NCPA - National Center for Policy Analysis

Affects Of Slow Economic Growth

May 20, 1996

Probably few of us realize just how much lower economic growth rates rob each of us of increased earnings. But the negative impact is dramatic, and will continue to have adverse effects until we cut taxes on capital and labor, according to some analysts.

  • Gross domestic product increased just 1.8 percent after inflation over the past year, and has averaged only 2.3 percent a year since 1989 -- compared to 3.3 percent growth during the 1980s.
  • Had the economy continued its 3.3 percent trend, real GDP would have been $2.6 trillion higher through 1995 -- with the average American realizing an additional $1,337 in income each year, or about $3,500 for the average family.
  • Slower growth also cut federal revenues by $538 billion from 1990 to 1995, or some $90 billion a year -- more than half the $153.6 budget deficit expected this year.

Seeing no prospect for a return to growth rates of the '80s for the remainder of the decade, economists estimate the average American will be denied a potential $15,000 more in income over the period -- or $40,000 for the average family. Between now and 2010, this slow growth would cost the economy another $22.8 trillion while lowering annual federal revenues by $313 billion -- enough to wipe out the deficit.

Capital formation is a key ingredient to productivity growth. Yet by historical standards the current investment "boom" is not as dramatic as it would at first seem.

  • From 1952 to 1982, annual growth in the stock of business capital (excluding land and owner-occupied housing) averaged above 3 percent after inflation.
  • From 1982 to 1989, business capital grew at 2.6 percent a year.
  • However, since then, the increase has slowed to 2.1 percent a year.

Labor is another important ingredient for growth. But the labor force has expanded only 1.1 percent a year on average during the 1990s -- compared to 1.7 percent in the 1980s. since 1989, employment has increased just 1.1 percent a year on average -- well below the 2 percent rate of the 1960s and 1980s.

Many economists blame high tax rates for the economic slowdown.

  • Federal, state and local taxes this year will eat up 42.6cents of the next dollar earned by the average worker, up from 39.1 in 1988 and equal to a 6 percent cut in take-home pay.
  • Meanwhile, the economy-wide marginal tax rate on business capital has jumped from 61.9 to 66 percent -- an 11 percent drop in the after-tax return to savers and investors.
  • As a result, savers save less, investors invest less and the rate of capital expansion slows.

It is the opinion of many economists that a well-crafted tax policy -- cutting marginal tax rates on labor and capital -- could boost the current 2 to 2.5 percent annual growth rate by one percentage point or more, returning the economy to higher rates of growth.

Source: Aldona and Gary Robins (Institute for Policy Innovation), "The Price of Slow Growth," Investor's Business Daily, May 20, 1996.


Browse more articles on Economic Issues