America's Economic Growth

The 1960s. The Jetsons
best describe it.

Captain Capitalism gave me an interesting idea when he presented a chart in one of his lectures on historic GDP growth.  He chose to look trailing twenty year growth increments because, in his opinion, it better reflected overall growth in the economy and its trend, rather than simply looking at economic data at any single point in time.  I agree with this methodology, it helps eliminate the noise due short term economic occurrences.  The one disagreement, or rather a concern, I had was that he only went back to the years after World War II.  I didn’t disagree with his point that the United States had a much more friendly economic environment and policy then that helped foster economic growth, but I also knew that for a decade or so the US benefited by being one of the few industrial powers that did not have to rebuild after WWII.  This meant that it could grow by a few methods.  One, it pretty much dominated international transportation after the war, I have been unsuccessful in finding this statistic but at one point I heard that 90% of all goods shipped were shipped on American ships.  Two, after decades of forceful under consumption via rationing, there was a huge consumer base hungry for new goods and willing to spend. Three, being the only industrial power still standing allowed the US to move in and fill new markets without major competition. During this period American steel was fabricated and shipped to almost everywhere in the world; since the other industrialized nations had to reindustrialize themselves before they could manufacture these materials.  Lastly, the very need for many nations to rebuild creates a demand for products needed towards rebuilding.  Given the US competitive advantage that I mentioned earlier, and given its size, the US benefited greatly.  I thought that unique, and unlikely to be repeated, conditions let the US grow in spite of the burgeoning regulation that was beginning to strangle the nation.  Given these concerns I decided to take the data back farther, all the way to 1790.

I decided to get a 10 year average growth rate for our nation going back to 1790.  There isn’t any real reason why I chose 10 years versus Captains 20, I just happened to organize my search that way.  I also found the average economic growth rate for the nation since its inception.  I have to give credit to Measuring Worth, it made doing this so much easier rather than having to find disparate pieces of information and cobble them together.  What I found was that the United States long term historical average growth rate is 3.74%.  This number includes every economic catastrophe we have ever faced. So if the US is growing just shy of 4% annual then the US is doing well.  Here is the chart I put together. Remember it’s a 10 year average so if you look at the year 1900 the number presented is the growth rate from 1890 to 1900.

We see a few things.  One is that the growth shortly after WWII, 50 on the chart, which represents the years 1940-1950, there was a tremendous spike in economic growth. This is largely skewed by war spending. Growth from 1935 to 1940  decreased by -.06% over the course of five years and it exploded by 11.45% during the war years. This seems to give credence to Keynesian economic policy but a few things need to be remembered.  Much of the economic growth during World War II was not real growth.  By not real, I mean not sustainable in the long term.  Yes there was a need to produce tanks, planes; ships, guns, and draft millions of Americans thereby lower the unemployment rate. But this all came at the cost of real long term growth. For every tank, plane, or ship made that was one less car, toaster, or some other consumer item. Shortly after the war, when we demobilized, we experienced a small economic contraction. This was the result of the nation needing to rebalance itself into a more sustainable economy, and I am willing to wager that the US unique position in the late 1940s kept the negative 5 year number from going any higher. 

We also see solid economic growth from the 50-70s.  While one could argue the much of the late 40s, and perhaps early 50s, the US enjoyed a tremendous economic advantage by the 1960s this wasn’t exactly the case.  European nations grew at a good rate, and the western European nations had largely reindustrialized at this point. The Captain was right, our growth in the 1950s and 1960s wasthe result of sound economic policy.  During this 20 year period the US enjoyed a growth rate slightly above the historic average at 3.85%. Not since the 1960s have we enjoyed a 10 year growth rate that was above our countries historic average.  And that raises the next issue.

Outside of a rather small period in US history, from the end of WWII to the 1970s the US has not trended above our historical growth average.  From 1870 to 1890 we enjoyed two decadesof growth that averaged above 5%.  We also had enjoyed above average growth during the 1820s, 1840s, and 1850s.  Looking at the chart during this period; 3% economic growth was a signal of economic weakness not strength.  Now, this was partly because of industrialization and the US expansion out west.  However, this was also a period of freedom for the American people when it came to commerce. Government was limited and people were free to eke out a living however they chose. I would argue that our growth rates are a result of this, and not our need to industrialize at the time.  There are plenty of nations now that are in dire need for economic modernization yet because of a culture of corruption those nations cannot sustain any sort of real economic growth.  In fact I would argue it is much easier for a nation like China to modernize itself, with the world wide accessibility and inexpensiveness of modern technology than it would have been for 19^th century America.  China sustained impressive growth rates by being the manufacturer of least cost; copying, or sometimes outright stealing, technology and methods that helped them produce the goods they exported. 19^th century America utilited and invented new methods and technologies, such as the telegraph, cotton gin, telephones (invented by our friends to the north, Canada), electricity, phonographs etc., that allowed the US to become an industrialized powerhouse.

We see that in the last decade of the gilded age economic growth slowed dramatically.  This is in large part due to the economic crisis of 1893, but thereafter growth continued at a slower pass than it had in the past. What had happened in the United States was a that there was dramatic change in the American political landscape.  This was the beginning of the progressive era of politics.  Now the progressives of yesteryear are not like the progressives today, but they did seek the use of government to influence society towards their social ends.  This marks the beginning of government meddling in the American economy and life. Public schools, regulations, and agencies began to grow. It looks like these policies had a negative effect on economic growth from the 1900s to the 1930s, when it was argued that the progressive era ended.

What we see though, is that outside of the 1950-70, is that growth has largely been beneath our ‘potential’.   The decades of the 70s to the millennium saw the US achieve growth rates closer to that potential, but not quite, and I think that much of this growth was the result of very loose monetary policy.  The US became complacent after the 1960s and began implementing grandiose social policies that were intended to eradicate racism and poverty. We could afford these policies at the time, however, few asked what the long term rammifications would be. Also notice that the above average growth ended right about the time Nixon killed Breton-Woods.  This alone isn’t the cause for the gradually deteriorating economic condition of this nation, more a symbolic moment.  When the US killed the agreement; it signaled to the world that it would no longer abide by the promises it had made, or keep spending within tolerable limits.  The reason why the US broke the agreement was that the eggs it had made during the previous three decades had now hatched and our economic output alone wasn’t enough to service these promises.  And rather than make the politically unpopular decisions that would ensure long term economic vitality. Our politicians decided to prime the pump.

Most telling is when you look at economic growth from 2000-2010.  A mere 1.55%, the worst at any point in American history, and the question is why?  The answer is relatively simple. The promised debt load that US now holds has become far too large, even with our ability to print money, and the US has slide drastically when it comes to economic competitiveness.  Our government has long been unable to pay the promises that it had made according to the gold chart from the late 1960s on. And the recent spike in the early millennium shows us that our economic output cannot as well. It’s a whole other topic but monetary policy is directly related to economic health.   Popularly elected governments stay in power by keeping their constituents happy, there a myriad of ways it can do this, but two stand out. One is economic growth, and the other is social programs.  What the gold chart and the 10 year rolling GDP chart shows us, is that around the 1970s our government decided that social programs, and not economic ones, were the key to obtaining voter approval. This meant that whenever the government couldn’t pay for its programs it would engage the printing press, and then search for ways to squeeze tax dollars our of its citizens and businesses.  This is done by taxation and regulation; both were utilized by our government. However, given the general anti-tax attitudes of most Americans taxes, regulations became the vehicle of choice.  It was through regulation that our government either received additional funds to fund its programs, or forced the private sector to take care of the promises that it had made but couldn’t keep, i.e. retirement and healthcare.

This leaves the United States in a very dire situation.  We cannot come close to paying our debts, or hold our standard of living, if we grow at less than 2% a year, and perhaps even 3% is too low.  It is unlikely that our government will stop its deficit spending, but if it could do anything to help make the burden easier to shoulder, and not destroy America’s standard of living, it would be to make the United States more economically competitive and return us to our historic growth averages.