Guest Post: A History Of Real GDP & Population Growth

Submitted by Lance Roberts of Street Talk Live,

In my recent missive on "The Long View Of Interest Rates" I made the comment that:

"The 'Great Depression' was not just one very long 'recessionary' period but rather two recessions that 'bookended' a period of relatively strong economic growth.  However, interest rates were unable to rise for over a decade as the 'depression' on 'Main Street' was far more real than the economic statistics revealed.  It is possible that in 30 or 40 years, as we look back at current history, we will indeed label the current period as the second depression.  While there indeed may not be "bread lines" on street corners it is only because the 'nutritional assistance' comes in the mailbox."

As you might imagine I received quite a bit of pushback from the economic bulls saying that there is no way that current economic situation is anything like the "Great Depression" particularly since the Federal Reserve has acted so strongly to prevent such an outcome.  While I can certainly understand their argument; the reality is that there is indeed a great difference between the current economic environment and that of the depression era.  

The chart below is a long view of the real, inflation adjusted, annual growth rate of GDP as well as on a per capita basis.  I have also included the annual growth rates of the U.S. population.   I have highlighted significant historical events for some context as well as notating the depression era and the current "Great Recession." 

[Data Source:  MeasuringWorth.com] click for large legible version

There are indeed many differences between the "The Great Depression" and the "Great Recession."  Economically speaking, during the depression the economy experienced extremely strong annual rates of growth reaching peaks of 13% and 18% on an annualized basis as opposed to peaks during the current economic cycle of 2.5% and 2.7%.  What plagued the economic system during the depression was the real loss of wealth following the "Crash of 1929" as a rash of banks went bankrupt leaving depositors penniless, unemployment soaring and consumption drained.  While the government tried to provide assistance it was too little, too late.  The real depression however was not a statistical economic event but rather a real disaster for "Main Street."  

During the current period real economic growth remains lackluster, real unemployment remains high with millions of individuals simply no longer counted or resorting to part-time work just to make ends meet and roughly 100 million Americans are on some sort of government assistance.  As I stated previously, the depression may indeed be on "Main Street" once again with the only difference being that the "breadlines" are formed in the mailbox rather than on street corners. 

One important difference is the rate of population growth which, as opposed to the depression era, has been on a steady and consistent decline since the 1950's.  This decline in population will potentially lead to further economic complications as the "baby boomer" generation migrates into retirement and becomes a net drag on financial infrastructure.  (My friend Doug Short has done some excellent research in this regard that is worth reading.)

I have also noted the average rates of economic growth for various periods throughout history.  During the "agricultural age," prior to 1900, the average rate of real economic growth, although very volatile due to weather, disaster and economic events, averaged 4.2% annually.  As the world entered into the 20th century the impact of WWI, the massive inflationary spike that followed which led to a depression, the "Crash of 1929" and the "Great Depression" saw economic growth slip to 2.62% annually.  From the depths of this turmoil rose an economic powerhouse from 1940-1980 as the U.S. became the epicenter for manufacturing and production worldwide.  During this period economic growth surged to 4.51% annually.  Since 1980, as the U.S. became addicted to credit, leverage and debt, the economic growth rate has continued to weaken as the U.S. shifted from its production basis to an economy built on finance and services which have lower economic multipliers.  Despite the rise of technology, a surging "secular bull market," and increasing standards of living; the 1980's and 1990's saw real economic growth drop to 3.2% annually.  That rate of growth has continued to decline since the turn of the century as the bursting of the technology bubble and the housing/credit crisis has led to an annual growth rate of just 1.94%.

Despite trillions of dollars of interventions and zero interest rates by the Federal Reserve, combined with numerous bailouts, supports and assistance from the Federal Government, the economy has yet to gain any real traction particularly on "Main Street."  Are we currently experiencing the second "Great Depression?"  That is a question that we can continue to debate currently, however, it will only be answered for certain when future historians judge this period.  It will also be that same group of historians that will ultimately determine whether the actions taken by the Federal Reserve, and the Government, were a ultimately a success or a failure. 

One thing is for sure.  With the lowest rate of annualized economic growth on record there is a problem currently that is not being adequately recognized.  Despite ongoing interventions and hopes for economic recovery the rate of population growth has now fallen to levels not seen since the early 1930's.  Employment-to-population ratios remain at the lowest levels since the early 80's and 53 percent of all American workers now make less than $30,000 a year.  The long term consequences of an aging population, lower incomes and savings rates and a declining rate of population growth is a problem that is likely to continue to hamper the economy going forward.  Of course, these are the same problems that currently plague Japan and will soon cripple China's economy.