Demand adjusted capital input and potential output in the context of U.S. economic growth

George Bitros ()

The Journal of Economic Asymmetries, 2020, vol. 21, issue C

Abstract: Two alternative measures of demand adjusted capital input for the U.S. non-farm private business sector are derived and their differential impacts on the potential supply of output are compared to those obtained using the unadjusted index of capital input published by the Congressional Budget Office (CBO). The results show that, allowing for the demand pressure on the fixed assets of firms, leads to three effects. It raises the level of estimated potential output well above CBO’s estimates; with the exception of the 1990s, the estimated growth rates turn out to be higher than those computed by CBO; and, lastly, the long term trend of the growth rates with and without the demand adjustment to the capital input is sloping downwards. The latter finding was not unexpected since aggregate demand, as reflected in the utilization rate of fixed assets by firms, has been trending downwards throughout the postwar period. Drawing on these findings it is concluded that the path to secular stagnation that the U.S. economy is following in the postwar period is not due solely to headwinds on the supply side. To some degree, perhaps significant, the deceleration in the expansion of productive capacity as well as in the intensity of its utilization is due to the declining long term aggregate demand.

Keywords: Potential output; Capital input; Capital stock; Economic growth; Economic growth headwinds; Secular stagnation (search for similar items in EconPapers)
JEL-codes: E01 E22 O47 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300799

DOI: 10.1016/j.jeca.2019.e00140

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