How rich are we?

Arnold Kling makes some good points:

…after a crash it is very tempting for people to believe that the previous prosperity was false. However, there is a good economic case for presuming that it is a recession that is an aberration, not prosperity. For example, a graph of long-term GDP growth shows a steady upward trend, to which we return even after severe recessions.

We still have the capacity to produce the output we produced in 2006. Therefore, to a first approximation, we should still be able to consume what we consumed in 2006.

I have a few responses:

1. The problem is not in reattaining the 2006 level per se, but rather that people in 2006 expected an entire future path of growth which now appears further away.  They made plans based on these expectations and we are not yet in a position to make comparably luxurious plans.  Ireland is an extreme example of this point and do note that their capital stock has not been destroyed.

2. As I've written elsewhere, I remain an optimist about the future path of utility, though perhaps not gdp.  Many of today's innovations improve people's lives directly, without necessarily generating much revenue or employment.

3. This problem also resembles the equity premium issue.  Each crisis there is some probability that "this time is different" and upward growth will not resume or at least not for a long time.  Until that expectation is cleared away (if indeed it is cleared away), the real living standard is genuinely lower, most of all in expected value terms.

4. I'm still an optimist about the much longer run, whether for utility or gdp.  In fact the greater the current labor market troubles, the greater the long-run "human capital dividend" from reallocating resources.  Sooner or later, we'll have another burst of important innovation, comparable to that of 1870-1940.  We just don't have it now.


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