The Great Stagnation in Australia

Is the developed world in the midst of a “Great Stagnation?”  That question has several parts:

1.  Is growth in living standards slowing?

2.  Is growth in RGDP/person slowing?

3.  If the answer to #2 is yes, is it merely because of the recession?

I’d like to examine questions 2 and 3 by looking at Australia.  As far as I can tell between August 2006 and August 2013, Australia’s population will grow from 19.855 million to about 23.1 million, up 16.35%.  Real GDP will grow from $1.112 trillion in 2006 to $1.376 trillion in 2013.  Thus per capita GDP will grow by about 6.3% over 9 years, or roughly 0.9% per year.

Here’s why I find the Australian growth rate interesting:

1.  Australia avoided the recession, so it should give some sense of the sort of long term growth rate one can now expect in a fully developed and relatively successfully managed economy.  The unemployment rate did increase very slightly, but on the other hand there was a huge and probably unsustainable mining boom.  So if anything, I’d guess 0.9% is a slight overestimate of Australia’s long term RGDP/person growth rate.

2.  In the US there has been almost no change in RGDP/person since 2006, but that’s partly due to the recession.  Suppose we look at RGDP/employed person.  Employment fell a total of 0.2% between February 2006 and February 2013.  RGDP rose 6.6% between 2006:1 and 2013:1.  So RGDP/worker rose 6.8%, or just under 1% per year, pretty close to the Australian rate.  But the jobs lost have been disproportionately low-skilled, so again the trend rate of RGDP/person growth may be even lower.

3.  What does this mean about living standards?  You can argue it either way.  Maybe a lot of this growth is simply imputed quality changes, which don’t make people happier.  So actual real GDP is even less than estimated.

4.  Or maybe growth in living standards (that elusive “utility”) is much faster than estimated, because there’s lots of fabulous free stuff on the internet, and medical science is reducing problems like depression.

Here’s the bottom line in my view.  The way our modern society is structured, businesses will keep innovating and reducing costs, and this will lead to 0.5% to 1.0% per annum rise in measured RGDP/person.  But that number is no longer very important.  Instead the key issue will be how well society addresses the unpredictable challenges that will come our way courtesy of scientific advances—good or bad.  Will there be genetically manufactured viruses that do all sorts of damage?  Or will we find a way to stop the aging process?  Or invent happiness pills?  Will we genetically program our babies to have high IQs?  When you think about the unexpected challenges over the next few centuries, it really doesn’t matter very much whether RGDP is growing a bit more or less than 1%.  Something very, very big is coming along.

I’m not a fan of the “robots will take our jobs” meme.  A similar theory was very popular during the 1930s (for obvious reasons), and it will fade from view when the recession ends.  I have an open mind on the “robots will create inequality meme.”  It’s too soon to say.  If it does we might want to weaken intellectual property laws, or redistribute consumption (not income.).

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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