A Deeper Look at Economic Growth

growthBy Michael “Luni” Libes

Repetition does not make a statement true.  Case in point, we are repeatedly told that the economy must grow.  We are told this by the mainstream media, by the Federal Reserve, by Congress, by the Harvard Business School, Wharton, Standard, et. al.  We are told from these credible sources that right now the U.S. economy is growing too slowly.  In the Federal Reserve’s most recent calculation, the U.S. economy grew at an annualized rate of 2.4 percent in the first quarter of 2013.  The news reported this as “sluggish” growth.

The growth of the economy is discussed frequently in the business news; daily when the economy is shrinking; less often when it is growing “sufficiently.”  No one seems to agree on the “proper” speed of economy growth, but few have questioned the need to grow.

Looking back at 1900, the U.S. per-capital GDP (the total economic output divided by the total population) was approximately $6,000, as measured in 2012 dollars.  In 2012, the per-capita GDP grew to approximately $43,000.  That is a seven-fold increase.

The average annual growth rate across those 112 years was just 1.75 percent.  This average includes the economic shrinkage during Great Depression, again during the Great Recession, and multiple other downturns, but nonetheless, the average growth was far slower than the so-called “sluggish” growth the economy is experiencing this year.

To answer the question of the “proper” speed of growth, however, we need to look not just into the past, but also into the future.

What happens if this 1.75 percent average continues for another 112 year?  At that rate of growth, compounding annually, in 2135, the per-capita GDP exceeds $300,000 (still counting in 2012 dollars).  That initially sounds great, with our grandchildren and great-grandchildren will be far richer than us, seven-fold again like us vs. our great-grandparents.

Looking out yet-another 112 years, however, in 2237, with the same average 1.75 percent growth, the per-capita GDP will exceed $2,000,000.  Continue to 2349, and the result is nearly $15,000,000 per person.  2461, more than $100 million per person.  By the year 3000 (if modern civilization lasts that long) at 1.75 percent growth per year, the economy reaches over $1 trillion per person.  That is simply preposterous!

What is wrong with this projection?  The flaw is not in the mathematical model.  The flaw is in the assumption that the economy can grow year after year for as long as we wish.  The flaw is in the belief that what worked for the last century will continue to work for the future.

The 112 years between 1900 and 2012 were unique.  Large-scale, breakthrough technologies, such as electricity and telephones, literally rolled out on wires across the country.  There were innovations in manufacturing, like the assembly line.  New global industries were created, such as automobiles and aviation.  The country built the Interstate Highway System, hundreds of airports, sewage treatment plants, skyscrapers, and so on.  In short, hundreds of trillions of dollars worth of infrastructure, and entire new industries were built, most of which we now take for granted.  And while we will need to replace much of the concrete, steel, and copper of this infrastructure in the next 112 years, it is unlikely we will be expanding this infrastructure by even a factor of two, let alone a factor of seven.

The real question then is thus not how fast the economy should grow, but for how much longer will it be growing.  With finite resources on a finite planet, there is a limit to what we can consume.  Productivity and innovation can help boost growth, as it did in the 20th Century, but we are unlikely to see growth as fast as that era again.

Thus, in the end, it seems we are being misled by the repetition of the question “How fast can grow?”  Instead we should be talking about a future with slower and slower growth.  In the end, perhaps we should applaud the current 2.4 percent growth, and be happy when it simply brings the economy back up to the pre-recession level, plus any small growth beyond that baseline.

Michael “Luni” Libes is a 20+ year serial entrepreneur, founder/co-founder of five companies, now spending his time helping entrepreneurs start startups.  He is founder and Managing Director of Fledge, the “conscious company” incubator, and Kick, the “inclusive” incubator.  Luni is Entrepreneur in Residence and Entrepreneurship Instructor at the Bainbridge Graduate Institute, and an Entrepreneur in Residence Emeritus at the University of Washington’s Center for Commercialization.  Luni is author of The Next Step: Guiding you from idea to startupandThe Next Step: A guide to pitching your idea.

3p Contributor

TriplePundit's guest author program has had over 600 contributors over time. If you'd like to be a guest author, please get in touch!