Thursday, October 1, 2020

Demographics and productivity weigh on GDP growth

In Demographics and Debt Hang Over Long-Term U.S. Growth, the Wall Street Journal's Greg Ip provides a summary of CBO's Long-Term Budget Outlook released last week. 

Fewer births and lower productivity growth lead the CBO to expect annual economic growth to average 1.6 percent over the next few decades. The role of debt is more uncertain. Ip provides a summary of CBO's approach to modeling it at the end of the article:

"The elephant in the room is the national debt. Conventional economic models like the CBO's say government debt soaks up saving and thus crowds out private investment, and the U.S. is about to have a lot more debt ... The "crowding out" model hasn't fared well in recent years: steep deficits have coincided with ultralow interest rates. This is probably because investment has been persistently weak globally relative to saving."

Claudia Sahm questioned why the WSJ included debt in the title, since Ip writes "Most [of the lower growth forecast] reflects longer-lasting forces, namely demographics and productivity." Sahm notes that CBO "is a fairly conservative shop in its forecasts."

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