Potential output, capital input and U.S. economic growth

George Bitros ()

MPRA Paper from University Library of Munich, Germany

Abstract: The objective in this paper is to highlight the complex linkages of capital input to potential output in the U.S. nonfarm private business sector. For this purpose the analytical framework used by the Congressional Budget Office (CBO) is adapted and re-estimated using data from the U.S. Bureau of Economic Analysis (BEA) and the U.S. Bureau of Labor Statistics (BLS) over the period 1949-2016. By focusing on the changes in the composition of the capital stock in terms of structures, equipment and intangibles, average service lives, and the relative prices of producer’s to consumer’s goods, the paper allows for their influence on the capital input and traces the latter’s effects on the potential output. It is found that: (a) when the capital input is adjusted to reflect all aforementioned changes, the potential output decelerated in recent decades even faster than suggested by CBO’s estimates; (b) in the post-2007 period the shortfall in the estimated potential output widened relative to that computed by CBO, and (c) the faster deceleration of the potential output emanated from the declining share of structures in the capital stock and the spectacular decline in the prices of equipment relative to structures. Drawing on these findings it is concluded that, although the real economy may have overshoot its potential in the last few years, the forces that slow down potential output through changes in the capital input remain intact and, unless some remedial policies are instituted, they will continue to function as significant headwinds to U.S. economic growth, along with all others that are well known.

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: 2019-04-20
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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