The way economic growth is reported in the media can be misleading. The number that gets all the attention, is real GDP growth. But what determines the standard of living is not real GDP, but per capita real GDP. Growth due simply to increasing population does not make anyone better off, it just means there are more of us. To illustrate the importance of this distinction, Exhibit 1 below plots the path of growth for both real GDP, per capita real GDP, productivity and population from January 1947 through July 2019. The exhibit shows that per capita GPD growth significantly lags GDP growth and even falls short of the growth in productivity. (The later shortfall is due to the fact that people are working fewer hours on average.) Nonetheless, the implication is clear – people are made better off by increases in productivity, not increases in the number of people. To further investigate the nature of growth, Exhibit 2 plots a rolling ten-year average of both real GDP grow and per capital real GDP growth over the same period. The exhibit shows that both have been dropping with per capita GDP growth falling below 1% during most of the recent period. In a world of constant population with less reliance on fossil fuels, 1% growth is likely to be a ceiling for the growth rate of developed countries.
The distinction between the two measures of growth is important because sustainability requires that in the relatively near future human population growth will have to cease. There is a limit to how many people the planet can support without catastrophic degradation, particularly if all those people aspire to a living standard equal to that of a middle class American. The goal of policy, furthermore, should not be to pack as many humans on the planet as it could possibly support, but to assure an acceptable standard of living for all.
If population stops growing there will be two effects of which investors should be aware. The first is the relatively minor and tautological fact that real economic growth will drop to the rate of per capita growth. If we continue to focus on real GDP growth, without adjustment for population, it will appear that economic performance is declining, but that is a mirage because no one will be worse off. To avoid the political fallout from slowing growth, we should begin focusing on per capita growth right now. The more significant problem is that many social programs and economic institutions are built on the premise that each future generation will be larger than the last. This allows taxes collected from the young to pay for benefits provided to the elderly. In a world with constant population that will no longer be possible. In the short run, furthermore, the problem will be exacerbated by a growing elderly population due to improved health care. The time to start planning for this is now, in conjunction with programs designed to respond to climate change. The fact is that economic and social institutions built during the industrial revolution, and relying on exploitation of fossil fuels, will require extensive modification for a future sustainable world. The implications for policy makers and investors are profound. The time to start taking action is now.