Growth Rates

Tim Pawlenty took a drubbing today for saying that his super plan will generate 5% growth for a decade. One article on the subject is here at TPM. Currently the growth rate is 1.8% according to the article. Growth rates are tied to the exponential function. As much as this guys pleads with his students and now millions of viewers on Youtube the exponential function is little understood.

In this case we are going to look at continous GDP growth at a rate of 5% and 1.8% for 10 Years. The function for continous growth like compounding interest is pert or



What does that actually look like. Using the google history of US GDP I made this chart.




Five percent doesn't look that crazy based on the previous years, but a lot of people think its impossible to do that for a decade straight. In fact its never been done before.


Just to illustrate how crazy big 5% growth is lets investigate the history of the growth rate and expand his promise out a few years. The fed has GDP measured here data from the fed available here. By calculating the change in growth each quarter, taking the mean and standard deviation of the result we can get sense of typical growth rates. The resulting distribution shows how rare 5% growth is.



To compare typical growth to 5% growth lets expand our charts to 20 and 50 years. The distribution function was used to create a random growth rate for each year past 2011. At twenty years twice as long as Pawlenty is promising we get this.



Redoing it for 50 years, You can see how incredible that kind of growth would be.



So take growth predictions with a grain of salt and remember the exponential function when a politician, broker or god forbid an engineer promises you a growth rate.