Politics & Policy

Don’t Count On the Growth Fairy

“Black Friday” shoppers in Manhattan, November 25, 2016 (Reuters photo: Andrew Kelly)
People are a better bet for economic growth.

Real economic growth in the United States has stunk on ice since the financial crisis: 1.6 percent in 2016, 2.6 percent in 2015, 2.4 percent in 2014, 1.7 percent in 2013, 2.2 percent in 2012, 1.6 percent in 2011, 2.5 percent in 2010. The economy shrank by 0.3 percent in 2008 and plunged by 2.8 percent in 2009. We’re a long way from the almost 5 percent growth of 1999.

The powers that be in Washington dream of stronger growth, because stronger growth would mean that they could put off some hard and unpleasant decisions. Stronger growth would raise revenue without raising tax rates, bolster Social Security and our other wobbly entitlement programs, and potentially lower deficits. And while stronger growth helps on the revenue side of the budget, it also helps on the spending side: When growth is strong, unemployment tends to be lower and wages tend to be higher, which relieves pressure on welfare programs. You can understand the economist Robert Lucas’s maxim: “Once you start thinking about economic growth, it’s hard to think about anything else.”

People associated with the Trump administration have taken up 3.5 percent economic growth as a goal. It’s a fine goal, but it probably is not going to happen.

Even if you exclude the financial crisis and the slow-growing years that followed, 3.5 percent real growth — “real” here meaning adjusted for inflation — is higher than our long-term average, which ran 3.2 percent from 1950 to 2008. There’s no reason in theory why the United States could not enjoy 3.5 percent real growth indefinitely, but it has not happened in the past. Don’t go betting your national fiscal position on the Growth Fairy, who is a particularly fickle sprite. Better to place your bet on a proven economic performer: people.

Growth during the post-war era was satisfactory, and more than satisfactory. But something else happened between 1950 and 2008: The population of the United States more than doubled, from 152.3 million to 306.8 million. There were tremendous gains in productivity thanks to innovation, education, and investment in the post-war years, but the population also just got a lot bigger. That’s a lot of new workers, a lot of new investors, and a lot of new consumers.

And that brings us to a figure that comes up a lot less often in our economic-policy debate: the average real economic growth per capita in the United States, which over the long term has run right around 2 percent.

You can see where this is going.

Growing at 2 percent is nothing to sneeze at — not for a big, complex, highly efficient modern technological economy such as that of the United States. A 2 percent growth rate means that when children born today hit their mid-30s, the economy will be twice as large in real terms as it is now. But the 3.5 percent growth rate dreamt of by our policymakers would mean an economy that doubled in size by the time they started college, quadrupled in size by the time they reached 40, and sextupled in size by the time they were ready to retire. That extra 1.5 percent growth per annum adds up to a heck of a lot over the long term.

But what about the population?


Americans in 2008 were radically wealthier and healthier than they were in 1950 — not even though there were twice as many of them but in no small part because there were twice as many of them.

If you view people as assets — as economically productive and socially valuable — then the economic-growth story of the post-war era (3.2 percent growth overall, 2 percent growth per capita) seems like a pretty good story. Americans in 2008 were radically wealthier and healthier than they were in 1950 — not even though there were twice as many of them but in no small part because there were twice as many of them.

Whether you are selling cars or shining shoes, you’re generally better off with 300 million potential customers than 150 million of them, for much the same reason that the top 20 bankers and car dealers in New York City earn a lot more than the top 20 bankers and car dealers in Muleshoe, Texas. (That’s the real story of globalization’s effect on the incomes of the highest earners, who now thrive in a global market with billions of customers.) If you own a business, you have a much larger work force to draw from. If you are looking for financing, you have a much larger pool of potential investors.

But not everybody views people as an asset. Some people — the neo-Malthusians on the left and on the right — view people as liabilities. The neo-Malthusians worry that there are too many workers and not enough jobs to go around, that there too many mouths to feed. Sometimes, they believe there is too much supply and not enough demand (as in the case of labor), and sometimes they believe the opposite (as in the case of water). They tend to be anti-immigration, and many of them worry about overpopulation, both on the planet as a whole and in the United States in particular.

The new Malthusians are wrong for the same reason that the old Malthusians were wrong. Between 1950 and 2008, the population of the United States more than doubled. But the economy in 2008 was seven times as large.

According to my English-major math, that’s a pretty good deal.

Native birth rates being what they are, this would seem to add up to a case for more immigration, something that neither the populists on the right nor those on the left are very friendly toward. We all know Donald Trump’s views on immigration, but consider that Bernie Sanders campaigned for president arguing that American billionaires are scheming to flood the United States with cheap immigrant labor to undermine the position of the working class. Of course, the reality is more complicated than such campaign crudities, inasmuch as it matters what kind of immigrants we are talking about: Indian oncologists aren’t South African entrepreneurs aren’t English journalists aren’t Mexican day laborers. Much of our current immigration debate is about the wrong question — How many? — rather than the right one: Who?

Assets or liabilities?

Is America full, or is America open for business? How we answer that question will mean a great deal more to our future prosperity than debates about presidential budget proposals.

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