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Opinion | Jeffrey D. Sachs

The GDP doesn’t tell the whole story about economic growth

Last week’s GDP report, showing that growth had slowed to an annual rate of just 0.7 percent, was a striking reminder that US long-term economic growth has been slowing for decades. In a fascinating new book, “The Rise and Fall of American Growth,’’ economist Robert Gordon argues that the period of rapid US growth, from 1920 to 1970, was a golden age never to be revisited. Several economists have joined Gordon in arguing that we have entered an age of secular stagnation. This kind of fatalism is misplaced. The United States, and the world, could achieve rapid economic progress in the coming decades, but only if we address the root causes of slower growth.

First, let’s do some statistical housekeeping. One quarter’s GDP growth doesn’t tell us too much. GDP data are regularly revised, so that the slow growth could be a mere aberration of preliminary data. Even if it’s real, one slow quarter might signify little when growth is averaged over several years. And GDP growth itself is a deeply flawed measure of well-being. High growth does not guarantee shared economic improvement, and slow growth does not necessarily imply widespread economic hardship. In recent decades, most of the fruits of US growth have gone to the richest of the rich, who least need it.


Still, even after accounting for data errors, short term cycles, and the yawning gaps between GDP and well-being, there is little doubt that the US economy is failing to raise living standards at the same pace as in the past. Annual growth of GDP averaged 3.4 percent per year between 1980 and 2000, but only half of that, 1.7 percent per year, between 2000 and 2014. Since the United States is a high-income country, slow growth is not necessarily a catastrophe (compared, say, with extreme poverty, war, or environmental degradation), yet the US economy has room for major improvement.

The big mistake of “secular stagnationists” is to treat the slowdown of US growth as inevitable, a consequence of the drying up of technological opportunities for future economic improvement. Such fatalism is misguided. Long-term economic improvement occurs when societies invest adequately in their future. The harsh fact is that the United States has stopped investing adequately in the future; slow US economic growth is the predictable and regrettable result.


While simple measures of national saving are flawed, they convey useful information. The evidence suggests that the US national saving rate has declined markedly since the “Golden Age” celebrated by Gordon. The saving rate is measured in two ways: as “gross saving” before subtracting capital depreciation, or as “net saving” after subtracting depreciation, both relative to national income. The net saving rate has declined more than the gross saving rate because capital depreciation as a share of national income has risen in recent decades.

We can compare the saving rate of the private economy (business and households) and government. We find that both private and government saving rates have declined by roughly the same amount, each by around 5 percentage points of national income. Households are not saving as much of their income as they did decades ago. Government (combining federal, state, and local levels) has gone from a net saving rate near zero to a chronic negative net saving rate.

There are several possible causes. Depreciation of capital is certainly absorbing more of gross saving, as we would expect in a capital-rich, mature economy. Households are aging. And government has turned populist, promising tax cuts at every election cycle, thereby denying the government the revenues needed to invest in America’s future.


With higher saving rates, both public and private, invested into productive capital, the United States could overcome secular stagnation. The benefits of new scientific and technological breakthroughs — in genomics, nanotechnology, computation, robotics, renewable energy, and more — are certainly within grasp, but only if we invest in them. It is especially shocking that at a time when we need new clean energy sources, more nutritious foods, better educational strategies, and smarter cities, we have been cutting the share of national income that government devotes to basic and applied sciences.

In the 1960s, around 4 percent of the federal budget was spent on nondefense research and development. Now only around 1.5 percent of the budget goes for civilian R&D. As a share of GDP, nondefense federal R&D declined from around 0.9 per cent in the 1960s to under 0.4 percent today. In the pursuit of tax cuts, we have undermined our collective ability to build a more prosperous and sustainable future. And we’ve done it with little recognition of the long-term consequences.

We certainly notice the crumbling of the roads, bridges, and dams that suffer from chronic undersaving and underinvestment. We are less aware of how we are shortchanging the science, skills, and natural capital that we depend upon for long-term progress. And we are less aware still that investing in our future requires robust rates of public and private saving. Golden ages don’t just happen; they reflect societies that choose to save and invest vigorously in their long-term well-being.


Jeffrey D. Sachs is director of the Earth Institute at Columbia University and author of “The Age of Sustainable Development.’’