Long-term outlook: How does it all end?
What economic path are the US and major allies likely to take over the next decade? Here is my take on how this is likely to pan out.
First, let's start with a template of what a healthy, growing economy looks like.
A Virtuous Cycle
Growth is dependent on two factors:
- Demographics -- that is a growing, skilled workforce; and
- Productivity -- where output grows at a faster rate than the workforce.
Growth requires not only a growing population but a growing workforce. An ageing population or large population under the age of 25 is unlikely to contribute much to output. What is needed are people of 25 to 55 who hold down productive jobs. We also need to ensure that they have the necessary skills – productivity tends to rise with education levels. Education that is skills-based is worth a lot more than a barista with a bachelors degree.
The most important source of productivity growth, however, is investment. More specifically, private investment – government investment tends to provide a short-term boost to the economy but acts as a long-term drag on growth (Dr Lacy Hunt). Mechanization and automation increase the output per worker, boosting productivity.
The chart below shows US private domestic non-residential investment (blue) at a healthy 13.5% of GDP, while productivity (magenta), calculated as real GDP/total non-farm employees, has grown steadily since the 1950s.
Savings are needed to fund private investment. Either domestic savings or offshore borrowings...
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