Cover of Fully Grown
Fully Grown Why a Stagnant Economy Is a Sign of Success
by Dietrich Vollrath
University of Chicago Press, 2019
Cloth: 978-0-226-66600-6 | Paper: 978-0-226-82004-0 | Electronic: 978-0-226-66614-3
DOI: 10.7208/chicago/9780226666143.001.0001

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ABOUT THIS BOOKAUTHOR BIOGRAPHYREVIEWSTABLE OF CONTENTS

ABOUT THIS BOOK

Vollrath challenges our long-held assumption that growth is the best indicator of an economy’s health.

Most economists would agree that a thriving economy is synonymous with GDP growth. The more we produce and consume, the higher our living standard and the more resources available to the public. This means that our current era, in which growth has slowed substantially from its postwar highs, has raised alarm bells. But should it? Is growth actually the best way to measure economic success—and does our slowdown indicate economic problems?

The counterintuitive answer Dietrich Vollrath offers is: No. Looking at the same facts as other economists, he offers a radically different interpretation. Rather than a sign of economic failure, he argues, our current slowdown is, in fact, a sign of our widespread economic success. Our powerful economy has already supplied so much of the necessary stuff of modern life, brought us so much comfort, security, and luxury, that we have turned to new forms of production and consumption that increase our well-being but do not contribute to growth in GDP.

In Fully Grown, Vollrath offers a powerful case to support that argument. He explores a number of important trends in the US economy: including a decrease in the number of workers relative to the population, a shift from a goods-driven economy to a services-driven one, and a decline in geographic mobility. In each case, he shows how their economic effects could be read as a sign of success, even though they each act as a brake of GDP growth.  He also reveals what growth measurement can and cannot tell us—which factors are rightly correlated with economic success, which tell us nothing about significant changes in the economy, and which fall into a conspicuously gray area.

Sure to be controversial, Fully Grown will reset the terms of economic debate and help us think anew about what a successful economy looks like.

AUTHOR BIOGRAPHY

Dietrich Vollrath is professor of economics at the University of Houston. He is coauthor of Introduction to Economic Growth, now in its third edition, and writes the Growth Economics Blog.
 

REVIEWS

"For the past decade, Robert Gordon has written about the rise and fall of American growth, praising the first in our past that was and lamenting the second in our present that is. Now comes Vollrath with a lively, accurate, and essential corrective to Gordon's pessimism: growth is slow today, he demonstrates, not because our economy is failing but because our economy has succeeded."
— Brad DeLong, University of California, Berkeley

"Vollrath offers a provocative new explanation of the slowdown in economic growth experienced by the US economy during the past two decades: we are a victim of our own success. Rising leisure, declining fertility, and the shift out of manufacturing into services explain the bulk of the slowdown in aggregate income growth. Each is a feature of a mature, developed economy, and in that sense, the slowdown may be a symbol of success rather than a sign of failure. Brilliantly supported by the latest research and engagingly presented, Fully Grown provides a startling, novel assessment of economic growth in the 21st century."
 
— Chad Jones, Stanford University

“Anybody who has followed Vollrath’s blog will have been eagerly waiting for this book. Fully Grown is essential reading for anybody interested in the future of the economy. It investigates why the United States and other advanced economies are growing more slowly than in the past. Contrary to conventional wisdom, it argues this slowdown is due to success, not failure. All the leading economies have aging populations, thanks to past gains in health, and are largely service-based, as material goods account for a shrinking share of spending. These two characteristics alone mean the economy will not expand as rapidly in the 21st century. There are plenty of other problems to tackle, from unequal opportunities to excessive market power; but, Vollrath argues convincingly, the growth rate is the wrong way to assess how well the economy is doing.” 
— Diane Coyle, Bennett Professor of Public Policy, University of Cambridge

"Given the likelihood of recession, some desperate West Wing scribe might want to sneak a few thoughts from Vollrath's Fully Grown: Why a Stagnant Economy Is a Sign of Success into the State of the Union speech. Challenging the automatic equation between economic health and a growing gross domestic product, the author argues that capitalism 'has already supplied so much of the necessary stuff of modern life--brought us so much comfort, security and luxury--that we have turned to new forms of production and consumption that increase our well-being but do not contribute to growth in GDP.'"
— Inside HIgher Ed

“Fully Grown makes a coherent and compelling argument that American productivity growth has only mildly faltered.”
— Wall Street Journal

“For Dietrich Vollrath of the University of Houston, low growth is reason for cheer. In a new book he argues that America’s growth has slowed because so much in the economy has gone so well. . . . His triumph is in showing the degree to which these [GDP numbers] make economic growth an unreliable measure of success. Attempting to capture progress in a single number is a fool’s errand.”
 
 
 
— Economist

“This book completes, for me, a series of books that have come out in the last couple of years that help to explain the current state of the US economy and why we can be optimistic about a lot of what is going on.”
 
— Seeking Alpha

"Taken together, slower growth in the labor force and the shift to services can explain almost all the recent slowdown, according to Vollrath. He’s unimpressed by many other explanations that have been offered, such as sluggish rates of capital investment, rising trade pressures, soaring inequality, shrinking technological possibilities, or an increase in monopoly power. In his account, it all flows from the choices we’ve made: 'Slow growth, it turns out, is the optimal response to massive economic success.'”
— New Yorker

"Typically, lower economic growth is deplored because it squeezes private living standards and government programs. But in a fascinating new book, economist Dietrich Vollrath of the University of Houston challenges the conventional wisdom."
— Robert Samuelson, Washington Post

"An impressive survey of the economics literature on US productivity. For those interested in the subject, it is a must-read."
 
— Financial Times

“Vollrath sets up a clear framework and expounds it lucidly.”
— Inside Story

"But what if slow growth instead reflects great economic success? That’s the provocative thesis of a new book, cleverly titled “Fully Grown,” by economist Dietrich Vollrath...Vollrath not only offers the proverbial two cheers for slower growth rates, but also explains why many oft-proposed policy solutions are not likely to rekindle rapid growth."
— Charles Lane, Washington Post

"It is refreshing today to read that the U.S. economy is not weak because of a trade war with China or a failure of innovation. According to Vollrath, it is growing more slowly because families have made different decisions about how to live their lives, and those decisions were only possible because of the economy’s previous success. It is conceivable,perhaps even likely, that the U.S. will never again see such a period of supercharged growth as it did in the second half of the 20th century, when it benefited from the tailwinds of life-changing innovation and abundant labor. The lesson of Fully Grown is that perhaps it doesn’t need to."
— Mike Jakeman, Strategy + Business

"Why has the growth slowed in the high-income countries, notably the US? Is it a sign of failure or of success? Vollrath argues that it is the latter. Thus, the main reasons for the slowdown in the early 21st century are demographic - smaller family sizes and ageing - and the shift from goods to services. The failure to accelerate the overall rate of growth of productivity in the services is striking. Given that reality, Vollrath is right."
— Financial Times

"A combination of admirably lucid, engaging exposition and well-informed synthesis, Vollrath’s book is a must read for anyone interested in long-term trends in the US economy. . . . Highly recommended."
— Choice

"The post‐World War II years brought unprecedented economic growth to much of the world, resulting in massive declines in poverty and huge wealth. How long can this go on? In the United States and other highly developed countries, economic growth has slowed significantly after 2000. This book examines the fundamental causes of this slowdown...[Its] findings are important because they imply a new normal of slower growth in the economically advanced countries."
— Population and Development Review

“A wide-ranging and original study of the slowdown in economic growth in America in recent decades.”

— Economist, Best Books of the Year for 2020

"If you want to learn a great deal about frontier research in economic growth written in an accessible and engaging way, you will have a hard time finding a better read."
— Economic Record

TABLE OF CONTENTS


DOI: 10.7208/chicago/9780226666143.003.0000
[growth slowdown;success;population growth;services]
This chapter introduces the central hypothesis of the book, which is that the slowdown in economic growth that occurred during the 20th century is a consequence of past success in raising living standards. High living standards led to low population growth and a shift towards producing services, both of which put a drag on growth. That hypothesis does not imply that economic conditions are fair or equal for everyone.


DOI: 10.7208/chicago/9780226666143.003.0001
[slowdown;China;financial crisis]
This chapter reviews the evidence on the growth rate of GDP per capita, showing that this growth rate slowed from 2% per year during the 20th century, to 1% per year during the 21st. The evidence shows that the growth slowdown started prior to the financial crisis. Other developed countries display similar growth slowdowns at around the same time. Compared with China, the growth rate in the US is much lower, but overall GDP per capita is still much higher.


DOI: 10.7208/chicago/9780226666143.003.0002
[physical capital;human capital;inputs]
This chapter describes the data on human and physical capital, the two major factors of production used in generating GDP. Human capital is a combination of the number of workers, the hours worked by each, the skill level of workers (proxied by education), and the experience of workers. The growth rate of human capital per person slowed down starting in the late 20th century. Physical capital is a combination of structures (like houses or office buildings), equipment (like computers), and intellectual property (like software). The growth rate of physical capital also slowed down during the late 1990s and into the 21st century.


DOI: 10.7208/chicago/9780226666143.003.0003
[productivity;growth accounting;capital]
This chapter shows how to break down growth of GDP per capita into three component parts: growth in human capital, growth in physical capital, and the residual growth that is unaccounted for by the two capital types. That residual growth is how productivity growth is measured. Using the data on the growth rate of the capital types from the prior chapter, the accounting shows that the vast majority of the growth slowdown is due to the drop in human capital growth during the 21st century. A fall in productivity growth is the next most important component, and the drop in physical capital growth had little to no effect on the growth slowdown. This accounting is used to motivate the rest of the analysis in the book.


DOI: 10.7208/chicago/9780226666143.003.0004
[human capital;aging;Baby Boom;fertility]
This chapter documents the fall in human capital growth in detail. The driving force behind this was the fall in fertility rates that happened starting in the middle of the 20th century. This resulted in the high proportion of elderly in the population during the 21st century, which naturally lowered the ratio of workers to population. In addition, while the growth rate of skills and experience were high during the 20th century because of the Baby Boom generation, their aging and low fertility rate meant that during the 21st century skill and experience grew much more slowly. The evidence suggests that the fall in fertility behind the slow growth in human capital was a response to higher living standards and increased rights and opportunities for women, both successes.


DOI: 10.7208/chicago/9780226666143.003.0005
[technology;productivity;research]
This chapter turns to asking whether technology, and technological change, was plausible as an explanation for the growth slowdown. The first thing it does is distinguish between technological growth (e.g. did we invent a fancier camera) from productivity growth (e.g. did we get more efficient at using human and physical capital). The former may influence the latter to some extent, but they are not identical. It is quite possible that technological growth was rapid during the 21st century while produtcivity growth was not. The argument that the growth rate of GDP per capita and productivity are understated because of new technologies is addressed and dismissed. Evidence that more R&D effort is being expended but productivity growth in not rising does not explain the growth slowdown.


DOI: 10.7208/chicago/9780226666143.003.0006
[allocation;goods;services]
This chapter begins the discussion of how the allocation of workers between goods-producing industries (e.g. manufacturing, construction, agriculture) and service-producing industries (e.g. health care, education, professional services) does provide an explanation for part of the growth slowdown. Productivity growth in goods production is higher than in service production, and the fraction of the workforce in services grew over time, which pulled down aggregate productivity growth. A smaller share of workers in goods production did not mean fewer goods were produced, more were. However, it is true that the price of goods fell by a lot relative to the price of services. Thus, goods production accounted for a smaller share of total GDP in the 21st century than in the 20th.


DOI: 10.7208/chicago/9780226666143.003.0007
[Baumol;cost disease;goods;services]
This chapter explains the work of William Baumol, who first explored the reasons behind, and implications of, the shift away from goods and into services. He identified why productivity growth in services is low compared to goods. In services, labor is part of the output itself (e.g. time with a doctor or lawyer) whereas in goods labor is simply incidental to the product (e.g. you do not spend time with an auto worker when you drive your car). Because of this, it is relatively easy to economize on labor when producing goods, but not so much with services. On top of this, our demand for goods is not very elastic with respect to income. When productivity goes up in goods, it makes them cheaper, and while we take advantage of this and spend a little more on goods, we spend most of the savings on new services. The slowdown in growth caused by a shift into service production is because we were so successful at producing goods that we no longer demand as many workers in those industries.


DOI: 10.7208/chicago/9780226666143.003.0008
[market power;markups;profits;productivity]
Evidence that the market power of firms increased in the 21st century compared to the 20th is widespread, and is at times used as an explanation for the growth slowdown. This market power is reflected in higher markups of prices over marginal costs, of which there is extensive evidence. And the evidence also shows that the average markup in the economy rose in the 21st century. However, this rise is not responsible for a slowdown in growth, and in fact may be one thing that kept growth higher than it otherwise would be. The rise in the average markup indicates that production shifted away from low markup firms to high markup firms, and thus from low value to high value products. This shift contributed to higher GDP growth, not lower GDP growth. A consequence of more market power would be a shift in the distribution of income towards owners of firms, but not to lower growth.


DOI: 10.7208/chicago/9780226666143.003.0009
[investment;market power;Q-ratio;competition]
This chapter presents evidence that the rise in market power was also associated with lower capital spending by firms. This was true despite the Q-ratio rising over time, which indicates that investors viewed the future of firms as more profitable than their present. Evidence is presented showing that the decline in capital spending was associated with firms having fewer competitors. While the connection of higher market power to lower capital spending is apparent, capital growth was not responsible for a meaningful amount of the growth slowdown.


DOI: 10.7208/chicago/9780226666143.003.0010
[market power;innovation;intellectual property]
This chapter presents the theoretical basis for why some market power is necessary for economic growth, even though it technically means the economy is not producing at maximum efficiency. Economic growth comes from new ideas or plans about how to employ our human and physical capital, which might take the form of a new product, or simply an idea about reallocating that capital to a different location or purpose. Regardless, in order to create an incentive for people to have new ideas or plans, and hence generate economic growth, we have to give them some market power over their idea, which otherwise might be copied easily. While true that market power is necessary for growth, it is not true that higher market power always leads to faster growth. There is an optimal amount of market power. There is some suggestive evidence that market power has gone beyond that optimal amount.


DOI: 10.7208/chicago/9780226666143.003.0011
[turnover;jobs;reallocation]
This chapter begins the discussion of turnover, or reallocation, of both firms and workers. This turnover, which for firms consists of new firms entering the economy and old firms exiting, is partly responsible for growth because it represents the entry of new ideas for production, and the exit of old (and unproductive) ones. The evidence is strong that this kind of firm turnover is a major source of productivity growth, as opposed to existing firms getting more productive. Similar for labor turnover, workers shifting between jobs can contribute to growth because it reallocates workers from a low productivity activity to a high activity. The data show that both firm turnover and worker turnover were slower in the 21st century than in the 20th, which could explain a small portion of the growth slowdown.


DOI: 10.7208/chicago/9780226666143.003.0012
[mobility;reallocation;housing]
This chapter documents that geographic mobility fell during the 21st century, similar to how worker turnover between jobs fell. With significant productivity differences across locations, this could have also contributed to slower economic growth, as the economy did not take advantage of opportunities to move workers to more productive locations. This appears to be in part a result of people wanting to move to warmer climates, where cities tend to have lower productivity. It may also be due to housing costs rising in the most productive locations, eliminating the incentive for people to move. To the extent that the rise in housing costs was due to aggressive zoning or other legal restrictions on homebuilding, this is one example of a failure that may have contributed to the growth slowdown.


DOI: 10.7208/chicago/9780226666143.003.0013
[government;taxation;regulation]
This chapter explains why the government, and in particular tax rates and regulation, are not responsible for the growth slowdown. The evidence on tax rates runs counter to the timing of the slowdown, with tax rates falling at the beginning of the 21st century, not rising. Similarly, there is no evidence that higher tax rate states grew slower than low tax rate states. For regulation, there is also no evidence that industries with more regulation grew more slowly than industries with less regulation, or that states with more regulation grew more slowly than state with less regulation. The absence of a significant effect of government on growth is attributed to the fact that market size is much more important that tax rates for potential firms. The entry of new firms, with new ideas, is much more sensitive to how many customers it has access to than the exact tax rate.


DOI: 10.7208/chicago/9780226666143.003.0014
[inequality;distribution;human capital]
This chapter reviews evidence that income inequality rose during the late 20th and early 21st century. It then shows that there is no clear way to link that rise to the decline in the growth rate. While rich and poor people have different spending patterns on goods and services, the effect isn't large enough to account for much of the shift into services. Inequality could also have limited human capital accumulation for those in the bottom of the income distribution, but again the effect of this does not appear large enough to account for the slowdown.


DOI: 10.7208/chicago/9780226666143.003.0015
[trade;China;manufacturing]
This chapter explains that increased trade, in particular with China, did not account for the growth slowdown. Trade did result in serious job losses within goods producing industries, and in particular in some specific locations within the country. However, the scale of those jobs losses, and the associated decline in manufacturing output, are nowhere near large enough to explain the over shift away from goods production to services production, or much of the growth slowdown. Further evidence suggests that trade may have been positive for job creation and manufacturing in some areas, so trade may have been a net positive for the growth rate.


DOI: 10.7208/chicago/9780226666143.003.0016
[slowdown;success;immigration]
This chapter consolidates the results of the book and lays out an accounting for the growth slowdown. The vast majority was the result of the decline in human capital, followed by the shift from goods to services production. The remaining explanations can account for a tiny fraction of the slowdown. The drop in human capital and shift to services are clear evidence of economic success. This point is made by considering the sacrifice of living standards that it would take to recover the higher growth rates of the middle 20th century. One policy recommendation for reversing the growth slowdown is an increase in immigration, and in particular skilled immigration, which would offset the decline the growth rate of human capital. The book concludes by noting that the successes behind the growth slowdown do not imply that economic conditions cannot be improved, and that policies to address economic issues should be less concerned with the effect on the growth rate, which is unlikely to be affected much.

Book published by University of Chicago Press, 2019. Page maintained by BiblioVault.