that interesting to me, no matter who the president is, because of how one-sided and perfunctory such defenses tend to be. Of course, if you are looking for talking points to support the economic policies of the Biden administration or if you want to take target practice against those policies, you may be attracted to those 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 discussion from thoughtful academics, and some of these can be worth passing on. Here’s one from the first chapter of the 2023 Economic Report of the President, showing the long-term average for US economic growth going back to 1790.
The figure breaks down overall economic growth into three chunks: growth of population (which means more workers and consumers), changes in labor force participation (the share of the adult labor force that either has a job or is looking for a job), and output per worker, which changes according to improvements in human capital (education and skills), physical capital available to workers, and “total factor productivity,” which is econo-speak for productivity improvements. Here are a few reaction to the figure:
1) The slowdown in overall economic growth in in the 2000s is readily apparent. But in a broad historical perspective, it’s also apparent is that a lot 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 in part to the aging and retirement of the “baby boom” generation born in the 15 years or so after the end of World War II (the light blue bars in negative territory on the graph). At least in the last decade, output per worker hasn’t been rising at an especially slow rate.
2) For political scientists and those interested in global politics, the sheer size of the US economy matters–the total height of these bars. But for economists, what matters more is a gradually rising 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 isn’t likely to come from population growth; instead, it will need to be generated by higher output per worker. The US economy had a mass expansion into high school education from about 1910 to 1940, and a mass expansion of higher education after World War II, but no mass expansions of education since then. US capital investment seems OK, but a lot of one’s thinking around that issue revolves around placing an economic value on information technology and internet access, which isn’t easy to do. Productivity gains are calculated as the residual of what is left over, unexplained, by forces like labor force growth, human capital and physical capital–and by that measure, the US economy isn’t doing especially well since the early 2000s.
4) The 1870s appear on the graph as a time of rapid growth. I confess that I don’t understand this. The report emphasizes that the 1870s are a time of expanding the railroad and the telegraph, along with new inventions. However, the standard dating of US business cycles suggests that the US economy was in the “Long Depression” from October 1873 to March 1879. Maybe it was just a really 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 looks less “great,” in the sense that overall growth during the decade of the 1930s was similar to that of the 1910s and 1920s. In part, this is probably because we tend to understate the multiple deep recessions of these earlier decades, including three recessions in the 1910s and another three in the 1920s, as well as understating how the US economy recovered from the Great Depression in the later part of the 1930s (albeit with a recession in 1937-38). It may seem odd that labor force participation doesn’t fall 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 need to be not looking for work (say, retired or working in the home by preference).
6) In the 1970s and 1980s, you can see that a noticeable chunk of overall economic growth was the rise labor force participation, mainly due to growing participation of women in the (paid) labor force.
There’s a remarkable economic story behind every bar and line in this graph.