How much does economic growth matter anyway?

by on November 13, 2006 at 2:45 pm in Economics | Permalink

Chris Bertram writes:

Mill’s idea (endorsed by Rawls btw) that the goal of our policy ought not to be one of continual struggle for growth or for relative advantage once the threshold has been reached where we could all hope to enjoy a satisfactory level of well being seems to be right.

In a forthcoming article, I write:

Just as the present appears remarkable from the vantage point of the past, our future may offer comparable advances in benefits.  Continued progress might bring greater life expectancies, cures for debilitating diseases, and cognitive enhancements.  Millions or billions of people will have much better and longer lives.  Many features of modern life might someday seem as backward as we now regard the large number of women who died in childbirth for lack of proper care.  Most of all, economic growth limits and mitigates tragedies.  It is a simple failure of imagination to believe that human progress has run its course.

If I read Chris correctly, he is saying "so what if Germany is poorer than the United States?" 

It is not my belief that the Germans will be consumed with envy.  I do think that a) the Germans will be missing out on some wonderful gains, b) there is no real standard for "a satisfactory level of well-being," c) a poorer Germany will be much less able to help the truly desperate parts of the world, if only by accepting immigrants, d) this is not a long-run political equilibrium in Germany, and e) at the global level, it is important that Western and European values are prominent, and this does require good or at least a decent growth performance.  Furthermore it is possible to believe a)-e) without seeing status games in relatively healthy Western societies as zero or negative sum.

On growth, keep the following in mind: If we are comparing a two percentage point boost to the growth rate, and starting at real income parity, a time horizon of only 55.5 years is needed to establish a 3:1 ratio of superiority in income.   

I am not not not saying that Chris is a communist or even a socialist, but my reporting would be remiss if I did not point out that defenders of East Germany, in the 1980s, made more or less the same argument as Chris’s bit quoted at the top of this post.

That all said, I am relatively bullish about German recovery, at least compared say to France or Italy.

Burce G Charlton November 13, 2006 at 3:14 pm

I too believe that Germany, in a (typically?) slow and methodical fashion, will move towards a consensus for reform and turn itself around economically. And when that eventually happens – just watch them go!

KipEsquire November 13, 2006 at 3:30 pm

“…the threshold has been reached where we could all hope to enjoy a satisfactory level of well being…”

Satisfactory to whom? Private people acting privately amongst themselves — or the central planners?

Unlike TC, I will most definitely call Bertram a socialist.

Chris Bertram November 13, 2006 at 3:37 pm

Thanks for your response Tyler. I have no problem with you calling me a socialist, though it probably isn’t a particularly accurate description of my politics these days.

As it happens I spent some time in East Germany in 1984. As I recall, it was then claimed that the per capital GDP was comparable to that of the UK. It was immediately obvious to me that the standard of living for most people was far far lower. But real problem with East Germany was not its comparative level of economic development or the level of health care its citizens could receive (rather good, actually). It was the fact that it was a police state where people were denied the basic liberties.

Given them those liberties and I think you’ve achieved most of what’s morally important. If they then choose a policy of more leisure and lower growth or the opposite … that’s up to them. I don’t think it matters, morally speaking, that they are poorer than Americans are.

Chris Bertram November 13, 2006 at 3:55 pm

And one small additional point….

Your list of the expected benefits of progress consists almost exclusively of improvements in medical technology. I’m afraid I don’t know the literature on the relationship between economic growth and improvements in medical technology (wasn’t MRI scanning partly developed in the UK in the 1970s?). I believe, however that I’d be correct in asserting that the relationship between actual health outcomes and choice of economic model isn’t one that favours the US over Europe.

jim November 13, 2006 at 4:37 pm

Chris wrote:

“I believe, however that I’d be correct in asserting that the relationship between actual health outcomes and choice of economic model isn’t one that favours the US over Europe.”

You’d think you were correct if you ignored such matters (pointed out in a new co-authored book by Ohsfeldt) as:

1) differences in body mass
2) differences in murder rates
3) differences in treatments of deaths at birth (“fetal death” in places in Europe vs. “infant death” in the U.S.)

Sean November 13, 2006 at 4:42 pm

“I believe, however that I’d be correct in asserting that the relationship between actual health outcomes and choice of economic model isn’t one that favours the US over Europe.”

The noise-signal ratio is way too high for this point to add much to your argument. One small point of my own is, without the freer market in medicine and medical procedures in the U.S., would pharmaceutical companies have had the incentives to develop medicines that, as an attendant effect, also benefited European consumers at a lower price than Americans paid.

“Given them those (basic) liberties and I think you’ve achieved most of what’s morally important.”

Huh? Wouldn’t this also include the liberty of private property? Freedom of association (to form businesses and other organizations)? When you use the fallacy that, as a society, they would (quite morally) be “choosing” more leisure and less growth, they are truly abrogating many of the “basic rights” of their fellow citizens. A choice on the personal level of leisure over production has no moral problem (unless there are dependents i.e. kids to be provided for); but forcing other citizens to conform to a 35-hour work week (in France) or ridiculously high income taxes (in most of W. Europe) because of a “societal” (i.e. majority, in a democracy) decision to prefer leisure over production is a definite moral problem.

This forces some citizens (those who would like to produce at a high level) to, in some manner, subsidize the ones who prefer leisure or else limits their individual work level so as to give the leisure-preferers their short-term utopia – a labor market that cannot penalize an unwillingness to work “long” hours, nor reward a willingness to do so. However, this comes at the expense of those who at the margin prefer production to leisure.

Randy November 13, 2006 at 4:56 pm

It is entirely possible to live a life of simple ease, but very few choose to do so.

Mr. Econotarian November 13, 2006 at 5:57 pm

Individuals can always cease their economic growth. Stop working, or cut back to a part-time job at Walmart. Or move to Zimbabwe. Go for it!

Meanwhile, leave those of us who prefer economic growth alone!

David Wright November 13, 2006 at 6:15 pm

Chris: Thanks for your comments; it’s nice to see this back-and-forth.

I think you are wrong that it was only the lack of political freedom that caused the collapse of East Germany; I think the glaring contrast in standards of living played a significant role. Masses of East Germans were desperate to own a car or even eat a banana, and it was very clear to all of them that the organization of their economy was at fault for the gap with West Germany. The fact that the division of Germany was about as good a controlled experiment as we’re ever likely to get, “randomly” spliting a population into two groups with initially similar culture, demographics, and economics and observing their development under different economic systems, made the contrast in standards of living all the more stark.

As evidence for this view, I can offer my own impressions from time spent in East Germany around 1987, and my later conversations with former East Germans. Not to mention the fact that East Germans overwhelming wanted reunification even after multi-party Democracy came to the east in 1989. Granted, many East Germans were unprepared for the dose of market disipline that came with the introduction of capitalism, but later nostalga shouldn’t cloud our picture of the mix of motivations at the time.

Another piece of evidence in this direction is the degree to which rapid economic growth has pacified the population of the authoritarian countries that have been able to achieve it. It worked for South Korea and Singapore in the 1980s, it’s working for China and Saudi Arabia today.

happyjuggler0 November 13, 2006 at 6:32 pm

The coach,

I agree that when governments get out of the way that there will be convergence between per capita GDP over the long haul. The key is that the government has to get out of the way. For example, despite the fact that Japan has a generally superior automotive sector than the US, and dominates in non-IT electronics (for the most part, but don’t tell Bose), the US’s per captia GDP is about a third higher than Japan’s. Why? Because there is much more to an economy than a few manufacturing industries. US business is innovating in retail for example in ways that Japan won’t let its locals do.

Thus any country except the US can get away with social capitalism for a much cheaper cost than one would expect from a theory of compounding, and still have a per capita GDP somewhat close to the US.

Thinking of things in this way, one could argue that the US as number one has a moral obligation to grow its GDP as fast as possible in order to make it easier for the rest of the world to grow. The US simply needs to have as much incentives for innovation as possible, and at the very least needs to stop getting in the way. I suggest abolishing all taxes on capital, such as capital gains and corporate taxes. Currently the US has virtually the worst (i.e. highest) corporate taxes amongst developed countries, and is far down in the overall country list as well.

josh November 13, 2006 at 7:03 pm

When people are able to have a vanilla milk shake with every meal without having to worry about the health consequences, a $7 bottle of Cabernet Savignon tastes like 1961 Latour, there is always a show on the holovision that is as funny as Arrested Development, and nobody ever gets old, sick, frail, or obese, we will be close to a satisfactory standard of well being.

John November 13, 2006 at 7:41 pm

josh, I have to say I disagree.

We will never be close to a satisfactory standard of well being until every human being is able to live off-planet. The costs required to build interstellar space ships is far, far beyond us now. The technology required to build them is beyond us as well. It will take tremendous amounts of money to get us there. And without any clear picture of exactly what technology will be correct – (you and I might have guesses, but remember when they thought that the future would be full of pneumatic pipes delivering mail and food?) – the best course is to ensure as much economic growth as possible, allowing us to balance the needs of the future with the needs of the present.

There is only one system that has been proven powerful enough to change the world in this way, and that is the free market. The more we suppress it in the name of “equality”, the more likely we are to experience an extinction-level catastrophe before we can either stop it or avoid it.

“What about the animals? What about the delicate balance of nature?” If an asteroid hits this planet, if Yosemite blows up, if the sun ejects a massive solar flare – there won’t be many animals left, and the delicate balance of nature will be shot to hell.

There is nothing on this planet that will save the animals of the Earth from certain destruction except humans and human technology. It is an uncomfortable fact, but it is a fact nonetheless.

David Wright November 13, 2006 at 8:29 pm

Chris: I am really fascinated by your moral calculus of growth vs. equality.

You argue that the current typical European/American standard of living (give or take a factor of two) represents a sort of moral phase transition, at which the interests of the society change from being best served by growth to being best served by redistribution. Is this correct?

Do you suppose this special value of GDP/capita is an ethical universal? In other words, could the Americans of 1800, extrapolating the growth rate of GDP/capita, say: “Well, if these trends continue, around about 2000 we’ll be able to stop concentrating on growth and start concentrating on redistribution. What a fine day that will be?”

Taking this view does get you out of one intellectual difficulty. If it were always better to favor equality over growth, then the asian tigers would have been doing the wrong thing for the last 30 years. And yet it is very difficult to argue that mere redistribution would have been able to cut in half the number of asians living in extreme poverty in the way that phenomenal growth there has. With your moral phase transition, though, you can argue that it is right for them to concentrate on growth even while it is right for us to concentrate on equality.

Still, the moral phase transition theory does have its own problems. For example: given all the times before and after this transition that you and I might have lived, isn’t it amazing that we just happen to live in the time that our own society is undergoing the transition. Quite the coincidence, that is.

A Tykhyy November 13, 2006 at 11:07 pm

As it turns out, there was a proposal for a second wager in 1994 (a sure win for Ehrlich had it been accepted, look up the terms on Wikipedia), which Simon declined like this:

“Let me characterize their [Ehrlich and Schneider's] offer as follows. I predict, and this is for real, that the average performances in the next Olympics will be better than those in the last Olympics. On average, the performances have gotten better, Olympics to Olympics, for a variety of reasons. What Ehrlich and others says is that they don’t want to bet on athletic performances, they want to bet on the conditions of the track, or the weather, or the officials, or any other such indirect measure.”

What could this mean? That, crudely speaking, only commodity prices and GDP matter, and the state of the planet is irrelevant?

happyjuggler0 November 14, 2006 at 1:47 am

Kevin Nowell,

I agree that the welfare state is anti-liberty, and that its supporters are hypocrites if they claim to be in favor of liberty and also the welfare state.

However, there is another reason to oppose it. It doesn’t help the people it claims to be “compassionate” towards. Give a beggar on the street a handout, and soon enough they will need another handout. Give him a job and he will be able to feed, clothe and shelter himself. The Welfare state tries (and to a large extent fails in my opinion) to make poverty more livable, when it really ought to be trying to help people out of poverty. The US-definition poverty rate in the US fell steadily until the implications of the “Great Society” became clear to the poor, and then it simply bottomed out in 1973 hwen people adjusted to not having to try to escape from poverty. This is compassion? Ask the French rioters and car and bus burners if the French system is more compassionate than the in the US which is still the land of opportunity.

At the same time, private charity works better at helping those in need than government does. Who did a better job with Hurricane Katrina? Private charity or the federal, state and local governments? If you answer one of the last three you clearly witnessed a different disaster than I did.

The welfare state is simply a waste of resources, both human and capital.

David Wright November 14, 2006 at 3:15 am

A Tykhyy: Crudely speaking, what Simon means is that there is no such thing as “planetary welfare” — only human welfare matters. And I agree.

Consider some of the metrics in the proposed second wager. One is that there will be less per capita cropland in 10 years; but if cropland is halved and crop yield quadrouples, who cares? Most of the other metrics don’t even involve people; who cares if CO2 or NO concentrations go up, if we can find a way to compensate for any ill-effects? A few of the metrics aren’t even measurable; how does one determine how many plant and animal species exist? (Commodity prices don’t matter either, provided we can find alternatives that can be used to produce the same or a greater degree of human happiness.)

It seems to me the doomsayers have two options. One is to agree that, fundamentally, it is human welfare that concerns them, too. In that case, they need to start making predictions about when broad measures of human welfare (e.g. global average lifespan or GDP/capita or fraction of humanity subsisting on less than $1/day) are going to start being significantly negatively impacted by their doomsday scenarios.

The other is to admit that they believe in some sort of moral hierarchy of environments independent of human wants and needs. In which case, I would ask: Is the environment on Mars better than the environment on Venus? Was the Cambrian terrestrial enviornment morally superior to the present terrestrial enviroment? When they are done working out the moral hierarchy among themselves, they can come back and try to convince the rest of us of act to move the Earth toward their more perfect state.

Rob Sperry November 14, 2006 at 3:45 am

“I am amenable to the argument that there is still room for growth. But I’d like to hear pro-growth people explain just when and how it’s going to end. Because the end of growth is, in the long run, a certainty.”

Please expalain how you are certain that there is a end of growth? Is this an apriori theory about how all possible universes must be such that they have a limit on growth? Is there some series of observations that lead to a cosmilogical theory that new eveidence could not overturn?

As for how far growth can go: Ray Kurzwiel: The Singualrity is Near, Charls Stross: Accelerando, Greg Egan: Permutation City, Vernor Vingie: A Fire Upon the Deep.

Those would give you a good start to how to think about serious growth. Our capacity for growth is a function of our ability to apply intelegence to the problems we face. The effective intellegence of our problem solving systems is expanding rapidly. And we are just half way accross the moores law cheese board doubling those grains of rice as we go.

John Konop November 14, 2006 at 5:05 am

Economists Are Destroying America

Economists, politicians, and executives from both parties have promised American families that “free† trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:

†¢ Increase wages
†¢ Create trade surpluses (for the US)
†¢ Reduce illegal immigration

Well, their trade policies have been in effect for about 15 years. Let’s review the results:

†¢ Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)
†¢ A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)
†¢ Illegal immigration out of control
†¢ Soaring trade deficits, much with countries that use slave and child labor
†¢ Personal and national debt both out-of-control
†¢ Global environments threatened by lax trade deal enforcement

Economists Keep Advocating Policies That Aren’t Working

Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.† Others say, “Be patient. Stay the course. Free trade will raise all ships.†

Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.

Why Aren’t American Economists Shouting From Street Corners?

America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:

†¢ Economists are too beholden to corporations and special interests that provide them with research grants.
†¢ Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.
†¢ Economists refuse to admit they make mistakes.

Economic Ambulance Chasers

Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit†.

josh November 14, 2006 at 7:38 am

Why do you people consider having the same amount of wealth such an important form of equality? Why no atheletic equality? Equality in the amount of sex we all get to have? Intellectual equality? Equality in how good we all are at playing Madden 2007? Sounds pretty arbitrary to me.

theCoach November 14, 2006 at 9:01 am

David Wright,
thanks for addressing the questions, but I think you misunderstood 1).

Let me try to be more clear.
For the sake of clarification lets imagine two countries over a one hundred year period.
At the beginning they are even and over time their populations stay exactly the same. For the first fifty years country A’s gdp grows at 10%, while country B’s growth remains static.
On the first day of the next fifty years country B magically matches country A’s gdp, and for the next fifty years their GDP remains exatly the same.
Question one refers to how much of the wealth accumulated during that first 50 years, will still advantage country A?

Theoretically, I think you can abstract this by using financial vehicles, but I have a sense that they do not actually capture the long term dynamic. For example, what does our trade deficit with China imply?

happyjuggler0, just in response to the first, I suggest you read Dean Baker before dismissing him out of hand as absurd based on ideology.

If I have time I will respond to the later more on persuasive response on compounding.

theCoach November 14, 2006 at 10:09 am

happyjuggler0,

“I agree that when governments get out of the way that there will be convergence between per capita GDP over the long haul. The key is that the government has to get out of the way.”

This would seem to be in contrast to Tyler’s original post on this subject with regard to intensive and extensive growth. My reading, albeit a murky one is that Tyler was implying that the social democratic model was better at playing catch up than innovating. That would seem to me to be accurate.

As far as corporate taxes, they are not obligatory – you could simply opt out of the protections the government offers corporations. Thhat they do not is a pretty good indicator that the cost of the taxes is a great deal for the governemtn provided protections in most cases.

You seem to be arguing for a ton of government interference in the economy – government enforced patent monopolies, free protections for corporations and similar, but they all seem to be going to protect those that already have the most power politically.

josh November 14, 2006 at 11:49 am

Tony,
Why do you assume the end of cheap oil? Do you really think it is unlikely that another form of energy won’t replace oil? Is combustion that special?

theCoach November 14, 2006 at 12:48 pm

Tony,
Additionally to use the argument of Malthus’s failure in conjunction with a dubious projection of growth rates as constants for 55 years is really missing the point of Malthus’s failure.

It was not that one side is always correct, it is that using long term projections of trends as if they will continue forever that produce estimates of collapse is probably not the best way to look at things.

happyjuggler0 November 14, 2006 at 1:25 pm

Re: corporate taxes, as well as capital gains taxes and dividends.

Saying that an entity such as a corporation has some sort of moral obligation to pay taxes totally misses the point for their existence. They create goods and services we need and want, and they provide jobs. Most importantly, they drive efficiency and innovation (when they are not under a government “protection” racket), which ultimately is the only way to raise living standards.

India has lots of very low skill workers, lots of medium skill workers, and lots of high skill workers. (Mostly though India is filled with poorly educated people. But with over a billion people a relatively small percentage of educated people can produce a high amount in absolute numbers). They have something for any employer to swoon over. But it wasn’t until the government got out of the way that IT started to boom in India, which is driving most of India’s new high growth rate. The government is still “protecting” most of the industries that would enable the low skill workers to climb out of poverty though.

When China’s government started getting out of the way of the people’s natural desire to become rich, they started creating riches, and the poverty rate predictably plummeted. The government still has a ways to go to get out of the way though, but it has made a fabulous start. What it does have though is a terrible commons problem, which, yes Coach, is due to a lack of private ownership and protection. This commons problem goes under the broad rubric of pollution.

What eliminating investment taxes of all sorts in the US would do is stop inefficient govenment redistribution of money that is earmarked for wealth creation, a.k.a. GDP growth, a.k.a. the building blocks of wage growth, and sent it into wealth destruction (i.e. unearned consumption) paths instead, which also has the detrimental effect of discouraging wealth creation amongst the recipients of this largesse.

Like it or not, businesses are the driving force of economic growth, and are best poised to leverage human capital, investment capital, and infrastructure into rising living standards for everyone. One can make the India mistake and decry the profits that result as being somehow unfair, or one can praise the job creation, wage raises, and new and improved product and service creation. You can’t have one (jobs, higher wages, and new and better products) without the other (profits).

A business can’t reinvest its wealth creation when the government takes it. Thus corporate taxes hurt the people tremendously.

By the way, this isn’t some absurd “trickle down” theory. It is most definitely “trickle up”. An investment only becomes lucrative for the investor after first creating jobs, jobs which by definition are higher paying (taking into account all forms of compensation mind you) than the would be employee would otherwise have made, and also creating something that we the people value, and somehow doing it for less cost than the final sale price. Then, and only then, after creating all this good, does the investor get rewarded. The notion that an untaxed entity that does all that good is somehow a leech is silly.

happyjuggler0 November 14, 2006 at 3:19 pm

Jack,

I guess it depends on how you define recently, and what sector you mean by invest. But defining it as post first quarter 2000 in the US stock market, my answer is:

Markets do their best to discount (i.e. predict and price accordingly) the future. In the late 90′s the US market overestimated future earnings, not just in the famously bubblicious internet stocks, but also in “hgih tech” in general, and also in the overall market in general as well, at least in anything that resembled a growth stock.

Since then the market has dropped P/E’s considerably, to a much more reasonable level relative to asset alternatives. In addition, lots of overinvestment in the bubbling late 90′s had to be “worked out”, which meant either lower earnings or slower earnings growth. It is really only lately that all this has played out and generic earnigs growth has been rewarded via higher stock prices. Although it is worth pointing out that anyone who predicted, by putting his money where his mouth was, that commodities would boom due to growing world demand and anemic new investment since the mid 80′s, did a fabulous job investing since the first quarter of 2000.

happyjuggler0 November 14, 2006 at 7:54 pm

I prefer to move the distribution curve to the right so that everyone is better off. Your approach is to make the distribution curve more narrow by using government coercion to hurt some people. I can’t abide by that in good conscience, and I believe that the European welfare state will indeed collapse when people start retiring in droves and the unsustainability of their system becomes clear to all.

Ideally they will abandon their system now while they can minimize the damage to those who foolishly chose to depend on government coercion giving them something for nothing. I suspect that Italy, if no one else, will be the first in the bond market disintermediation and that by default they will have to massively slash government benefits. If they try to raise tax rates, the young will flee to greener pastures. Borrowing simply won’t work since the problem is systemic, not temporary.

Once the first country capitulates involuntarily, the rest will be forced to since the government bond market in their country will simply disappear due to likelihood of inability or unwillingness to both pay back debt and also cut back massively on governement coercive redistribution.

The reason I think Italy will be the first to go down is that too much of their country is Communist (I kid thee not), and they can’t get together a big enough coalition to do the hard things they need to do ahead of time when the pain will be lesser.

srp November 15, 2006 at 7:44 pm

Don’t let dsquared bluff you: EMI invented the CAT scanner, not MRI. Two US guys won the Nobel Prize for MRI, just as the very British Dr. Hounsfield did for CAT. What the heck are they teaching at LBS these days?

Incidentally, a primary factor that doomed EMI’s business in the US was the weak electronics infrastructure of its UK supplier base. Had they manufactured from the beginning in the US, they might have sustained their position. To be fair, though, market saturation in CAT scanners means that EMI actually ended up with a significant fraction of total industry net present value–they just overinvested at the end.

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