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April 03, 2008

Doing Some Figuring

Friedrich von Blowhard writes:

Dear Blowhards,

I’ve been doing some figuring lately. I thought the results were interesting enough to share.

I wanted to look at U.S. economic growth independent of two factors that often distort it: inflation and population growth. After all, any economy can appear to grow if you distort the measuring stick (inflation) or add production inputs (people). The question is, how well is the economy doing at the job of creatively utilizing its productive inputs?

I took the real U.S. GDP (that is, adjusted for inflation, all numbers in FY2000 dollars) at 1940, 1950, 1960, 1970, 1980, 1990, 2000 and 2007, and divided each number by the official population of the country the same year, thus coming up with the real GDP per capita for that year. I then calculated the compound annual growth rate (CAGR) for that decade. Of course, I used a 7-year "decade" instead of a 10-year decade for the current period.


Obviously, the long-term trend is down.

It seems to me that this graph suggests a good deal about the political life of our country over the past 70 years or so.

Obviously during the 1940s, the 1950s and the 1960s, things were looking pretty good to the average citizen . Life and the paycheck were getting better. The New Deal consensus about how to run our country was firmly in place, and the extension of that New Deal, Lyndon Johnson's Great Society programs, were a logical next step.

The 1970s were obviously a big blow to this optimism. What could have gone wrong?

The 1980s and the 1990s were perceived as rebounds from that horrible decade. The general consensus was that the economy had been rejuvenated by the impulse toward deregulation. The glories of the free market were trumpeted. The numbers suggest, however, that this widespread perception was a myth, at least economically: the rebound decades were actually less impressive than the so-called horrible decade.

This misperception suggests to me that there is a bias in the media, and possibly in our national life, which is not liberal or conservative, exactly. It's a bias that focuses attention on the fortunes of the people at the top. If they’re doing well, then the country is doing well. And the people at the top have done very well over the past 27 years, although unfortunately not as a result of their incredibly successful economic management of the general economy.

This graph also makes it pretty clear why there is a disjunction between elite opinion and mass opinion on currently high levels of immigration. If your compensation correlates with total GDP growth (and thus with asset values like stock prices) rather than per-capita GDP growth, you’d tend to support the notion that the antidote to slowing per person growth is, um, more people.

Of course, if you’re just one of these people, you might prefer a different strategy, since what you’re seeing is a continually slowing rate of improvement in your lot (maybe none at all) while enduring lots of social friction.

This graph also explains why the notion of an Imperial America calling the shots around the world is (or was) pretty popular. The decades when we’ve been at war have, except for the current one, been good periods for the economy. I showed this graph to a friend who worked in the military-industrial complex and asked him why the war stimulus mojo didn’t seem to be working today. He explained that we’re fighting wars in Iraq and in Afghanistan in which almost all the spending is operational, rather than on developing and producing new weapon systems. His point was that in terms of military innovation and procurement, the 1980s, the 1990s and the 2000s saw continual declines in the innovative hardware design-and-procurement end of things. (The 1970s saw the design of most of our current major weapon systems: F15s, aircraft carriers, atomic submarines, ICBMs, etc.) New forms of body armor and road-mine-proof Humvees – two big items of expense at the current time -- aren’t exactly revolutionizing the civilian economy.

If you think that this is too bloodthirsty an explanation, I’d remind you that modern electronics, computers, the Internet, atomic power, the airline industry and many other of our “engines of growth” all started out life as war-making tools. I don't know if you're aware of it, but the phrase “high tech” started out life as a euphemism for “military tech.” (No kidding.)

So where do we go in the future? Well, I would suggest it’s time to rethink the notion that we should run the country purely as a form of financial speculation, as we have for the past few decades. It might be a good thing for the U.S. if the words "Federal Reserve," "M&A," "LBO," "private equity," and "financial engineering" got considerably less press going forward – you know, focus on the real economy for a change. And perhaps we should consider investing at a governmental level in some of the big challenges that we face as the world’s leading industrial and energy-consuming society.

Unless, of course, you'd prefer more wars. That’d probably work too.



P.S. If you are wondering, I found the numbers I used to construct the graph above here, here, here and here.

posted by Friedrich at April 3, 2008


Nice work, tks. Reminds me of one of my pet rants -- the way regular people seem to have no idea what a snowjob the whole "we need more immigration" argument is. The ruling-class agenda has got nothing to do with ensuring your retirement, and everything to do with pumping up the raw numbers of people. After all, even if growth per person is tanking, raw numbers of people will keep pushing the overall sum up. And if you get, say, 10% of that, then your income is rising even if the incomes of normal people aren't. And if you live a gated/protected sort of life, you aren't stuck dealing with many of the social costs -- ethnic rivalries and resentments, crowding, etc. Things are good.

Hey, America: quit letting yourself be hoodwinked, for god's sake.

Oh, one further thing, the idea that all these new immigrants will be thrilled to pay taxes to support a mob of largely-white retirees .... Ahahahahahahahaha. I love the idea that this kind of mass immigration is the only way to save Social Security. It's probably the best way imaginable to torpedo it.

Phew, feels good to get that out ....

Posted by: Michael Blowhard on April 3, 2008 10:54 AM

Hey, did you notice that even that liberal utopia Sweden has begun to question its immigration policies?

If that's really happening, it'll be interesting to see how much longer American lefties will go on being sentimental about indiscriminate immigration ...

Posted by: Michael Blowhard on April 3, 2008 10:58 AM

Very interesting, but I think that the arbitrary division into "decades" is a little misleading. A look at the whole trend is available here:

Posted by: tschafer on April 3, 2008 11:25 AM

Kudos Friedrich. Great post.

Posted by: yahmdallah on April 3, 2008 12:03 PM

I'd be a little careful about interpreting the 1940s because in 1940, we were still in the Depression and had quite a bit to recover from. The 1930s were so bad that we were arguably recovering from the Depression well into the 1950s.

I'd also probably go with GDP per worker instead (or maybe per labor force participant) since that tells us what's happening with our productive capacity in the long run. Per capita GDP will rise when women have fewer kids and enter the labor force instead; per worker GDP will probably fall though. The 1960s and 1970s were fueled in a large part by this exact phenomenon. Doing that, thing flatten out a bit since the mid 1960s. The 1950s end up looking really great and the 1970s pretty lousy, with the 1980s through 2000s somewhere in between.

All in all, a nice effort. It would probably be cool to chart these things next to population and labor force participation growth--I'd tend to think of politics as being driven heavily by that too. The 1960s (exciting, young, maybe a little dirty) look quite a bit different from the 1990s and 2000s (boring, upper-middle-aged, fanatically clean).

Posted by: Chris on April 3, 2008 12:19 PM

May I suggest a plot of your growth rates versus the number of civilian employees of Government, per capita of population? It might suggest a potential reason for your problems. It used to be said that Britain ran India with fewer civil servants that the Austrians used in Prague; I think you might conclude that the USA is becoming a wee bit Hapsburg in its habits.

Posted by: dearieme on April 3, 2008 1:47 PM

Interesting. This seems like a visual representation of what everybody "feels" viscerally---we keep hearing about our tremendous "productivity gains" how come it doesn't "feel" like that? I think Chris' point might illuminate your point further---factoring "partipants in the labor force" would measure "productivity" of labor force participants but not "general wealth" per person, especially as retirees grow. It's not as if worker productivity goes straight into the workers' pockets. Worker productivity sure does make the CEO's of major companies bonuses bigger, though!!! And of course there is all the money which has little to do with true value creation for anyone but the landed gentry---the "M & A" stuff which re-jiggers the "value" of a company without selling one more dime of product, inventing anything, or growing anything.

Just a thought....the sixties also had the space program, an offshoot of the military which was not warmongering, to add to the tech and invention bucket. Maybe we need to send someone to Pluto.

Posted by: annette on April 3, 2008 4:38 PM

tshafer: That's an interesting graph. It might be more informative with a logorithmic scale on the Y axis. Eyeballing it, it looks like per-capita GDP doubled between 1900 and the early 40s, doubled again by the early 60s, and doubled yet again by the late 90s. So obviously there's been a slowdown, but it hasn't taken as much wind out the economy's sails as the Great Depression.

Posted by: Intellectual Pariah on April 3, 2008 7:36 PM

Wow, I'm really surprised by the 90s result. I guess the 1990-1993 period saw really slow growth, because the late 90s were the best time for the American economy since the 60s.

You really have to think about income inequality here, as you clearly do. For the median (typical) male worker with a non-graduate level education, the period from 1973-present has been really pretty bad. For say the 90th percentile of men or the typical woman, things have been economically very good.

Posted by: mq on April 3, 2008 10:22 PM

Something is wrong here. Real GPD per capita has been rising steadily:

Table 1. Real GDP per Capita
Converted to U.S. Dollars using PPPs
(2002 U.S. Dollars)

Year United

1960 14,420
1961 14,516
1962 15,161
1963 15,598
1964 16,278
1965 17,107
1966 18,014
1967 18,267
1968 18,958
1969 19,351
1970 19,162
1971 19,557
1972 20,374
1973 21,342
1974 21,040
1975 20,797
1976 21,694
1977 22,468
1978 23,470
1979 23,944
1980 23,615
1981 23,970
1982 23,282
1983 24,115
1984 25,623
1985 26,445
1986 27,114
1987 27,780
1988 28,667
1989 29,402
1990 29,620
1991 29,179
1992 29,752
1993 30,152
1994 30,987
1995 31,389
1996 32,174
1997 33,221
1998 34,208
1999 35,324
2000 36,225
2001 36,111
2002 36,311
2003 36,856
2004 37,934
2005 38,778
2006 39,682

Posted by: Mike on April 4, 2008 10:36 AM

Thanks to all for their commnents.

MB: I thought you'd like the implications for immigration, which I think are pretty clear.


That's a nice graph, but it doesn't undercut my thesis; the rate of increase is slowing. The graph would have to be more exponential than it is to counteract my point.


You're too kind.


I don't understand why it would make more sense to do this as the CAGR of GDP per worker than GDP per capita. Last time I looked, everyone had to be fed, kids and old people and housewives as well as paid workers. I would assume that most wage earners, especially heads of households, would agree. However, I will admit that I'm intrigued by what you report and will look into it.


Again, an intriguing suggestion and one I'll look into in a future post!


The gap between increasing worker productivity and stagnant wages is, of course, a scandal. I like your idea about sending someone to Pluto: there's got to be some highly commercial ponies in that pile. (Of course, the same is likely true of energy efficiency, renewable power and renewable fuels). On a related note, given that we're spending a lot on biomedical R&D, it's interesting that we're not seeing much of a multiplier effect in the real economy. I wonder what's up with that?

Intellectual Pariah:

You say:

So obviously there's been a slowdown, but it hasn't taken as much wind out the economy's sails as the Great Depression.

I don't know if you've noticed how similar the causes of the current financial crisis are to the run-up to the Great Depression: booming asset prices, complex securities that no one really understands...they're pretty much all there in both cases. Perhaps periods of financial exuberance like the 1920s and the 1990s-2000s look good on the plate, but aren't really so filling in the stomach.


You describe the late 1990s as the best time for the American economy since the Sixties; I have to ask why. I don't know if you are aware that corporate write-offs in the 2000-2003 period essentially erased corporate profits of the late 1990s entirely. Booms and busts are a bitch!


I haven't redone my math with your numbers (which skip the 1940s and 1950s entirely), but as I said above, I'm not saying that real per capita GDP isn't rising; it's that it is rising significantly more slowly today than it did sixty years ago. The U.S. economy is effectively a less attractive investment than it was in 1940, or 1950, or 1960, etc.

Posted by: Friedrich von Blowhard on April 4, 2008 10:57 PM

If you fire up excel and graph the numbers I gave you, you'll see they are almost in a straight line, tilted nicely upwards. No decline in the rate.

Posted by: Mike on April 5, 2008 10:28 AM


If per capita GDP is rising on a straight line, the compound annual growth rate will be falling. To maintain a constant CAGR, the per capita GDP must accelerate so that the line curves upward. Try multiplying 1.05 times itself five times. The answer is not 5 X 1.05.

Posted by: Friedrich von Blowhard on April 5, 2008 5:19 PM

Yes, you are correct. The compound rate must be falling if the annual increase has remained fairly constant.

Has any other nation maintained a steady, compound growth rate of this magnitude for more than a few decades?

Posted by: Mike on April 8, 2008 9:43 PM

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