Question

As indicated in the chapter, the CBO forecast that real GDP would grow at an average annual rate of 1.9 percent from 2017 to 2027 . The Trump administration pledged to raise the growth rate to 3 percent, although some policymakers and economists were skeptical that this goal could be achieved. Yet from 1960 to \(1969,\) real GDP grew at an average annual rate of 4.5 percent. Briefly discuss the factors that make growth rates that high more difficult to achieve today.

Short answer

High growth rates like the 4.5% from 1960 to 1969 are now more difficult to achieve due to factors like an ageing population, the maturity of current technology, and contemporary economic policies that prioritize sustainability and economic stability.

Step-by-step solution

Understand the historical context

First, the historical context of GDP growth should be understood. The GDP growth rate of 4.5 percent from 1960 to 1969 was high due to a number of distinct factors during that time period, such as the effects of post-war economic boom, technological innovation increases, and rapidly growing populations.

Identify Current Limitations

Next, it's important to identify the current constraints to achieving a high GDP growth. This can include factors like ageing populations, the maturity of current technology, and economic policies which could have potential impacts on growth.

Discuss Specific Factors

In the last step, discuss these factors in detail. The ageing population is a significant factor because it leads to a slower labor force growth, which can limit GDP growth. Technological maturity implies there may be less scope for groundbreaking innovations that significantly boost productivity. And current economic policies may not favor rapid growth, due to concerns about sustainability and economic stability.

Key concepts

Historical GDP Growth

Understanding historical GDP growth is crucial in grasping why modern economies may find it challenging to reach high growth rates experienced in the past, like the 4.5 percent annual rate from 1960 to 1969. The post-WWII era was a time of reconstruction and expansion for many economies, leading to what was termed as an economic boom.

During that period, a swell in the labor force due to the baby boom generation reaching working age, as well as significant advancements in technology and productivity, propelled economic growth. Suburbs expanded, consumer spending increased, and industries such as automotive and manufacturing thrived.

This historical context sets a backdrop that differs greatly from today's economic realities, where factors such as demographic changes, market saturation, and various forms of economic headwinds present more of a challenge to attaining such growth rates.

Economic Constraints

Currently, a variety of economic constraints can inhibit the potential GDP growth rate. An ageing population is one significant constraint as it results in a slower growth of the labor force, which in turn can dampen economic expansion. A smaller working-age population translates to less production and innovation, and potentially increases the burden on social services.

Other constraints include market saturation in various sectors, which means many products and services are already at a level of 'enough' in terms of consumer needs, leaving less room for explosive growth. Limits to natural resources and environmental issues also pose significant challenges, necessitating a focus on sustainable practices which may not always align with rapid economic expansion.

Moreover, the global economy's interconnectedness can also work as a limiting factor as economic downturns in one part of the world can have ripple effects elsewhere, making consistent high growth rates across all regions more difficult to achieve.

Technological Innovation

Technological innovation has historically been a key driver of economic growth, as seen during the 1960s. However, the argument goes that current technological advancements may not have the same econ-boosting impact. This is not to say that technological innovation isn't occurring, but rather that the nature of recent innovations might lead to less dramatic increases in productivity.

Today's technology sector is marked by rapid improvements in information technology, automation, and digitalization. While these advancements continue to transform how businesses operate and compete, the scale of productivity gains can be incremental as opposed to the large leaps seen in the past with the advent of, for instance, the automobile or widespread electricity use.

Hence, while technological innovation continues to contribute to economic growth, it might not single-handedly drive GDP growth rates to the high levels witnessed in the historical periods without parallel advances in other economic and policy domains.