Our obsession with growth rates, by Scott Winship

by on February 20, 2013 at 7:36 am in Economics, History | Permalink

Many MR readers have asked for commentary on this very interesting piece by Scott Winship.  Scott makes a number of points but here is one in particular:

As nations become wealthier, it is harder for them to sustain high rates of growth. That doesn’t mean that the United States is in decline, or even stagnating. When a nation is as rich as ours, it can realize larger absolute gains than it did in the past and larger gains than other nations even if it has lower growth rates. That’s because a growth rate of, say, 2.5 percent represents a larger increase in absolute wealth the richer an economy becomes. In 1900, a 2.5 percent increase in gross domestic product (GDP) per capita would have translated into about $150 in today’s dollars for every man, woman, and child in the United States. In 2010, it would have been roughly $1,200, reflecting the fact that in the aggregate, we are about eight times wealthier than we were 110 years ago.3 By focusing too much on growth rates and too little on absolute increases in wealth, we have failed to appreciate the magnitude of economic gains in recent decades.

A few remarks in response:

1. First, this is not so far from my own view, for instance Scott cites me as writing: “Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.”

2. I still think this — to the extent it is true — is tragic.  Just imagine the future potential loss that would result from the disappearance of compound growth.  People one hundred years out would be much worse off, relative to exponential growth, and their ability to fix the environment or elevate poor countries to wealth, also will be much lower.  In essence economics would be surrendering the gain it won from the victory over Malthus.  “Hey, Reverend, you were right, growth will be only an arithmetical progression, not geometric as we had thought from 18?? through to 19??.  But you were wrong about one other thing: the populations of many of the best countries in the world are shrinking!”  I find that response horrible and depressing, not heartening.

3. Many features of our budgeting, especially from the public sector, rely on exponential rates of economic growth.  For better or worse, we are not about to back our way out of those.  We also may need exponential growth to pay off the growing power of special interest groups.

4. Most importantly, I think high rates of economic growth will resume, at some (unknown) date in the future.  Note that in a very broad data sample, stretching across centuries, rates of growth for the technological leaders are on average rising, as shown by Paul Romer.  It was a big deal in the 17th century when England started to manage an average of about one percent growth a year, but today we would call that a kind of stagnation.  The Great Stagnation is a temporary slowdown in growth, not the permanent end of new ideas.

Robert Cosgrave February 20, 2013 at 7:57 am

No or low growth per capita isn’t good, but it’s not such a terrific disaster. We’ve gotten used to budgets going up all the time and that takes pressure off optimisation. I think there’s definitely scope for growth in measures of wellbeing in a static budget. Look, for example, at health. It’s capable of consuming vast amounts of GDP, and the value you get is often poorly coupled with how much you spend. Twist 2% of optimisation out of health per year, and you can free up GDP to use elsewhere – a penny saved is a penny earned, surely. It’s boring, and difficult, sure, compared to year on year growth, but it’s still a valid that we can improve peoples quality of life in a net zero GDP change.

Masked Defender February 20, 2013 at 4:20 pm

I am not Scrooge and I’m not advocating a drastic change.

But growth rates have slowed in lock-step with the expanding welfare state beginning in 1960. Growth rates were highest during the Industrial Revolution, i.e., when there was no welfare and people had to work hard to survive. But were we to supervise the welfare state better, we could have BETTER growth rates with time. Instead we toss them their easy money to assuage our consciouses while in fact so many lives and neighborhoods are ruined by the welfare state. Thomas Sowell wrote a great very short op-ed piece that was syndicated and I read in the NY Post. Harlem in the 1950s was a wonderful middle-income neighborhood by today’s standards. People had middle-income values of hard work and good-neighborliness. Today? Well it’s better than the 1970s, but that’s partly due to gentrification. But inner cities are not; e.g., South Chicago.

Jonpez February 24, 2013 at 1:45 pm

Two percent off health to be used elsewhere is exactly the kind of thing that makes GDP grow…

paul February 20, 2013 at 8:10 am

Can you elaborate on why you find shrinking or stable population to be depressing? This has come up a number of times on your blog, and you seem to treat it as something more than just a personal value, as if we should all agree that population stability is depressing.

Outside of context, why should any number for population growth be better than others? If we colonize a new planet, it would make sense for population growth to be high. If we reach the limit of resources, it seems optimal for population growth to be low or zero. What is so special about zero – why do you get depressed if it becomes a little bit negative?

Onshore unbalancer February 20, 2013 at 8:18 am

+1
As an antinatalist I agree the population growth fetish is one of the more peculiar obsessions that is shared among fascists, communists and libertarians alike.

jdm February 20, 2013 at 8:20 am

I have the same question.

Greg G February 20, 2013 at 9:16 am

I also don’t see why we should be depressed by the prospect of the end of compound rates of population growth. On a finite planet what else could happen? Sure we will lose the bump that population growth gives to economic growth. If compound rates of population growth were to continue indefinitely we would all be standing shoulder to shoulder within what would be the blink of an eye in the scope of human history.

Cliff February 20, 2013 at 10:07 am

It’s not about “compound rates of population growth” obviously. That’s a canard.

Millian February 20, 2013 at 8:59 am

Mood affiliation. With one chosen belief, one can simultaneously participate in “the West’s been in decline since the onset of Socialism”, “the minorities are outbreeding us”, “women have it too good”, and all the other right-wing memes.

IVV February 20, 2013 at 9:03 am

I would imagine that the feeling has something to do with how one feels about the future generations of humanity. If you feel a kinship with them, then you’ll want them to do well, and a growing population is at least indicative of some level of future success. If you don’t feel a kinship with them, then why bother being a custodian for the future? Why not pollute and overharvest today, when you can enjoy the benefits? Do the nonhuman parts of this planet deserve my loyalty more than the human parts?

My wife and I have been having difficulty conceiving, so I’ve been feeling very philosophical about this. Will I be represented among the future generation? What does representation mean? If I am not represented, then what loyalty do I owe them?

jdm February 20, 2013 at 9:26 am

“growing population is at least indicative of some level of future success”

The logic behind this sentiment seems doubtful to me. I rather think the opposite is more likely to be true.

From a personal perspective, it is precisely because I care about future generations, that I’d be happy to see a lower population.

IVV February 20, 2013 at 9:51 am

I’d imagine that depends on how species propagation occurs.

If a species will procreate until constrained by resources, then a larger population indicates more resources are available. Procreation occurs with plenty, and population contracts in situations of starvation. Thus, lower population is indicative of not enough resources to go around.

Now, certainly, there could still be collapse-style scenarios where a species overconsumes and stresses and environment, causing there to be famine and a resulting collapse in the population. You might want to prevent that. But we can only be sure that there is the disastrous famine by the fact that the collapse occurs. But in this case, low population is the proof of the tragedy, and not of success.

So, if the goal is to lower population, then you will have to make people believe that they can’t do with fewer resources and can’t afford to procreate. It’s looking at someone with little and being satisfied with that which must be abhorred. The world will have to see what we have now, and say “oh no, $10,000 per year GDP is abominable! We need to cut our population in half, so that we all can have $20,000 per year GDP!”

That’s easy to say and think in the USA. But for the billions who already have had to make do with less, and are now seeing their fortunes increase, this argument is a complete non-starter. Furthermore, the argument only operates under the assumption that the economy is a value that is independent of its participants, which, of course, it completely is not.

Am I missing something?

Millian February 20, 2013 at 10:26 am

Interesting perspectives.

“a growing population is at least indicative of some level of future success”

The fastest-growing populations nowadays are in countries like Niger, Zimbabwe and Uganda; who is to say that the future will be different?

“If I am not represented, then what loyalty do I owe them?”

But I’m sure you accept that you have moral duties to complete strangers, going beyond what is legally minimal? So I think this is not so different.

IVV February 20, 2013 at 10:43 am

I’ll agree that the “what loyalty do I owe them” does have a dismissive, nihilist tone about it, but I mean to ask the question from a more philosophical position. Your view vis-a-vis strangers is an excellent one; what loyalty do I owe strangers, and would my loyalty to the future generation be similar? My loyalty to them must be different, because while my actions cannot will a stranger to have never been born, I do have that power over the future generation. But if it is wrong to rewind time to erase someone’s existence, is it not also wrong for me to attempt the same to the future?

Also, the real question is whether the life of the average sub-Saharan African is better or worse than it used to be, and why. Zimbabwe has become demonstrably worse in recent times, but their growth rate has also dropped; it’s still above replacement, but it’s among the lowest in Africa. Now, certainly, high-growth rate nations are not in great shape: Afghanistan, Liberia, etc. But isn’t the high growth rate proximally the result that infant mortality has dropped while reproduction levels remained constant? And isn’t that a good thing? Maybe not, and if you have evidence to the contrary, I’d love to see it. Does the high growth rate cause the poor economic outcome? How does the causation run, here?

Millian February 20, 2013 at 11:00 am

I don’t mind your tone, as it’s a valid moral question to ask, though I think it’s solipsistic more than nihilistic. You may not owe me loyalty, per se, if you passed me on the street. But you could have lesser moral duties (like, don’t mess up my stuff) that correspond to obligations we have to future generations of humans. As you note, these obligations are contingent on their being born. We know that, with a decently high probability, SOMEONE will be alive then. So you could have obligations to the class of “people alive in the future”, without necessarily including the obligation “bring more people into existence” as part of that set, just as we recognise that some obligation exist and some don’t when we meet each other on the street .

I dunno about the causation with growth of GDP and population, but it’s just an illustration that high population growth isn’t an indicator of success. Looking at the CIA World Factbook figures (http://en.wikipedia.org/wiki/List_of_countries_by_population_growth_rate), I see about six countries in the top half of the distribution where I’d be content to be the median citizen, and a lot more than that in the bottom half.

TJ February 20, 2013 at 9:10 am

I’m not particularly attached to population growth, but the main arguments for steadily increasing population being good would be:

1) More people increases possible production directly through more hands
2) More people increases the possibilities of cooperation and positive spillovers (more minds)
3) More people means a guaranteed increase in consumption demand all else equal.
4) A stable growth of population guarantees the stability of PAYG social insurance systems, demographic “humps” are a policy headache.

I suppose you could say that as it is right now, the US has the geographical size of China, it has a higher level of general technology implemented and higher effectivity and efficiency in its economy and utilization of land, but it also has only a third of the population. If 1 billion Americans in the US is sustainable, increasing the population size to that would mean much larger markets and much higher aggregate demand, many more scientists and artists and engineers etc. etc.

Maybe 1 billion people in america living like americans do now wouldn’t be sustainable, but in a long-term view it is not unreasonable that the US as a land mass can support many more people than are currently living on it and not having those people there is a loss in human potential.

Personally though, I see a vast amount of wasted human potential in every society on earth that could and should be developed and capitalized on before we start birthing vast hordes of people in order to easily capitalize on the 10% that are naturally talented.

jdm February 20, 2013 at 9:35 am

“Personally though, I see a vast amount of wasted human potential in every society on earth that could and should be developed and capitalized on before we start birthing vast hordes of people in order to easily capitalize on the 10% that are naturally talented.”

I agree.

Cliff February 20, 2013 at 10:18 am

I completely disagree. How “could” this wasted potential be developed and capitalized on? What wasted potential are you even referring to? Unless you are talking about genetic engineering, which I approve. And why can’t you do both?

TJ February 22, 2013 at 10:55 am

I am referring to people in society who could be more productive given increased investment in them. Currently the level of investment in human capital (education, ability to work in formal society, decision-making skills, aspiration towards productive role-models etc.) on an individual level is correlated highly with inter-generational wealth. The potential arising from breaking that correlation and preventing low human capital inheritance, if realized, would lead to much more benefits to society than just increases in productivity.

I suppose there is no reason you can not do both at the same time, but forcing each generation to have more children will probably get you to a ceiling sooner or later, and THEN you have to deal with the demographic issues we have now. but on a much larger absolute scale.

Other than that, the primary effect of population on GDP is a level effect, if you have 2 times as many people you can have 2 times as much GDP, but your GDP per capita would initially be lower (i.e. china), to the degree that resources are limited, or at least increasing in scarcity with consumption, a doubling of population would mean an absolute smaller potential GDP per capita, arguably translating to a worse standard of living.

The naturally declining population growth rate implies that a sort of equilibrium has been reached, and while it could possibly be pushed up in a non-intrusive manner but increased child credits or parental leave, this wouldn’t necessarily incite people to have more children (looking at European countries that have these benefits but also have declining population growth rates.) I’ll be the first to admit though that the claim of a population/wealth rate equilibrium is not robust, however to the extent that it extends to the microeconomic level (of poor people having more children and rich people having none) the separation human capital and background is even more relevant. .

Hoosier February 20, 2013 at 9:55 am

I like human beings and want to see more of them. I also like the idea that there will be more ideas, more interesting people to meet and talk to, and believe that there will be more dynamism in a place with a growing population as opposed to a place that is just treading along. The most interesting places in the world to me are the ones that are growing the most- Africa, the Middle East- and to see how they will shape the world in the future.

So, you may not agree, but that’s at least why I see a shrinking population as depressing.

Millian February 20, 2013 at 10:42 am

1. contingent; football fans wouldn’t want indefinitely more football games; 2. the ideas would be necessary to merely sustain living standards given rapid population growth; as for dynamism, history suggests this is not always good; 3. they are interesting because their people are poor, and your wealth gives you great power when you go there to do many things ordinary residents wouldn’t.

Hoosier February 20, 2013 at 10:52 am

As a football fan, I would certainly like indefinitely more football games- I could just choose not to watch if I was no longer interested. I’d like more of everything I enjoy to be honest.

You may say this is not feasible, or that the cost is higher than the benefit, but you can surely understand the appeal of high growth and abundance.

Urso February 20, 2013 at 12:43 pm

“I like human beings and want to see more of them.”

So basic and fundamental, but the commentors to this blog seem to believe it’s not a sufficiently objective reason. Or maybe they just reject it a priori.

Millian February 20, 2013 at 1:21 pm

It’s trite and cheap talk. It doesn’t matter to my philanthropic preference one way or another if China gets another hundred million people. Do you care? Really? The maximum human social network is less than ten thousand people, beyond which people are objects – if you have evidence to the contrary, furnish it…

Go Kings, Go! February 20, 2013 at 3:17 pm

The maximum human social network is less than ten thousand people, beyond which people are objects – if you have evidence to the contrary, furnish it…

The U.S.A.? More specifically, our national laws, treaties, judicial system, internal exchange networks, our military security. If the U.S.A. had 100 million fewer people all of that would be completely different, and worse.

Millian February 21, 2013 at 6:27 am

I wrote about human social networks; not everyone in the USA knows everyone else. As a philanthropic preference, it’s irrelevant whether the USA has 200 or 300 millions; I can’t know more than a tiny fraction of them, no matter how much I like people. As a political preference, smaller countries tend to be better-governed, perhaps due to the stronger ability of citizens to monitor and punish bad behaviour by politicians.

Urso February 20, 2013 at 1:42 pm

Right, if you reject the concept of “intrinsic worth” (and I’m assuming, given the tone of your post, you’re howling in laughter at me for even typing those words), then what you’re saying is correct. It’s really a battle of first principles, something you either accept or do not.

Millian February 21, 2013 at 6:38 am

You could say the same for anything. It’s an illusory argument that renders debate meaningless. If we can all claim that we have a set of unchallengeable first principles, we can’t hope to use reason to resolve questions about truth.

Go Kings, Go! February 20, 2013 at 12:00 pm

Each person contains a specialized piece of the knowledge that aggregates into our civilization. To grow our capabilities, we need more people to carry new knowledge. In contrast, if you whack 10% of population, you might eliminate the plumbers, the orchardists, the ability to fly at supersonic speeds, combine manufacturers, polyester. Some great chunk of knowledge will be lost and you can’t pick or choose.
The Dark Ages of 1200 BC (when writing was lost) and 600-900 AD followed population declines and resulted in massive loss of knowledge and reduced living conditions. Smaller episodes of population decline had identical results throughout time and space. Maybe nanotechnology or computers will overturn that inevitable result, but I prefer to bet on people.

Anon February 20, 2013 at 1:24 pm

Poppycock. There is no question that at least 10% of humanity consists of ZMP people.

Go Kings, Go! February 20, 2013 at 3:13 pm

Yes, but that’s not exclusively who’s going away when you reduce population.

dirk February 20, 2013 at 1:08 pm

You should put it into context. He said “the populations of many of the best countries in the world are shrinking!”

Put slightly differently: the best populations are shrinking!

Frederic Mari February 20, 2013 at 8:25 am

First, what Robert Cosgrave above said: “It’s boring, and difficult, sure, compared to year on year growth, but it’s still a valid that we can improve peoples quality of life in a net zero GDP change”.

Second, you say: “Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.”

I don’t know. How do you measure that? My grand-mother was born in 1918. She died a few years ago but basically didn’t really get exposure to the IT revolution since she stopped working in the mid-80s. I saw the birth of PCs with pac-man as the peak achievement and I can now play MMORPG with breath-taking graphics and I have still decades of adulthood in front of me. And I suspect health care may well make just as impressive a progress…

“I find that response horrible and depressing, not heartening”. Just like you, to the extent that you can argue that we have a slower rate of change (something I am not convinced about, unless you include, say, social changes such as universal access to education, health care and social safety nets), I expect things to accelerate in the not-too-distant future. I damn right hope it doesn’t come with population increases. I doubt that the Earth can really take much more human pop. increases. And colonising Mars is still some distance away…

“We also may need exponential growth to pay off the growing power of special interest groups”: If something can’t go on forever, it won’t. At some point, we’ll sort the issues linked to retirement. One way or the other. In a bloodbath if we must. But things can’t go on unchanged so something WILL change. Either we redistribute productive assets ( http://theredbanker.blogspot.com/2013/01/robots-labour-and-sciences-fiction.html ) or we start killing people…

“I think high rates of economic growth will resume, at some (unknown) date in the future”. See above, I agree. I think something you seem to underestimate (AFAICT) is the transformative power of spreading purchasing power. IMHO, XIX century capitalism when it was forced to spread its gains to workers and thus created a middle class saved itself from “stagnation” and this unleashed that explosive growth we saw in the first part of the XX century. The entrenching of those social gains after WWII led to the growth we saw in the post-war period till the late 70s.

http://theredbanker.blogspot.com/2012/03/what-went-wrong-with-our-capitalism.html

I wrote “Keynesianism was in part built and certainly achieved political dominance thanks to a back-lash against the foolishness of neoclassic theories’ response to the 1930 crisis. Monetarism and supply-side economics went through the same cycle when Keynesianism couldn’t solve or even explain the stagflation of the 70s and 80s.

But, consciously or not, these policies returned us to a pre-WWI economic set-up. As a consequence, we have recreated the types of crisis of that time.”

Rates of growth may well accelerate as soon as we will have find an econo-political solution to this XIXth century-like set-up we’re living through… When that will be? Your guess is as good as mine…

Orange14 February 20, 2013 at 8:28 am

One always runs up against the ‘law of large numbers’ (pace Tim Cook, CEO of Apple who’s confronting this right now) in this regard (the only thing that I’ve seen that somehow manages to escape this is Moore’s law but that will be tested at some point). National economies are not exempt from this and I agree with Paul above that population growth should not be thought of as depressing at all. As long as we are making ‘per capita’ measurements, slowing down population growth or even decreasing population could inherently be a good thing as ‘per capita’ growth would increase as long as productivity continues to increase. We’ve seen how technological advancements have increased growth even as net labor inputs have decreased (just look at the steel and automobile industries as the prime example). Methinks that economists are trying to make analyses way to difficult (time to step back and consider the impact of Occam’s Razor).

Brian Donohue February 20, 2013 at 8:32 am

My first thought was all the bleating about Japan.

To your points:

1. Yup

2. Get over it

3. Ponziish arrangements are not sustainable and will change.

4. Maybe

Andrew' February 20, 2013 at 8:42 am

2. Get over it? Have you ever played Master of Orion? Is it too late to bring back the Voyager?

Anon. February 20, 2013 at 8:57 am

How will 3 change? Old people are the ones that stand to lose from it changing, and they hold virtually all political power. By what public choice mechanism do you envision that change happening?

JWatts February 20, 2013 at 9:54 am

You can’t have long term:

a) growing government pensions and b) constant percentage retirement funding

So it’s fundamental that one of these factors will indeed change.

Claudia February 20, 2013 at 8:51 am

4. Why / how? Your optimism sounds like a hedged, drawn-out form of the logic I hear often..kind of like the self-healing powers of the economy. Note: that logic has not worked so well lately: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/19/forecasters-keep-thinking-theres-a-recovery-just-around-the-corner-theyre-always-wrong/ The end of that article sounds a lot like the end of your post:

“Eventually the forecasters will be right, and the U.S. economy will grow at 3 or 4 or 5 percent and return to its full potential. Unfortunately, we don’t know how long “eventually” might be.”

What is it that gets us from here to there?…whether there is a cyclical recovery or a trend-boost. It’s not low hanging fruit (that is Winship’s argument). It’s not serious institutional reform in a lower than expected growth state of the world (seems unlikely)? So what is it? I guess pointing to the past is the best we can do for the future. But I agree giving up on growth would be tragic.

Frederic Mari February 20, 2013 at 9:59 am

Supply-sider version: The economy needs to rebalance, the workers need to re-train/re-adapt themselves. Structural adjustments are always lengthy but they’ll occur.

Tyler Cowen version (afaict): We are due for some radical productivity boosting innovations soon-ish. Some policies could help. When that happens…

Demand-sider version: We need stimulus till a self-sustain recovery is apparent. Failing that, it’ll take very very long for things to recover, if ever (‘equilibrium’ with high unemployment till capacity is destroyed and thus output gap falls).

My version: Probably tired of hearing it by now. We’re in the jam till a revival of the middle class spending power drives the economy and, incidentally, technological change/adoption forward. ETA totally dependent on politics/power struggle between the top 0.01% and the rest of us.

Alexei Sadeski February 20, 2013 at 11:19 am

Why would middle class purchasing power, NOT all else being equal, function as some kind of revitalizer?

Frederic Mari February 20, 2013 at 2:15 pm

Well, I hesitate to cite the main inspiration behind this idea as he is Marxian. But Aglietta (http://en.wikipedia.org/wiki/Michel_Aglietta) is a French economist who basically differentiates between extensive capitalism (19C mostly) where conquest of new markets while products remain basic is the name of the game and intensive capitalism (mostly post-WWI) where products climb the Maslow pyramid and while you can no longer conquer new markets, people’s needs increase and expand thus providing the required growth.

I am slightly mixing and matching Aglietta’s idea with Maslow and stuff but that’s the gist. A prosperous middle class, by providing revenue growth opportunities to firms (‘capitalists’ in the Marxist language) is the motor of modern capitalism.

By regressing to the 19C set-up, we are hitting the same kind of issues they had prior to WWI. The world is finite and saturated inasmuch as people can only afford what they already have and so things stagnate.

Careless February 20, 2013 at 4:55 pm

Don’t worry, everyone knew that was coming from Marxism the first time you brought it up

Claudia February 20, 2013 at 7:10 pm

BTW, that was not the answer I was looking for … and I’d be shocked if that’s the mechanism behind the optimism. I will just go back to mulling over, arguing about what the problem really is and therein lies the answer. Just because you say something, doesn’t make it true.

Frederic Mari February 21, 2013 at 2:44 am

To Careless: Well, fine but most people (you included?) dismiss things instantly as soon as they hear ‘Marx’. You don’t have to buy the whole shebang to find some Marxist or Marxian concepts interesting and well adapted to our period where inequality has grown back to ‘robber barons’ levels.

To Claudia: I don’t know. I thought my summary of the various schools of thought was fair. As to whether my version is correct or not, well, I am biased so I won’t pronounce on it. I agree that there isn’t that many people out there saying that (apart from OWS and John Stiglitz) but it’s catching on – http://www.motherjones.com/kevin-drum/2012/10/income-inequality-and-great-crash-2008

and the link which formed the base for Kevin Drum’s post: http://www.nationaljournal.com/next-economy/essay-the-growing-income-gap-in-the-u-s-harms-the-economy-20120927

It might not be very respectful when debating things on Tyler Cowen’s own blog but I find this a superior hypothesis to TGS.

Brian Donohue February 21, 2013 at 7:57 am
Floccina February 21, 2013 at 9:16 am

We’re in the jam till a revival of the middle class spending power drives the economy

Sounds a bit self serving (most of us consider ourselves middle class). Why would middle class spending power be any different from rich or poor spending power? BTW investing is spending too.

Statspotting February 20, 2013 at 9:00 am

This is another perspective that sounds impossible, but actually has a good chance of happening. For example, how many of us would believe that americans have been responsible spenders, and have allocated their money in the best logical way possible?

http://statspotting.com/who-says-americans-spend-irresponsibly/

Floccina February 21, 2013 at 9:26 am

Since additional spending on education and healthcare above some low base, lets say the 1980 level yields insignificant benefits it is the epitome or irresponsible spending. When people say that USAers spend irresponsibly they generally mean that they spend more than they can afford not that they are buying booze and cigarettes.

King Cynic February 20, 2013 at 9:15 am

It makes as much sense to be upset about not achieving high exponential growth ad infinitum as it does to be angry that you won’t live to be 1000 years old. Put another way, you are a fool for feeling you’re being robbed of something you were never entitled to in the first place.

john personna February 20, 2013 at 9:25 am

It’s easy to think of a world, not quite as bad as Idiocracy, where everyone makes a great deal of money, and spends it on electrolytes and Starbucks. That would be a high GDP world, with low environmental quality and little access to untouched nature. It sounds like the view of “non-enviro” economists is that as long as everyone make enough money, that’s ok.

Ray Lopez February 20, 2013 at 9:32 am

Wow this is news! TC is not married to the Great Stagnation thesis! A lot of authors would not back down from their position. As for modern government requiring compound growth, we need to break that cycle before it kills us. Here in Greece they bureaucrats run the economy–and that’s a bad thing (garbage men on strike today–and journalists–and the list goes on). As for populations shrinking being bad, it depends on whether you believe Total Factor Productivity can be raised through incentives or not. The debate is as follows: if TFP cannot be raised by incentives, then you need a large population since innovations are a function of population (more population, more ‘genius inventors who invent, sua sponte, without the need for incentives–this BTW is how the modern world as we know it was largely built). However, if TFP can be ‘engineered’–ala as suggested by Paul Romer in some papers–and are not ‘exogeneous’ as they are in the Solow model–then a shrinking population is not a bad thing. Mankiw and Cowen seem to be of the latter school, while I* and Romer are of the former school. (* no, I’m not famous, lol).

IVV February 20, 2013 at 10:05 am

But for a world in which TFP can be raised, is a lower population still better than a higher population? Wouldn’t a world (taking this to the extreme) of billions of geniuses all knowing how to attend to their needs with the resources available be a bad thing? I think not.

Millian February 20, 2013 at 10:48 am

A lower population isn’t better, a priori, but there’s no reason to think a priori that it’s worse. Your suggestion is only one of many possible worlds; on the other side, you could have a population of billions of fools (bear in mind that they would have legacy nuclear weapons).

IVV February 20, 2013 at 10:55 am

Very true. In that case, it seems to be more important to prevent fools than to prevent people.

Brian Donohue February 20, 2013 at 4:17 pm

Of course it’s fashionable to pooh-pooh Jared Diamond’s grand narratives, but I think his analysis of Australia and, in particular, Tasmania, provides a thoughtful rebuttal to the idea that “there’s no reason to think a priori that it’s worse’ where it refers to a small population:

http://www.edge.org/3rd_culture/diamond/diamond_p5.html

Millian February 21, 2013 at 6:59 am

But we are not debating whether the world should have four thousand people. I agree that a four-thousand person human race would be bad, especially if they should all live on one small island. That says nothing as to whether a world of ten billion people would be better than a world of twenty billions. The potential for catastrophic environmental disaster doesn’t scale. Nor do the initial gains from specialisation and trade when one moves beyond four thousand people. With respect, that argument is irrelevant and verging on the ridiculous.

Brian Donohue February 21, 2013 at 8:01 am

10 billion v. 20 billion? Your grasp of demography is…well,,,grasp isn’t the right verb at all. But perhaps my argument does verge on the ridiculous, inasmuch as this critique comes from someone with such manifest expertise along these lines.

Brian Donohue February 21, 2013 at 8:03 am

* noun

/not an English major

Claudia February 20, 2013 at 7:17 pm

Ray, I can’t believe you didn’t read the book…the end of TGS was foreseen there too, in the same gauzy way as here. Books about important social and economic problems which don’t go out on a limb and spell out some plausible policy solutions are as annoying as good movies that forget to have an ending.

buddyglass February 20, 2013 at 9:49 am

Here are some more charts:

Real Per Capita GDP by Quarter:
http://research.stlouisfed.org/fred2/graph/?graph_id=108094

Year over Year Absolute Change in Real Per Capita GDP by Quarter:
research.stlouisfed.org/fred2/graph/?graph_id=108096

Couple observations:

1. The most recent recession was really exceptionally terrible.

2. The three most recent growth periods seem to indicate a downward trend in absolute increases to per capita GDP. That’s just from eyeballing it though. If you look at the late 1990s the YoY quarterly growth seems to average around 1.1, then around 0.8 in the 200s and 0.6 since the most recent recession.

buddyglass February 20, 2013 at 9:50 am

Link posting fail. Guess I need to put a blank line before a URL.

Brian Donohue February 20, 2013 at 4:20 pm

Dude, I really like your graphs.

So…the 1950s were mostly about population growth? Interesting.

buddyglass February 20, 2013 at 4:28 pm

Not sure if I’d go that far, but maybe. You could also argue that the 1960s and 1970s were due to increased integration of racial minorities and women (particularly women) into the workforce. We’ve picked that fruit, so to speak. Though, if we could somehow find a way to shrink the “dysfunctional underclass” that seems to be a particularly large drag on U.S. growth (relative to wealthy peer nations) we could reap some benefits from that.

DocMerlin February 20, 2013 at 9:50 am

Excuses, all excuses.
The real reason:
Government spending has grown at more than double the rate of economic growth. Its eaten a larger and larger share of the future growth.

john personna February 20, 2013 at 9:57 am

In my dad’s day it was free camping along the California coast. Now a local state park charges $50 per night. More GDP, wooo whooo. Although, it is not strictly a situation where government “took away” that “growth” from the “private sector.” It was a free environmental service that contributed to quality of life, that is more rationed at a price.

Andrew' February 20, 2013 at 10:01 am

Possibly, but OTOH isn’t that why ‘rents’ are called ‘rents’?

john personna February 20, 2013 at 2:42 pm

Sure, but we’ve had choices about what we do with public lands. The real libertarian would want them all sold off, and for the then-private rents to seek their own level. Some of us would prefer a healthy reserve of public wilderness, with low cost, even if that meant lottery, access.

jdm February 20, 2013 at 10:11 am

Yes. And when the population density was lower, places like Yosemite used to be pleasant to visit. Now it’s a madhouse. In New Zealand, where the population density is low, you can still camp for free on the coast. Once their population grows, this will end but presumably the New Zealanders will then be delirious with happiness at having a larger population.

In Chicago, we have these two 50 foot towers glass towers (The Crown Fountain) in Millennium Park on which are displayed ever changing human faces that occasionally spout water out of their mouths. I think these fountains say a lot about us as a species.

Hoosier February 20, 2013 at 10:54 am

That’s easy for you to say being one of the lucky ones born into this world to enjoy such beautiful places. A bit selfish isn’t it?

jdm February 20, 2013 at 11:03 am

Is having a population that doubles every twenty years a good thing for your average Kenyan or Rwandan? If it is, I don’t see it.

Urso February 20, 2013 at 1:43 pm

Man, what parks are you camping in? I never paid anything close to that.

john personna February 20, 2013 at 2:40 pm

Crystal Cove State Park, California. Jeez Louise, if I’m doing it right Reserve America wants $75 a night in July for a trailer/rv spot.

Urso February 20, 2013 at 3:50 pm

Well RV is different. That’s obviously going to cost more. I thought you meant $50 for a tent.

john personna February 20, 2013 at 4:17 pm

Yes, it is $50 for a car and tent spot.

JWatts February 20, 2013 at 10:00 am

To a statist that’s a Feature not a Bug.

buddyglass February 20, 2013 at 11:20 am

Maybe I’m missing something. Why does spending (in the general case) necessarily “eat” growth?

If the govt. takes $100 from me and gives it to you then you spend it on the same stuff I would have spent it on, what’s the difference with respect to GDP?

I’ll cede that no such transfer will ever be perfectly efficient. Maybe I get taxed for $100, you get $90, and some set of govt. employees get paid $10. You (plus the govt. employees) are still spending that same $100. The “cost”, then, is that some amount of human capital has been spent to facilitate such transfers that might otherwise have be used more productively. The amount of human capital that’s spent, though, is a function not of the size of the transfer (or spending) per se, but of its complexity.

Certainly spending can also cause resources to be allocated in ways the the markets would not naturally prefer, which has the potential to negatively impact growth. Subsidies are the obvious example and the easiest to argue against. We might also consider things like public primary and secondary education, though. I’m not convinced that all such reallocations represent a net negative (though some almost surely do).

Anon. February 20, 2013 at 1:09 pm

For one, you underestimate how much of the pie is lost in the transfer. Additionally, it’s not just about how much is lost in the transfer, you must also consider how big government (and the things that come with it such as high taxes, over-regulation, professional licensing, etc.) impacts future growth. Not everything that government does involves pure monetary transfers from one party to another.

buddyglass February 20, 2013 at 2:41 pm

Those figures were just for the sake of argument; I wasn’t trying to come up with an accurate estimate.

You mention that taxes negatively impact future growth. I’d say that depends on how they’re levied and what they’re spent on. That’s why I mentioned transfers, which look like “big government” but are different from other forms of spending. If the government imposes a new tax of $100/capita on every household but then turns around and cuts every household a $100/capita check then it’s essentially a no-op. However, on the books, it appears as if taxation and spending have both increased.

Obviously there’s some overhead involved, so there’s going to be some loss. But it’s not the case that every dollar taken out of the economy in the form of taxation is a dollar “lost”, since some portion of that dollar makes its way back into the economy. Potentially in ways that *increase* growth over the baseline.

Brian Donohue February 20, 2013 at 4:26 pm

Ya gotta follow this thought experiment through.

On day two, you’re like: I’ma just sleep in. What’s the point of earning another $100 if the gubmint just gonna take it and give it to DocMerlin.

More perniciously, DocMerlin spends day two lobbying the gubmint to take $100 from someone else (not you, you’re sleeping in) rather than doing something productive.

buddyglass February 20, 2013 at 4:41 pm

Sure. Any kind of transfer has the potential to reduce the incentive to be productive. If someone paid me $100,000/year I’d probably work a lot less than I do. For sure I’d work on different stuff than I do now. It’s the age old question: how do you ensure that the least productive members of a capitalist society (when acting in reasonably good faith) are able to afford a reasonable baseline standard of living, while incurring the least disincentive to productive behavior.

Sometimes, too, the benefit of a given spending program outweighs the “cost” in terms of disincentive toward productive behavior. I’d argue compulsory public schooling probably fits into this category. The net gain from avoiding the scenario in which a sizable percentage of the population is wholly illiterate and innumerate (as opposed to only “mostly so”, as is the case now) is probably worth the “cost” in terms of productivity disincentives created by the provision of free public school.

Alexei Sadeski February 20, 2013 at 11:22 am

>Government spending has grown at more than double the rate of economic growth. Its eaten a larger and larger share of the future growth.

Bingo. This aspect is given such little attention.

Government is dumping resources down the toilet instead of permitting it to be put to good use.

Ray Lopez February 20, 2013 at 1:03 pm

But your thesis, if true, does not explain the Great Stagnation, unless you assume government is crowding out that proportion of the population that does productive work. But another way: according to the Solow model maximum growth is due to technology alone. So, if only 10% of the population does productive work relating to technology, then increased government spending will impact long term growth only if it crowds out that 10%. And the evidence of ‘crowding out’ is non-existent for debt (private sector debt not inhibited by public sector debt increases) so why should it be different for claims on IP? Unless you assume ‘red tape’ is strangling innovation (and some have made this case) but against that, you have SBIR (government sponsored R&D). I think TC is right about Great Stagnation–and the cure is a better patent system, but that’s just me riding my hobby horse.

Brenton February 21, 2013 at 4:40 am

“Government is dumping resources down the toilet instead of permitting it to be put to good use.”

Like paying for poor peoples health care instead of letting the middle and upper classes spend it on stuff they don’t need?

whatsthat February 20, 2013 at 10:06 am

How well does the calculation of GDP reflect economic advances? How do you quantify the fact that I haven’t visited a physical Bank in more than 3 years?

Wilitts February 20, 2013 at 12:10 pm

For crying out loud, have we forgotten about diminishing marginal returns, diseconomies of scale, congestible public goods, negative externalities, diminishing marginal utility, and gains from trade?

We don’t need incredible technological breakthroughs to make the world a better place. Isn’t the subtitle of this blog “small steps toward a much better world”?

There is no stagnation, and certainly not a great one. By almost any objective measure, and certainly by a combination of all of them, we are much better off than ten years ago. Our ancestors would love to have our problems.

Brett February 20, 2013 at 12:28 pm

Interesting piece by Winship. He’s one of those bloggers whom I keep in my Reader Feed, simply because he forces you to think even if you disagree with some of his conclusions.

1. Why does Winship use Mean Family Income as his metric for most of the article, instead of the Median Family Income? The latter seems much less likely to be distorted by disproportionately high increases in family income in the top 10%, top 1%, and top 0.1% of the income distribution. If you look at real median family income, absolute family income growth looks less impressive, with very low gains in the past 23 years. He does ultimately shift to using median family income, but only to point out that a current median family is considerably richer than its mid-century equivalent.

2. The story about “bigger houses and bigger cars” is one of those facts that really needs to be broken down into specific analysis. How large have living arrangements gotten for particular segments of the income distribution, for example? I ask, because others (such as Ryan Avent and Matt Yglesias) have repeatedly brought up the issues of housing expenses driving migration patterns in the US.

3. GDP per capita can be misleading in terms of measuring the welfare and income gains of the population. Simply knowing the amount of output over the entire population does not tell you whether that person has seen increased wages and/or living standards, and it can quite often mask more serious issues of inequality in income and poverty (Angola is always my favorite case example here).

4. Bringing up the impressive productivity gains over the past two decades does not really seem to be an answer to critics like Paul Krugman and the progressive left. Very few would dispute that, but their main argument in this area is that productivity and wage growth for the median worker/family has “de-linked”. Whereas productivity growth used to translate into corresponding increases in wages, it no longer has nearly that strong of an effect, and instead the income growth is happening in the top 1%. It’s an issued of perceived equity and rewards to work for many of them. That said, it’s good to point to the fact that absolute gains still are increasing.

5. Political economy in the US and other areas is a big issue when examining safety nets and stuff like “work sharing”. We see greater disability claims on the basis of more vague criteria, because the political climate for assistance to the long-term unemployed is toxic. This is also why we usually need “universal” programs instead of targeted ones, since the targeted ones usually come under stronger attack for being “hand-outs” that “encourage the poor to be lazy”. In terms of work-sharing, that’s a product of tighter labor regulations and significantly greater union power in Germany, to the point where the unions there can force their workers to take across-the-board wage and hour cuts instead of the more expensive option of firing employees.

Major February 20, 2013 at 12:52 pm

1. Income is a poor indicator of changes in living standards. Standard of living is about consumption, not income. The primary focus should be on consumption measures.

2. All income levels have received the benefit of bigger/better housing and cars. The median size of new housing has increased dramatically since the 1970s. Appliances are much better. Heating and cooling systems are better. Home entertainment systems are much better. Plumbing and electrical is better. Housing affordability is at or close to record highs. Even cheap cars today are safer, more reliable, more efficient, easier to maintain and have more features than average or even luxury cars of a generation or two ago.

3 and 4: See 1.

Urso February 20, 2013 at 1:51 pm

I’ve asked this before , to no avail. Does anyone have a reliable link showing the average sq. ft/person in American housing stock over time. I know it has skyrocketed in the past 50 years, but by how much?

Steve-O February 20, 2013 at 12:34 pm

I’ve had pedants correct my use of “exponential growth” when used it for something other than the variable in the exponent. I guess that (assuming they were right), now I’m the pedant.

Dan Weber February 20, 2013 at 4:33 pm

That’s essentially what we have here. This is a 2^x scenario.

Larry February 20, 2013 at 8:11 pm

Declining fertility and expanding lifespans means that the robot revolution better hurry up, or the ensuing increase in the dependency ratio is going to be a real problem.

Not to mention that our current, scary fiscal forecast assumes no slowdown ever, much less another recession.

Florarie online February 21, 2013 at 12:56 am

We will not resume a higher rate of growth in the future if the institutional environment does not change. With higher tax rates, growing bureaucracy and IP rights the only new idea that will come to peoples’ mind is, well, the old idea of speculating, searching for public jobs or privileges, refusing to accumulate human capital and postponing investment decisions.

Matthew February 22, 2013 at 11:16 am

This is a rather strange post. The “loss” of compound growth would only be tragic if we have some reason to believe that it could continue. I don’t think that was the thesis of the original post, which postulated that “compound growth” of the past was mostly a mirage created by low denominators, not large amounts of growth.

That said, I don’t agree with the premise. I think growth will continue to average 2.5% to 3% for the foreseeable future.

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