Recent Contraction Has Barely Affected Decades of Sustained Economic Growth

The chart above shows annual real GDP per capita for the U.S. from 1929 to 2009 (estimated) using BEA data here for real GDP and Census data (here and here), and puts the current recession in some historical perspective (see a similar analysis here for UK). Despite a severe contraction, real GDP per capita will still be greater this year (about $42,000 in 2005 dollars) than any time before 2005, and that is based on second quarter real GDP, so the actual figure will likely be higher. It's also the case that:

1. Real GDP per capita this year ($42,000) will be more than 4 times the amount in 1940 ($8,832), and more than twice the amount in 1970 ($20,823) and almost 25% higher than just 15 years ago ($34,075 in 1994).
2. Nominal GDP per capita this year in the U.S. of about $47,000 (based on 2008 CIA data here) will be $13,600 per person higher than the European Union ($33,400), $12,800 per person higher than Japan ($34,200), $14,300 higher than France ($32,700), $10,400 higher than the U.K. ($36,600), $12,200 higher than Germany ($34,800) and $16,000 higher than Italy ($31,000).

As David Rawcliffe points out on the Adam Smith blog (about the UK, but it applies equally to the U.S.):

The recent contraction has not been evenly spread across regions or industries, and the hardship for many has been terrible, but the bigger picture is clear: the recent crisis has been little more than a hiccup in decades of sustained growth.

We should maintain this sense of perspective not only in assessing the harm wrought by this recession, but in developing policy for the future. The living standards of the next generation will not be chiefly determined by the severity of cyclical fluctuations, but by the long-term rate of growth in the intervening years.

In responding to the current crisis, and to the wider ills of society, a brave and forward-thinking government will bear this in mind, and pursue goals that do not simply address the problems of today, but recognise that economic growth offers the best solutions to the problems of tomorrow. It will accept that short-term sacrifices are necessary for long-term gains. It will encourage competition and innovation; it will reduce taxation and spending, and eliminate subsidy. It will ensure a productive workforce by educating and training the workers of the future, liberalising the labour market, and demolishing the benefits trap. And it will stimulate investment through price stability and fiscal prudence.

Comments

[Davewmart:]

'Recent Contraction Has Barely Affected Decades of Sustained Economic Growth '

You left out the word 'yet'.
You also seem remarkably sanguine as to the accuracy of Government statistics and their comparability over extended periods of time.

Sep 08 05:27 AM

[User 305589:]

''Recent Contraction Has Barely Affected Decades of Sustained Economic Growth''

Sorry, but when it comes to the sustainability of the economic growth of the past decade, the jury is still out. Statistics clearly and undeniably show that every $ of gdp growth has been achieved with ever higher borrowings - the count now stands at $5 to borrow for every $1 in growth achieved. GDP growth of course doesn't equal overall growth of profits and incomes - especially the latter have been flat or declining over the past decade (except, of course for govt workers and most of all legions of vastly overpaid corporate execs and bankers). assuming (very optimistically) that this $1 of economic growth translates into about $0.10 of incomes/profits growth you arrive at $5 in fresh borrowings getting you 0.10$ in additional net income. At (historically very low) long term interst rates of about 3.5% you are already paying 0.175$ for the additional interst expenses, though - or a net 0.075$ loss!!. It is obvious, that this isn't sustainable at all. Not to speak of what will happen once the interest rate cycle turns up in earnest!

''The living standards of the next generation will not be chiefly determined by the severity of cyclical fluctuations, but by the long-term rate of growth in the intervening years.''

true - but it looks as if that longterm growth rate will be much lower than the atrificially propped-up short-term cyclical rates of the pat 20 years. Let's look at the same chart 2-3 years from...

Sep 08 05:50 AM

[Chuck Carne...:]

Thank you for a terrific article.When we count our blessings we discover they dwarf our problems. I appreciate your good work.

Sep 08 07:20 AM

[Michael Clark:]

How about a chart showing GDP - National debt? I think that would make me more impressed than just GDP grown. In thi chart, it makes it look like the Great Depression in th 30's was a walk in the park of constrant growth, joy and party-time again and again -- with a tiny drop during World War II.

This chart indicates that the stagflation (depression with inflation) from 1965 - 1983 was another stroll in the park. I lived through that depression and it was not a stroll in the park.

'Sorry, but when it comes to the sustainability of the economic growth of the past decade, the jury is still out. Statistics clearly and undeniably show that every $ of gdp growth has been achieved with ever higher borrowings - the count now stands at $5 to borrow for every $1 in growth achieved.'

Sep 08 07:45 AM

[Michael Clark:]

I'm not sure our blessings dwarfed our problems through 1929-1947 and through 1965-1983...unless you mean it is better to be alive than dead. If that is what you meant, then I might agree with you, not knowing what death is like -- that is, having a lack of information to counter your argument.


On Sep 08 07:20 AM Chuck Carnevale wrote:

> Thank you for a terrific article.When we count our blessings we discover
> they dwarf our problems. I appreciate your good work.

Sep 08 07:47 AM

[Seth Wu:]

HUGELY MISLEADING.

Your chart depicting US GDP growth at a relatively steady about 30% to 40% slope is VERY MISLEADING.

For the slope of a chart to properly depict rate of growth, the chart must use semilog scale for vertical axis. If you used the correct vertical scale, this chart will show a fast weakening, slowing rate of growth.

Sep 08 07:59 AM

[Dirk McCoy:]

The chart data is real GDP, so it's inflation adjusted.

To make real this point, consider the number of hours a minimum wage worker had to work in 1950 to buy 10 gallons of milk, an outfit, a plane ticket to Florida, a television, and a course of antibiotics. You'll see it's significantly fewer hours now.

Sep 08 09:01 AM

[Donald Ingram:]

More spin from one of the "sun beams out the rear end" crowd!
Tell this to the people who are unemployed, lost their houses, lost their savings, can't find a job, living in Uncle Bob's basement (if they are lucky), or living in a tent city, eating on food stamps, hopes smashed and don't see little sun beams except the ones you are generating! Be truthful.

Sep 08 10:49 AM

[JeffDB:]

Of course, to a large extent the government can manipulate GDP almost at will.

The formula for GDP www.mindtools.net/Glob... after all is:

Y = C + I + E + G

where

Y = GDP

C = Consumer Spending

I = Investment made by industry

E = Excess of Exports over Imports

G = Government Spending

------------

So to make GDP go up, or hold steady rather than spiraling downwards, a government can just ramp up government spending to offset declines in consumer spending or investment. To the extent that they do so by printing money, as our own government has* that has the further "benefit" to the export/import side of things is to devalue the currency, as has been the case for the dollar recently.

Chris Martenson's chart on Debt to GDP shows that the borrowing portion of our continuing jump in government spending is not sustainable:

www.chrismartenson.com...

* The ongoing ramp up in our money supply by, in essence, "printing money" may not be sustainable either, at least not without some serious inflationary side effects:

M1: www.scribd.com/doc/193...

M2: www.scribd.com/doc/193...

Sep 08 11:23 AM

[HardwoodFlo...:]

Absurd! Sure the graph may be accurate but it doesn't tell the story of those on the ground. We are at nearly 10% unemployment! People are being hurt in this crisis. Businesses are failing. People are getting crushed.

I understand the article and the graph and in some ways agree nevertheless I find the it rather disingenuousin it's reflection of the cold hard real world realities out there.

Sep 08 11:24 AM

[John Lounsbury:]

This discussuin is not complete without bringing in the fact that the trend line for annual real GDP growth has declined by 50% over the past 50 years.

We can be so busy celebrating the past to neglect examining where it is leading us.

This is a very disappointing article, particularly since it is coming from an educator.

Sep 08 02:12 PM

[CLH:]

Thanks for the information Perry. Those frightened former investors (who have comments above) can come out from under the bed now and change their drawers.

Sep 08 03:17 PM

[thiazole:]

I agree - but it would also show that this recession wasn't nearly as severe as it looks in that chart. As a percent, it is very similar to the 1974 recession, but looking at this chart, it looks much worse.

On Sep 08 07:59 AM Seth Wu wrote:

> HUGELY MISLEADING.
>
> Your chart depicting US GDP growth at a relatively steady about 30%
> to 40% slope is VERY MISLEADING.
>
> For the slope of a chart to properly depict rate of growth, the chart
> must use semilog scale for vertical axis. If you used the correct
> vertical scale, this chart will show a fast weakening, slowing rate
> of growth.

Sep 08 05:26 PM

[thiazole:]

This line also isn't really linear, either. It does appear to be following a higher order of growth. Just draw a line from the Great Depression bottom up to say 1960, and you'll see that the slope is actually bent upward.

Sep 08 05:31 PM

[Ricard:]

Exhibit #2 in this GMO report also points to the same trend in GDP:

www.gmo.com/America/CM...

"Implicit in our analysis above is an assumption that the
impact of current economic conditions is temporary, rather
than permanent. Why do we believe this? There are two
basic reasons. One is because of our understanding of
how the economy works, and the other is because of our
analysis of economic history. The productive capacity
of the economy comes from the skills and size of the
workforce and the country’s accumulated intellectual and
physical capital. If GDP were to fall by 5%, it would not
be because our ability to produce goods and services had
fallen by 5%, but because aggregate demand for those
goods and services had fallen. When the demand returns,
the economy will be able to ramp up production quite
quickly. Take a look at GDP growth in the U.S. over the
last 120 years (Exhibit 2)."

These people (Jeremy Grantham's firm) called the crisis last year more than 10 years ago, and were precise in not only the timing, but also the severity. I'd give them a lot of consideration before summarily dismissing that they are too optimistic.

One thing I do note is that the 'trend line' has exhibited a tapering-off in the past 20-30 years. That would support John Lounsbury's point that there's something fundamentally wrong with our economy.

Sep 09 10:31 AM