Slower Growth, Lower Returns

In the November issue of Retirement Watch, now available on the members’ web site, I estimate that investment returns over the next five to 10 years will be lower than investors are used to or expect. Here’s a similar argument, which estimates that economic growth in the future is going to lower than we are used to or expect. Economic Brink Lindsay, writing a paper for the Cato Institute, argues that the four main drivers of economic growth are weakening and probably aren’t going to strengthen in the near future. Lindsay says in the past when one or more of these factors was weak, one or more of the others would strengthen to offset the weak ones and keep annual GDP growth at around 2% after inflation. Based on current conditions and trends, he doesn’t believe the economy can continue that pace.

Consider the four constituent elements of economic growth tracked by conventional growth accounting: (1) growth in labor participation, or annual hours worked per capita; (2) growth in labor quality, or the skill level of the workforce; (3) growth in capital deepening, or the amount of physical capital invested per worker; and (4) growth in so-called total factor productivity, or output per unit of quality-adjusted labor and capital. Over the course of the 20th century, these various components fluctuated in their contributions to overall growth. The fluctuations, however, tended to offset each other, so that weakness in one element was compensated for by strength in another. In the 21st century, this pattern of offsetting fluctuations has come to a halt as all growth components have fallen off simultaneously.