Why the growth rate is important

by on August 20, 2004 at 7:25 am in Economics | Permalink

The importance of the growth rate increases, the further into the future we look. If a country grows at two percent, as opposed to growing at one percent, the difference in welfare in a single year is relatively small. But over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990. At a growth rate of five percent per annum, it takes just over eighty years for a country to move from a per capita income of $500 to a per capita income of $25,000, defining both in terms of constant real dollars. At a growth rate of one percent, such an improvement takes 393 years.

That’s me quoting me, from a book I am just starting to write. The tentative title is “The Welfare Economics of Human Tragedy: A New Approach to the Theory of Economic Policy.”

If I had to explain, in one sentence, the reason I am not on the political left, I would cite the enormous long-run benefits of economic growth. Of course it still can be argued that various left-wing policies, properly understood, will contribute to long-term growth. But in my view, if you are not supporting growth-maximizing economic policies, you better had a pretty good reason in your pocket.

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