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How much does economic growth matter anyway?
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.
Posted by Tyler Cowen on November 13, 2006 at 02:45 PM in Economics | Permalink
Comments
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!
Posted by: Burce G Charlton at Nov 13, 2006 3:14:19 PM
...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...
Which is equivalent to saying that these values are doomed to fail.
How long do you expect economic growth to continue, exactly? Given that many scientists believe that the carrying capacity of the earth has already been exceeded, blithely speculating about the world as it would be after 3x economic growth is really going out on a limb.
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.
Posted by: Tony at Nov 13, 2006 3:18:34 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.
Posted by: KipEsquire at Nov 13, 2006 3:30:41 PM
Tony,
Why is it incumbent upon "pro-growth people to explain just when and how its going to end"? Have Thomas Malthus's dismal musings taught you nothing about the inaccuracy of sweeping long-run predictions?
Posted by: jim at Nov 13, 2006 3:34:20 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.
Posted by: Chris Bertram at Nov 13, 2006 3:37:11 PM
I think I found out where I am so confused here.
"If we are comparing a two percentage point boost to the growth rate..."
I believe this requires that either (or both)
a) wealth is accumulative (no decline in worth)
b) advances in productivity are in a silo, and there is no leaking to other economic zones
Both of these seem highly implausible.
What I think you would expect, given a clear advantage to one zone, is a period where the growth is similar to your model, followed by other zones catching up as technology spreads and existing holdings become obsolete and are swamped by the productivity gains.
What is the mechanism that silos the benefits of growth?
Posted by: theCoach at Nov 13, 2006 3:54:56 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.
Posted by: Chris Bertram at Nov 13, 2006 3:55:21 PM
The Coach has a good point. Per person productivity advances will surely leak from one first world country to another.
Posted by: joeo at Nov 13, 2006 4:09:57 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.)
Posted by: jim at Nov 13, 2006 4:37:22 PM
"How long do you expect economic growth to continue, exactly? Given that many scientists believe that the carrying capacity of the earth has already been exceeded, blithely speculating about the world as it would be after 3x economic growth is really going out on a limb."
Well, at least some growth is caused by gains in efficiency. We produce more food with less land and less water now than we did a hundred years ago. Clearly the limit on this sort of growth is not the amount of resources available.
"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."
It going to end many millenia from now, after humans have colonized asteroids, moons, other planets, and possibly other solar systems. The carrying capacity of the earth is miniscule compared to the carrying capacity of near-earth asteroids.
Posted by: Doug at Nov 13, 2006 4:39:34 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.
Posted by: Sean at Nov 13, 2006 4:42:06 PM
I think part of Tyler's implicit point is that Germans will not allow for a century of two percent growth differentials. But that also means some of the policies Bertram likes may not be stable in the long run. Hence, if we assume a 2 percent difference because of economic policy, at some point policy will change to imitate part of US policy to catch up some of those differences. But to the extent that Bertram is right, Europeans might tolerate large income differentials before pushing for policy reform.
Of course, individual countries may choose differently and some can get caught up in a slow growth equilibrium -- see Argentina in the 20th century, or Japan since 1991. I could imagine (for example) a resurgent Germany and a stagnant France, or vice versa.
Posted by: ghost at Nov 13, 2006 4:46:19 PM
It is entirely possible to live a life of simple ease, but very few choose to do so.
Posted by: Randy at Nov 13, 2006 4:56:28 PM
Everything I know or think I know is second or third hand, but I think Dean Baker has been providing a very strong argument that government enforced patent monopolies are an extremely inefficient way of incentivizing medical innovation.
Posted by: theCoach at Nov 13, 2006 4:59:04 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!
Posted by: Mr. Econotarian at Nov 13, 2006 5:57:31 PM
government enforced patent monopolies are an extremely inefficient way of incentivizing medical innovation
Oh yes, all those countries without such patents are kicking our butts in innovation.
Sigh. We've been in a fabulous medical revolution for the past generation now, but somehow people only seem to want to talk about Information Technology.
There is a very good reason comprehensive health care insurance prices have been going up. The basket of goods that make up "comprehensive" has increased radically from the days that jokes ended with the punchline take two aspirin and call me in the morning.
Ona can argue that the increases in insurance costs for the entire basket of medical innovation is "too high" if one wants to. There is a simple way out though. Simply tell your health insurance company that you want a policy that doesn't cover you for any new cures or vaccines. You can probably have declining health insurance premiums after you get your new policy (assuming the government will allow it).
In my opinion it is absurd to say that drug patents are a mistake. They all expire in a rather short period of time anyway, and then generics pop up and you can then buy it cheap at WalMart. If you don't want to pay for something that wouldn't have been invented anyway, then do without. But don't try to tell me that I am better off without future innovations via patent incentivising.
Posted by: happyjuggler0 at Nov 13, 2006 6:13:28 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.
Posted by: David Wright at Nov 13, 2006 6:15:19 PM
Chris: There is one more point I would like to make to those, like you, who believe that political and economic liberty are seperable. Surely any notion conventional of political liberty includes the freedom to emmigrate. And surely it must be clear to you that a country that offers its citizens this liberty but restricts their economic liberty will rapidly loose its most productive and entreprenurial citizens. This relationship was, in any case, clear to the East German government that built the Berlin wall in 1961 to stem the tide to westward emmigration.
Posted by: David Wright at Nov 13, 2006 6:29:29 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.
Posted by: happyjuggler0 at Nov 13, 2006 6:32:19 PM
Tony: Hasn't the humiliation of the Simon-Ehrlich wager had any impact on your "limits of growth" doomsday crowd? I guess if 200 years of failed Malthusian predictions w'ont chasten you, nothing will.
Are you aware that the resource itensity of our economy (GDP/resource consumed) decreases steadily for just about any resource you care to name? Are you aware that the known reserves of most natural resources increase faster than they are consumed? Are you aware that, if you do try to calculate approximate hard limits to natural resources of critical importance to our economy, you typically get exhaustion horizons, given present growth rates, measured in millenia?
Certainly, theoretical horizons for individual resources do exist (that is, if you rule out space mining). But are you aware that we have already ehausted several resources that were, in the past, critical to the world economy? Perhaps the best recent example is rubber, which is critical to just about every aspect of our industrial economy, and whoose natural supply wouldn't last us a week. What did the world do when, in the 19th centry, the world started to want more rubber than all the world's rubber trees could produce? It invented a synthetic substitute are went right on growing.
Posted by: David Wright at Nov 13, 2006 6:54:52 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.
Posted by: josh at Nov 13, 2006 7:03:42 PM
Coach: You have posed questions (1) and (2), in differnt guises, in several posts over the last few days. I will attempt to finally address them.
Regarding question (1), does economic output really behave this way, the emperical answer appears to be yes. The U.S. GDP/capita has increased on an exponential path, typically growing 1%-3% a year, for 200 years.
How does this work? Suppose last year our society managed to produce X. Then next year it stands to reason that we will at very least be able to produce X again; all we have to do is to repeat what we did last year. And if we put our minds to figuring out how to be more efficient, we can probably produce more. The remaining question is: when we do that, will we typically produce 1.1 X (multiplicative growth) or X + 1 (additive growth). The emperical answer is multiplicative growth, which puts us on an exponential growth path.
Regarding question (2), don't non-innovators get to piggy-back on the innovations of others, the emperical answer appears to be "sometimes". Development economists used to assume that poor countries would naturally catch up to rich countries for precisely this reason. But emperically this often doesn't occur.
Poor countries that have liberalized their economies (e.g. China and the other asian tigers) appear to be able to grow rapidly by adopting western technologies. (They aren't able to simply implement a western economy overnight; instead, they pass through the same stages that the west did at an accelerated pace.) Poor countries without liberalized economies (e.g. soviet eastern Europe) appear to simply stagnate. Apparently, if no one is going to get rich by introducing an innovation, or loose their job for failing to do so, individuals are not sufficiently incentivized to adpopt new technologies, even doing so would collectively benefit the society.
Posted by: David Wright at Nov 13, 2006 7:30:30 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.
Posted by: John at Nov 13, 2006 7:41:34 PM
Tony,
I forgot another important factor that might lead you to think the wrong way (again from the co-authored Ohsfeldt book):
differantial smoking rates
Posted by: jim at Nov 13, 2006 8:17:56 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.
Posted by: David Wright at Nov 13, 2006 8:29:13 PM
