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Tricky Math

A little over a week ago everyone from economists, bloggers, and politicians lambasted Tim Pawlenty for making his ridiculous claim that if he was president he’d achieve 5% economic growth for a decade. It’s nuts for a variety of reasons and Klein passed on a zinger from Alan Blinder:

Trend growth is three percent or so,” he wrote in an e-mail. “Five percent growth would be two percentage points higher, which should cut the unemployment rate by about one percentage point per year. So after 10 years, it will have fallen from nine percent to minus-one percent. Nice trick!

At the time, I thought the criticism was probably hyperbole designed to highlight the absurdity of Pawlenty’s idea – I wasn’t sure though. Now today Klein repeats Blinder’s remark and, at risk of looking foolish, I’m curious if it’s meant to be serious (even if “cheeky”). As Klein shares, the “speed limit” on the economic growth rate is basically the growth in productivity plus the growth in the labor force. Now, I realize that achieving that level of growth is completely unrealistic (and crazy to think a president can do anything that would directly cause it), but it doesn’t seem like it is impossible as Klein implies in multiple blog posts.

Sure, the labor force isn’t going to grow large enough without improbable immigration, but if the right mix of policy reforms coincided with a revolutionary invention that drove a sky-high productivity increase, couldn’t we  achieve 5% growth for a decade without having negative unemployment?

Are Klein and Blinder just joking or is it actually impossible? If it is impossible, what am I missing?

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  1. June 17, 2011 at 6:17 pm

    I just came across this post while TagSurfing. This is an interesting debate and I’ve subscirbed to your blog so I can see where it goes.

    My question, and maybe I’m missing something but hear me out, is this;

    “Why does everyone assume the perpetual economic growth is not only possible but even a good thing?”

    When something grows unchecked forever in another area of our lives we call it a cancer and seek to slow it down or even kill it. Why should the economy be any different?

    • June 17, 2011 at 6:35 pm

      Thanks for subscribing!

      Perpetually increasing economic growth just means we’re able to get more goods and services for less work. It’s not bad (inherently) because it doesn’t necessarily crowd anything else out like cancer in a body does. Cancer isn’t bad just because it grows, it is bad because it grows at the expense of nutrients and tissues your body needs to survive.

      Now, if economic growth comes at the expense of natural resources or other valuable goods that would be bad. But nothing inherent to growth means it must utilize these things. Often being more productive means we can get more using less materials as well as less labor.

      Relatedly, our current neurophysiology probably means humans have a limit on how happy/well-off we can be, but I don’t see any reason why perpetually increasing well-being would be a bad thing.

      • June 17, 2011 at 6:49 pm

        Ah – so economic growth is only a cancer if it damages the environment or crowds out other things that it must utilize to continue growing. Fair enough. Would that include the middle class?

        The damage to the environment some growth has caused seems obvious. Since 1980 the economy has doubled in size, yet adjusted for inflation the average middle class income has remained virtually unchanged or even shrunk. Recent growth seems to be crowding out some vital parts needed for it’s continuation.

        Perhaps you’re right, there is nothing inherently wrong with growth. But right now, without some major changes in government policy and consumer spending it looks a lot like a cancer to me.

  2. June 17, 2011 at 7:10 pm

    Keep in mind the difference between middle class wages and their wealth. Even though the distribution of wealth is more unequal, basically all Americans of all classes are wealthier on net than in the past. Therefore, in many ways they are “better off.” Economic growth leads to more education, better computers, and more comfortable homes. Income inequality and extreme distributional inequities are certainly a problem (ones I’m very concerned about), but they’re not caused by economic growth, per se. Globally speaking, economic growth has lifted tens of millions of people out of extreme poverty and led to greater levels of well-being in almost every metric.

    One of the biggest problems in our economy is sluggish growth. If we could achieve faster economic growth, many of our problems (especially unemployment and debt) would be vastly mitigated. Our economy has so many problems right now; too fast economic growth is not one of them.

    (I’ll check out your blog, looks like you’ve got a lot for me to read)

  3. June 17, 2011 at 7:44 pm

    That’s where I think you wrong. We are not better off than we were 30 years ago. A few are, yes but on the whole that is not that case.

    While we do agree that income inequality is a huge problem I suspect that’s where our agreement ends. We may just have to agree to disagree on the causes and potential cures.

    Thanks for taking a look at my blog.

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