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.