The Growth Imperative

T he U.S. economy has downshifted to sluggish growth, mirroring post-financial-crisis stagnation. Third-quarter GDP in 2022 was just 1.9 percent over the previous year. Whether or not 2023 contains a recession, there is little prospect of strong growth.

For those focused on economics, it can be a surprise when the importance of growth is questioned. Why, isn’t more obviously better than less? Yes, there can be externalities such as pollution, things not directly measured by economics, but aren’t environmentalists always demanding “green investment”? Investment requires having more, so more still reigns over less.

Higher growth means more jobs and better jobs, of particular importance to the 63 percent of Americans living paycheck to paycheck, but these are material concerns, very important, but is that all economic growth offers? Might it have a broader impact on society?

A comprehensive picture of American society is provided in The Upswing — a book by Harvard professor Robert D. Putnam, author of Bowling Alone, and Shaylyn Romney Garrett — in which the authors analyze economic, political, social, and cultural trends in U.S. society, finding them moving positively from the late 1800s, then negatively since the 1970s. Those not sharing the authors’ traditional liberal sensibilities may question an emphasis on economic equality, but few at any point of the political spectrum doubt there are adverse trends for political polarization, alienation, cynicism, and comity. Similarly, there is widespread recognition of undesirable declines in civil society, family strength, and social trust.

The Upswing analyzes social trends of a century or more. GDP data would be a natural economic comparison, but it’s inherently cyclically volatile, with limited availability for the early years. A series with more-complete long-term economic data is the U.S. capital stock, the value of all tangible and intangible assets at depreciated cost adjusted for inflation. Some of these measures go back as far as the 1700s. As of 2021, the U.S. capital stock was $77.6 trillion, about 3.3 times the U.S. GDP. Thirty-nine percent of it consisted of business investment in structures, equipment, and intellectual property such as software and entertainment assets, 37 percent was residential dwellings, and 24 percent government investment, primarily in structures such as buildings and infrastructure.

Per capita capital stock largely parallels GDP but is a more stable measure of economic well-being. It is distinct from financial wealth. Consumers benefit from residential assets they possess, business assets that improve productivity, and government assets providing a framework for society’s organization. The following chart compares growth in per capita capital stock with societal well-being measures identified by Putnam and Garrett.

There is remarkable congruence between the economic measure and The Upswing indices. Even for the Putnam–Garrett economic index oriented heavily toward equality, economic betterment produces greater equality; it’s easier to spread the wealth when there is more to spread.

Putnam and Garrett attribute the betterment and diminishment of American society to social attitudes evolving between communitarian and individualistic values, but the economic explanation is more compelling. Wouldn’t the abundance of advancing wealth ease political divisions, strengthen families, enable civil society, and encourage social confidence? Wouldn’t economic diminishment do the reverse?

What drove the 1970s’ worsening of America’s economy and society? That was an era of climbing government spending following Lyndon Johnson’s “Great Society” and significant entitlement boosts. While we might expect such a liberal era to advance liberal goals, it doesn’t take fancy analysis to understand that when government takes more of the economic pie, there is less remaining for the private sector to invest, so private investment declines.

The chart below compares government- and private-investment shares of the U.S. economy, using ten-year averages, a recognized method to smooth out cyclical volatility in economic series.

As expected, larger government produces smaller investment. Government-spending advocates may argue that this effect is solely cyclical, even with the smoothing ten-year averages, but the same analysis with shorter annual data shows that the negative effect of government spending on private investment is the same whether spending varies for cyclical or for long-term-secular reasons.

Investment is a core determinant of economic growth, so, naturally, lower investment produces lower growth. This is a universal among advanced economies. The chart below compares economic growth and government spending for the advanced OECD economies.

All these economies have seen government expand and growth shrink since the 1970s.

For the U.S., one of the most persistent problems highlighted in The Upswing and elsewhere is racial inequity. Liberals and conservatives differ in their diagnoses and prescriptions, but all desire that blacks be fully on par with whites in our economy and society. Representative of the gap is a comparison of black and white household income. The chart below uses ten-year averages looking ahead and behind to compare changes in the ratio of black to white income and in the level of government spending.

The chart compares the difference at a given time between subsequent forward and prior trailing data for black/white income and government spending. The spending figures are inverted, so increased spending is lower on the chart to align with the pattern for black/white income. Gains in black income relative to whites’ closely correspond to declines in government spending, with consequent gains in investment and thus growth. Sustained growth reduces black unemployment, boosting household income. There are three distinct turning points: around 1978, when the 1970s growth in government spending topped out; the early 1990s, when the Cold War peace dividend facilitated shrinking government; and the mid 2000s, preceding the great financial-crisis government-spending boost. At each of these turning points, when spending topped out, black income bottomed and vice versa.

The U.S. long-term spending outlook is crystal clear. We are headed to Japan’s stasis by way of Europe’s stagnation (and don’t be fooled by Japan’s short-term blip from depreciating its currency 30 percent). As long as Washington’s answer is more of the same, we will get the same economic and social problems, but worse.