Mark Thoma on the trend in real economic growth

Mark Thoma has published a long post on the evolution of real economy in the U.S. The question is -When will real GDP intercept its long-term trend? Or will it intercept at all? Mark also cited some related posts by Mankiw, Krugman, DeLong and own papers.

Before any discussion of real growth models one must replace real GDP with real GDP per capita in order to exclude the exponential working age population growth. This is a major source of confusion also missed by Mark. Then, one should compare other developed countries in order to reveal common features. Also, one has to test predictive power of all models.

My recent post on the growth model was based on observations in developed countries and showed that the growth rate of real GDP per capita has a trend decaying proportionally to the reciprocal value of the real GDP per capita. All fluctuations in the growth rate in developed countries, including the USA, return to this trend, at least since 1950 (no reliable data before).

Thus, the US economy will likely return to the decaying trend, not to the linear trend in the growth rate as borrowed from the Lucas lecture.

When discussing models one has to validate them by data. Otherwise this discussion is worthless.

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