Warren Buffett thinks 2% GDP growth isn’t so bad

201603-unsplash-railroadHave you read Warren Buffett’s 2015 letter to Berkshire Hathaway shareholders? You totally should. He published it Saturday morning, and it’s fantastic, as always.

The reason I like Buffett’s letters so much is how clearly he thinks, and then how clearly he communicates his thinking. There’s a section of this year’s letter where he addresses the common worry that U.S. GDP might only grow at about 2% per year on average going forward. That’s compared with the 3-5% growth rates we saw in the 1990s and early 2000s.

You see the 2% number a fair bit in the press. Here’s one example:

The economy expanded at a 2.4% clip last year, the same as in 2014, the Commerce Department said. The U.S. hasn’t topped 3% growth since 2005.

Buffett uses some arithmetic to show how many wins we can still have, even at a 2% GDP growth rate. His argument goes like this:

  • U.S. population growth is around 0.8% per year, with 0.5% coming from more births than deaths, and the remaining 0.3% coming from net immigration into the U.S.
  • Then, given the population growth number, 2% of overall GDP growth translates to 1.2% of per capital GDP growth
  • Then, after 25 years, we can expect a 34.4% growth in real GDP per capita, given the magic of compounding

He spends a lot of words in his letter addressing the gains in productivity we are witnessing throughout the economy. He recounts an interesting story of the productivity gains we’ve seen in agriculture since 1900. He uses these stories, in part, to address the growing concern of people being displaced from jobs because of increasing automation.

Buffett is sensitive to the pain that people feel, whose talents are no longer highly valued by the market. He makes a compelling argument that we need to continue to promote all kinds of productivity improvements, while at the same time ensuring that market forces don’t eliminate the ability of people to earn an income.

This kind of discussion can get prickly. Politics show up quickly. The presidential candidates talk about these issues a bunch, and they know how to get people riled up. Buffett navigates it smoothly, and offers a good example for the times where you can’t avoid a contentious issue.

Buffett is optimistic about the U.S. economy, as he always is. I highly recommend reading his letters. It’s a good way to pick up some financial vocabulary. And it’s a great example of how to use simple arguments to provoke thought and cut through the noise that piles up around these kinds of topics. Enjoy.

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