Professor Kevin Murphy Explains Important Forces Driving U.S. Growth

Published on November 05, 2009

While the economy is tough and people focus on the recession, they should always remember the big picture, said Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics. Real U.S. per capita GDP has grown steadily from 1889 to 2009, said Murphy, a speaker at the third annual Real Estate Conference presented by the Real Estate Alumni Group at Gleacher Center on November 4 and 5.

“That big wiggle in the middle is the Great Depression and World War II,” Murphy said, pointing to a graph showing a general steady climb upward. “That little wiggle at the end is our current recession. Those fluctuations are important, but the most important thing on that graph is the red line – the trend rate of growth – showing we continue to grow and continue to move forward.”

The most important forces driving U.S. growth are technological change and the accumulation of capital assets, including both physical and human capital, he said. “Investments in technology and learning, along with investments in human capital and the physical capital required to embody that, are what generates that red line,” Murphy said.

After transferring from a people-based economy to an industrial economy based on investments in machinery, buildings, vehicles, and other physical assets, the U.S. has circled back to a people-based economy, he said. “But unlike the previous people-based economy of poverty, this new economy is fueled by people who are becoming increasingly healthy and increasingly wealthy over time,” Murphy said.

In fact, people have been at the center of some of the most important economic developments of our lifetimes, he said. Among those developments, Murphy said, are:

• Improvements to health and longevity have added about as much to people’s lives as increases in material wealth.

• Increases in returns to education and skills have revolutionized the labor markets in society.

• Technological changes have increased the value of education both in and out of the work place.

Improvements in longevity from 1970 to 2000 were worth about $95 trillion, or about $3.2 trillion a year, to U.S. citizens, he said. “What that means is that people gained just about as much from improvements in health as they gained from that entire movement along that red line of the trend rate of growth of U.S. real per capita GDP from 1889 to 2009,” Murphy said.

Throughout the 20th century and especially after World War II, growth in education played a huge role in driving the economy, he said. In 1970, a college graduate earned about 1.5 times what a high school graduate earned, Murphy said. During the 1970s, that ratio declined slightly to about 1.35 times what a high school graduate earned, he said.

But by the mid-2000s, college graduates earned 1.7 times that of – or about 70 percent more than – high school graduates, Murphy said. “The premium for having a college degree basically doubled,” he said. “The premium for having a graduate degree went from about 50 percent to over 120 percent. The gains in education over this period increased phenomenally.”

                                                                                                                    — Phil Rockrohr

 Read what alumni panelists said about the future of investment portfolios at the Real Estate Conference