The shell game
An interesting discussion with Prof. Percy Allan from University of Technology, Sydney regarding what caused declining economic growth in recent decades. The chart below shows how real GDP growth in the US declined over the past sixty years -- from a 10-year average above 4.0% to a low of 2.2% over the most recent decade.
The primary cause is the decline in capital investment, with 10-year average capital formation declining from between 3.5% and 3.6% in the 1970s and early 1980s to between 2.2% and 2.3% in the past decade. You need new investment in capital equipment in order to improve the efficiency of labor (productivity) -- increasing output (GDP) at a faster rate than labor input.
One possible argument for the decline is that productivity (blue) has grown at a faster rate than average hourly earnings (red) since the mid-1980s. This means that workers receive a smaller share of output (GDP) and are likely to consume less. Lower consumption will in turn lead to lower investment as there is no domestic market for the additional output1.
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