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Growth Domestic Prosperity

I’m always happy to gain new readers, even the ones that challenge me. In a way, the dissenters are the most useful; recently, Lauren Sheil questioned one of my premises.

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

I tried to answer that under the original post, but our short back-and-forth in the comments got me thinking further about what economic growth means and how that applies to today’s policy disputes. Many of my posts focus on the problems our world faces, but our discussion reminded me of the importance of stepping back and noticing just how good we actually have it. Let’s take a look at some graphs that provide some perspective on our current situation.

(source)

Even if you conclude that most of this growth went to the richest Americans that doesn’t mean everyone wasn’t gaining from this remarkable increase in wealth. For example, as Matt Ridley explains in The Rational Optimist, even today’s poor are substantially better off from even a short time ago.

Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36 per cent of all Americans had air conditioning: in 2005 79 per cent of poor households did.

Someone might counter that this all well and good for fat-cat Americans, but what about the rest of the world: how has economic growth benefited them? Let’s take a look at another graph.

Today, more than half the world is middle class. Economic growth made this possible. With economic growth comes better health, longer lives, more choices, more happiness, and much more. Expressing cheerfulness at our relative prosperity to ages past doesn’t mean we can ignore the pernicious effects of inequality, contemporary poverty, or any other problems still with us. It should remind us exactly why economic policy should focus on growth. People are suffering economically now precisely because growth is weak. Here’s the GDP data I grabbed from the St. Louis Fed.

FRED Graph

Growth has mostly been trending below 2.5%. In other words, all those unemployed people aren’t making new things like air conditioners or better homes and aren’t providing services that make our lives more comfortable. As policymakers lose focus on getting the unemployed back to work they aren’t just failing those individuals, they’re depriving everyone of more wealth and better lives. A stagnant economy that doesn’t produce more things means less for everyone – today’s growth is hardly enough to keep up with the population increase. If we hope to look back with memories of how only 65% of Americans had broadband access or any other good someone enjoys today remember that we need to grow to prosperity.

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Categories: Economy Tags: , ,
  1. June 23, 2011 at 9:14 pm

    Thanks for mentioning me. I’m glad I got you thinking but it all still seems like a giant shell game to me. What is money but respresentation value built upon finite resources? How much of this growth is the result of real tangible product and how much is based on an eitherial mathematic construct like interest?

    With world population expected to grow to least 9 billion by 2030 if we don’t do a much better job of distributing tangible resources we will add legions of poor to the bottom of the pyramid effectively destabizing the structure of the world economy all based on nothing more than the percieved value of money which has little to the with the practical value or use of goods.

    • June 24, 2011 at 5:20 pm

      I’m not sure why you see it as a “shell game.” Simply put, people have a good or service which another person pays for with money, which is a “store of value” that the recipient can use to buy another good or service. We could all barter directly but that’s pretty inefficient – money just makes it easier, not phony. It’s also not necessarily “finite” in any practical sense. People can go on trading money for massages or valet service as long as people are around to do it. Markets in themselves are ways of dividing up scare resources. Markets can be regulated or constructed for more just distribution, but they in themselves don’t cause the use of resources. People use resources because people need resources to live.

      Just as a matter of historical record, economic growth has generally been removing “legions of poor” from the bottom. The graph above that shows the growth of the middle class is just one example of that trend.

      I also see you’re conflating economic growth generally with economic systems specifically. No matter how you organize the distributive system of goods/resources economic growth is definitionally necessary to provide for humans as long as we live and breed. Just think – even if we moved to a totally sustainable resource economy, we’d still need economic growth. If 5 people each have 1 carrot/day (and only 5 carrots are grown/day) and then they procreate so 10 people now exist, economic growth is necessary to provide 5 more carrots to feed the new people. Of course, if those people specialized their labor so that 3 grew the carrots, while 3 built homes, while 3 built drums, and 1 played music for everyone they’ll all be better off because of the economic growth that took place.

  2. June 24, 2011 at 7:39 pm

    I think you’re missing the point of my argument. I agree that money is “stored value”. But the value is subjective. If we all suddenly decided it was better to walk everywhere the price of oil would plummet, and a huge pillar of our economy would callapse but would there be less oil in the world? Of course not!

    Would there me less money in the world? Not really. Then what would have changed?
    It was our perception of oil’s value that changed, nothing more.

    For economic growth to continue in perpetuity we have to continually increase the value of commodities. We do that through scarcity,(real and artificial) by blocking the production of competiting products or other deciptive means that inflate the price of certain things while keeping the price of other things down and call it the “Free” Market.

    I just don’t see the math behind your arguement that we have removed legions of poor either. 100 years ago it was possible for a poor farmer to survive because he was adept a self-sustaining enterprise and a “jack of all trades”. Today in order to compete he has to outsource and specialize more and more, he might make more money but he spends more too, usually on things he didn’t even know he needed until the demands of economic growth told him did. Can we really call that growth?

    Your argument about population growth is interesting too. Sooner or later we’re going to reach the maximum human population that our natural environment can sustain, some think we’re already there, at that point what happens? Will economic growth save us from Thomas Malthus or will millions die of famine and disease anyway?

    • June 24, 2011 at 8:22 pm

      We actually could have less money in the world if we had less things of monetary value to spend it on. It’s partly why Federal Banks buy and sell bonds to change the money supply. Generally the supply money goes up, but that’s because we generally have more stuff of value.

      I think your numbers are little off, but let me get to my general point on your romantic view of history. First, that “poor farmer” from 100yrs ago benefited greatly from the economic growth that proceeded him. How else do you think he bought his tools, home, books, and other goods? Also, is survival the only standard here? A poor farmer can still survive in today’s economy. As I pointed out earlier, today’s poor have electricity, running water, cars, phones, and air conditioning.

      If economic growth isn’t so great, you’ll have no problem going back even further in time. As Matt Ridley points out, say it’s 1800, that poor farmer’s kids are dying of smallpox. He’ll catch pneumonia and die in his 50s. In all likelihood, he’ll never see a play, paint a picture, or hear a piano. His lice infested jacket cost him a month’s wages. They’ll all sleep cold on straw mattresses. I could go on.

      Ask yourself, did “economic growth” really tell you to buy your laptop and the energy to power it (for remarkably little work compared to a farmer 100 years ago) or do you just prefer those things to not having them?

      I’m not sure where you’re looking at your numbers but I found that in 1820, 80% lived on less than a dollar a day, by 1992 that number was 24% (all adjusted for inflation).

      I’ll end by saying that population growth isn’t as big a problem as people think it is – unless, of course, we don’t have adequate economic growth. The better our productivity and technology the more we can provide for a growing population while maintaining our resources at a sustainable level. Technology is going to have to break our dependence on fossil fuels, unless you think going back to a pre-industrial, pre-electric era is really desirable. Try it for a month.

      I think I’ve got my point across, I’ll leave you with the last word. Thanks again for inspiring me to think about these important issues.

  3. June 24, 2011 at 8:46 pm

    Thanks for giving me the last word. Here it is;

    You and I keep talking past one another because our concepts of money – what it is, what it’s good for and how best to measure it – are completely different. We could go on and on for days and not convince one another of a single thing.

    The sad fact is that a person dies of starvation or preventable disease somewhere in the world every few seconds. Is that more or less than it was in the past? Who cares, it’s still too many! Nobody cares less about our theories than the man who can’t feed his own family.

    The bottom line here is that those of us with the resources to help have a responsibility to do so and if we were less obsessed with growing our own personal wealth maybe we could.

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