Is GDP growth stuck at 2% or lower forever?
By now I am sure you all know that GDP for the fourth quarter grew at an annual rate of 1.9% which means GDP for 20216 increased 1.6% over in 2015.
Chart courtesy of Dominguez and Jones WMG and The St. Louis Federal Reserve Bank
So the question crossing your mind should be: Why is GDP growth declining over time? If you have been a reader of these newsletters, you may remember we discussed the impact of regulation on growth as explained by Dr. John Taylor professor of economics at Stanford University. First Principles, his book, which I encourage you to read, postulates that regulation and its application on an arbitrary manner makes economic decisions regarding investing in the future all but useless. Moreover, economic growth is dampened considerably.
The Mercatus Center at George Mason University recently published a research paper titled “The Cumulative Cost of Regulations”: Their conclusions confirm the observations by John Taylor that regulations over time complicate and distort decision-making by companies in our economy ultimately resulting in lower investment rates, reduced output, and limp economic growth.
Figure8. Factual (Dots)and Counterfactual (Blue Line)Value Added to GDP, with 90 Confidence Interval
Their findings most likely explain the lower trend of GDP growth:
- “If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.
- This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.
- This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.”
GDP growth capped at 2% forever? No. However, it will take time to untangle the spaghetti, just like it did in the 20 years or so following the Carter years. Moreover, it was Carter that began the process the last time. I believe the pendulum is swinging back; growth shall resume, us optimists would say.
Our portfolios generally reflect overweighed exposure to Domestic Equities.
Carlos Dominguez, CFP® – Portfolio Manager
Bentley Coffey (Duke University) Patrick A. McLaughlin (Mercatus Senior Research Felow), and Pietro Peretto (Duke University). “The Cumulative Cost of Regulations.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, April 2016
First Principles: Five Keys to Restoring America’s Prosperity, New Paperback Edition, 2013, Hardcover or Kindle Edition, 2012
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