ECONOMIC GROWTH:
How Much Growth Can America Expect?

By Milton Friedman

President Clinton claims that the current economic growth rate of about 2.5 percent is pretty darned good. Not so fast, says Nobel Prize-winner and Hoover fellow Milton Friedman. The nation's economic history suggests that we should be doing much, much better.

Conventional wisdom is that the United States has a long-run capacity to grow at no more than 2.5 percent a year: faster growth will produce inflation; slower growth, unemployment. However, conventional wisdom is not consistent with long-term historical experience.

Over the past 125 years, average real growth has been 3.25 percent a year. More important, two selected periods totaling thirty-five years-not surprisingly, the decade of the 1930s; very surprisingly, the past quarter century-show lower growth than the other ninety years. For those ninety years, growth averaged 3.83 percent a year, closer to 4 percent than the conventional 2.5 percent. The high growth periods include times of mild deflation (1879-96), mild inflation (1896-1914 and 1947-69), substantial inflation (the two war periods), and relatively stable prices (the 1920s).

I expected to find precisely the opposite, that real growth during the past several decades was more rapid than earlier. I have been asserting that the twin revolutions of the past two decades-the technological revolution promising increased productivity, and the political revolution greatly increasing the supply of relatively low-cost, yet not necessarily low-skilled, labor available for cooperation with the limited supply of capital-had set the stage for a new industrial revolution. That prospect has been realized in the Far Eastern tigers and in some other countries, but apparently not in the United States. It is also reflected, I believe, in the historically high real rates of interest on long-term capital.

What accounts for the rather sudden drop in the decade whose midpoint was 1969? The period is highly significant: It spans the decade from 1964 to 1974, including President Johnson's Great Society program, enactment of Medicare and Medicaid in 1965, and the entire Nixon administration. I was a supporter of, and adviser to, Richard Nixon until he enacted wage and price control. He has many real achievements to his credit. However, his administration also saw the beginning of the real surge in the regulatory state.

The number of pages in the Federal Register more than doubled during his administration, rising from roughly twenty thousand in 1969 to forty-five thousand in 1974, when he resigned, and sixty thousand the next year. The all-time peak, reached in 1980, was eighty-seven thousand. The number of pages declined sharply during the Reagan administration, then rose again under Presidents Bush and Clinton. The Bureau of Alcohol, Tobacco, and Firearms; the Consumer Product Safety Commission; the Drug Enforcement Administration; the Endangered Species Act; the Environmental Protection Agency; the Legal Services Corporation; the National Highway Traffic Safety Administration; the National Oceanic and Atmospheric Administration; the Occupational Safety and Health Administration-all had their origin during the Nixon administration. In addition, affirmative action and wage and price control were introduced.

The accompanying chart is designed to test the hypothesis that the growth in the regulatory state was a major factor in the decline in economic growth. It plots the rates of growth against the number of pages in the Federal Register. The chart is restricted to the postwar period because the Federal Register was only begun in 1936 as part of the New Deal. During the high growth period, 1946-69, the number of pages in the Federal Register was low; during the low growth period, since 1969, the number of pages was high.

Doubtless many other factors affected the rates of growth during the postwar period. Yet it is hard to avoid the conclusion that dismantling the regulatory state would foster a return to the long-run capacity of the United States to grow at roughly 4 percent a year; and the twin revolutions (technological and political) should enable us to achieve an even higher rate of growth. We have been setting our sights far too low.

Milton Friedman, recipient of the 1976 Nobel Memorial Prize for economic science, was a senior research fellow at the Hoover Institution from 1977 to 2006. He passed away on Nov. 16, 2006. He was also the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976, and a member of the research staff of the National Bureau of Economic Research from 1937 to 1981.