The Corner

Economy & Business

John Cochrane Is Right about the Incredible Power of Economic Growth

In this is really great episode of Uncommon Knowledge, Peter Robinson interviews Hoover Institution fellow John Cochrane to talk about the importance of economic growth.

At the beginning, Robinson notes that with healthy economic growth you can double standards of living in one generation. You read that correctly. A few months ago, my colleague William Beach and I produced a chart that looks at the impact on GDP per capita under different growth scenarios and found that the payoff of higher and sustained economic growth in our lives is hard to overstate. Here is the chart:

We write:

At the end of 2015, the US gross domestic product (GDP) stood at $18.3 trillion. If the economy were to grow from that point on at a long-term, inflation-adjusted rate of just 2 percent per year, then it would take 35 years before the size of the economy doubles.

If the economy were to grow at a sustained average rate of 3 percent per year, it would take 23.5 years to double — that’s 11.5 fewer years than the scenario above — and 47 years to quadruple America’s GDP. And, if the economy were to grow at a sustained average rate of 4 percent, it would take only 17.7 years to double and 35.4 years to quadruple. At rollicking 5 percent growth rate, the US economy would double in 14.2 years and quadruple in 28.4 years.

In other words, at a growth rate of 2 percent, the economy would double in a little less than two generations, and at 5 percent, it would double in much less than a generation.

The bottom line here is the great opportunity cost of a slow-growth economy. Unfortunately, Americans are paying that cost and will continue to do so. The Congressional Budget Office’s Long-Term Budget Outlook report that came out last July projects that under current law the United States will not experience real growth much beyond 2.2 percent in the next 30 years. In the CBO report that came out yesterday, the average projected annual growth between 2017 and 2027 will be roughly 2 percent.

While this figure is a slight improvement over the last eight years’ growth average of 1.4 percent, it pales in comparison to the growth America experienced in the past. The average annual growth between 1950 and 1973 was 4 percent. Even during the ’70s, which is more known for its inflation than its prosperity, the 1974 to 1981 average annual growth rate was 3.2 percent. In spite of the 1981 recession, average growth was 3.2 percent again between 1982 and 1990. The 1990s saw a 3.3 percent average annual growth rate — only to slow down between 2002 and 2007.

Changes in policies, however, can make all the difference in the world. Deregulation and corporate-tax reform (done properly) as promised by President Trump, in particular, could make a dramatic difference to our rate of economic growth.

We can’t overstate the importance of reining in regulations. This is how the House is planning on doing it. I am particularly excited by the prospect of repealing regulations non-yet-implemented because this is fairly easy. On the list we find:

  • Phase 2 greenhouse-gas standards for trucks, which cost $29.3 billion
  • Overtime rule, $2.9 billion
  • Aviation drone rules, $2.5 billion
  • Drilling in the Outer Continental Shelf, $2 billion
  • Disclosure of payments by resource-extraction issuers, $1.2 billion
  • Fracking emissions standards, $890 million
  • Fair pay and safe workplaces, $872 million
  • Treatment of certain interests in corporations, $280 million

There are many more regulations to repeal — but it will be more labor intensive to do. That’s still a worthy goal, though, with big economic-growth payoffs.


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