Economic News & Analysis—November 29, 2012

GDP: Growth isn’t inevitable

By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Forces are at play that will likely slow economic activity in the fourth quarter of 2012 and perhaps in the first and second quarter of 2013, depending on what—if anything—happens with the fiscal cliff. Although the Bureau of Economic Analysis’ second estimate of GDP shows that real gross domestic product (GDP) advanced from the second quarter to the third quarter of 2012 to 2.7% (seasonally adjusted and annualized)—and this number is significantly higher than the 2.0% reported in the advance estimate—the number indicates that the economy is still weak. Longer-term, should investors expect growth to return to some normal pace? That’s impossible to say with certainty. History should teach us that few outcomes are inevitable, and almost every one of them is contingent on the decisions made and actions taken by myriad individuals.

Some major threats make me fear for the future (for example, violence between countries) and some little things also (for example, people who don’t know the difference between reply and reply all when they send emails and people who insist on backing into parking stalls, holding up other people who are trying to park, to give just two examples). But I don’t worry too much about other issues. Two that have gotten some prominence lately have been natural resource depletion and demographics.

Are we going to run out of natural resources?

The pace of growth over the past century, I think, can be traced back to the property rights and liberty revolution in 1688 that were part of the Glorious Revolution in England. My armchair-historian reading of history leads me to conclude that this revolution led to the Industrial Revolution from 1820 on and was followed by a demographic boom from 1870 to 1920. Enforcement of property rights and respect for individual liberties created an environment where creativity could be rewarded. As a result, there were many innovations—some good and some bad. In general, because lots of people worried about whether there would be enough food to feed a growing population, inventors and innovators were rewarded for finding new ways to grow and process food.

When people ask me about whether I think we’re at a point now where we’re going to run out of natural resources, I tell them that because other people are worried about it and are looking for solutions, we’ll most likely overcome the problem—provided that the people working on it are rewarded for their pursuit. It’s not guaranteed, but it seems likely. To paraphrase a former Saudi oil minister, the Stone Age didn’t end because they ran out of stones.

The decline in gainfully employed people of working age need not continue

Part of the rapid growth over the past 50 years has been due to some favorable demographic trends: Civil rights movements in the U.S. brought many women and minorities into the workforce, and the growing population referred to as the Baby Boom also provided a benefit to the workplace. The dividends from these trends can only last so long, and the past few years have seen a decline in the percentage of the working-age population that is gainfully employed. But this trend need not continue. Part of it could be reversed by people in retirement age choosing to come back into the workforce. Because our Social Security, Medicare, and tax system dulls the pecuniary rewards of working beyond the normal retirement age, we probably don’t now have more elderly people with productive abilities creating valuable goods and services. Similarly, some of the income support and welfare programs in the U.S. make it such that benefit recipients face effective marginal tax rates (if you include taxes paid and benefits received in the calculation of the marginal effective tax rate) that are even higher than marginal tax rates faced by high income earners. These systems need to change and will hopefully change.

Resource usage and demographic trends aren’t necessarily dooming the world to low growth. While growth isn’t inevitable, I think some fears—while not baseless—aren’t worth losing sleep over. Change happens.  

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