Even if there is a sharp drop in labor productivity, higher prices at given levels of nominal incomes seems like a reasonable way to signal to reduction in real incomes. However, if we imagine the population falling by 10 percent, there seems to be little point in having per capita money incomes rise by 10 percent along with prices.
During the Great Moderation, like GDP, per capita GDP remained very close to a trend growth path. The growth rate, however, was slightly lower--4.3 percent.
With the arrival of the Great Recession, per capita GDP first grew more slowly and then fell sharply in the second half of 2008. It's value in the fourth quarter of 2010, $47,812, is nearly 11.6 percent below the trend growth path. The value consistent with that growth path would be $54,068. To return to the growth path of the Great Moderation by the first quarter of 2012, the value would need to be $57,071, more than 19 percent higher than its value in the fourth quarter of 2010.
Of course, the growth path of the Great Moderation was inflationary. To move to a growth path consistent with stable prices in the long run, a slower growth rate is necessary. And so, parallel to my proposals for a modified target for GDP, I have calculated a modified target for per capita GDP. Starting with the growth path of the Great Moderation, it shifts to a 1.9 percent growth path in the fourth quarter of 2007.
The value of that adjusted growth path is $49,974 in the fourth quarter of 2010, so per capita GDP was 4.3 percent below target. The target for the first quarter of 2012 is $51,175, and so would require a 7 percent increase from the fourth quarter of 2010. That would be 5 quarters of growth at a 5.6 percent annual rate. This has happened before, for example, between the fourth quarter of 1984 and the first quarter of 1986.
According to the CBO, potential real GDP in the first quarter of 2012 will be $14,455 billion. If the population grows at its 1.1 percent trend growth rate over the period, then the level of GDP consistent with the target for per capital GDP in the first quarter of 2012 will be $16,137 billion. The price level (GDP deflator) consistent with real expenditure matching productive capacity would be 112, only slightly higher than its current value of 111.7.