The 2020 Long-Term Budget Outlook

Capital Services. Over the longer term, in CBO’s view, private saving, international flows of financial capital, and federal borrowing drive growth in the nation’s stock of private capital. Private saving and international capital flows tend to move in tandem with the rate of return on investment—a rate that measures the extent to which investment in the stock of capital results in a flow of income. CBO’s projection of that rate is consistent with the agency’s projection that the average real interest rate on 10-year Treasury securities (calculated by subtracting the rate of increase in the consumer price index from the nominal yield on those notes) would be 0.9 percent in 2030 and 2.5 percent in 2050. The projected increase in federal borrowing would increase interest rates, thus reducing private investment and tamping down growth in the private capital stock.

Total Factor Productivity. The annual growth of TFP in the nonfarm business sector is projected to average 1.0 percent in the 2020–2030 period and 1.1 percent from 2030 to 2050, yielding an average annual growth rate of slightly less than 1.1 percent from 2020 to 2050. That projected growth rate is about 0.3 percentage points slower than the average annual rate since 1950 of 1.4 percent and 0.2 percent slower than the average rate since 1990.

CBO projects nonfarm business TFP to grow more slowly than its long-term historical average for several reasons. Recent analysis of historical trends in TFP growth suggests that projections for the next few decades should place greater weight on slower recent growth than on faster growth in the more distant past. Thus, although CBO projects growth in nonfarm business TFP to accelerate from its unusually slow recent rate, the agency expects the future rate of growth to be slower than its long-term historical average.

A number of developments support CBO’s projection of slower growth in nonfarm business TFP. One is the anticipated slower improvement in labor quality—a measure of workers’ skills that accounts for educational attainment and work experience—that is implicitly included in CBO’s measure of TFP. Labor quality improved rapidly during the 1980s and 1990s and more slowly after 2000. In CBO’s assessment, that slowdown was the result of both a less rapid increase in average educational attainment and the continued retirement of the baby-boom generation, a large, experienced portion of the workforce. In future decades, however, that slower improvement in labor quality is expected to be partly offset by the overall aging of the workforce, as better health and longer life expectancy lead people to continue working past the ages at which previous generations retired. (Older workers generally have more experience than younger ones, and that group also includes a larger proportion of highly educated workers, who tend to remain in the labor force longer than workers with less education.)

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