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Someone pointed me towards this Washington Post essay by Michael Strain, of the AEI, on “Why we need growth more than we need democratic socialism“. It’s something of a rebuttal to Bernie Sanders’ positive statements regarding the social democratic systems that are in place in Denmark, Sweden, and several other countries. Strain takes issue with this, suggesting that we cannot purse the progressive social goals that are part of this social democratic system because we would sacrifice economic growth, and that would be bad. The TL;DR version of my post is that Strain is wrong. Wrong about the nature of economic growth, and wrong about the effect of progressive social policies on growth.
To start, Strain engages in some ham-fisted hippie-punching. Except he’s punching Swedes and Danes, so I guess he’s Scandanavian-punching?
Yes, yes, while it didn’t turn out so well under Stalin and Mao, something of the dem-soc variety may work for the good people of Scandinavia.
This is a breathtakingly ridiculous connection to draw. Strain is lumping Stalin’s USSR and Mao’s China together with post-war Denmark and Sweden. These are economies and political systems fundamentally different in kind, not in degree. I’m fairly sure calling Stalin or Mao’s system “democratic” would be a stretch. “Socialist” is also wrong for their economies. I know, it’s confusing, they used “socialist” right there in the name of the USSR! Sometimes labels are wrong. Chilean sea bass ain’t Chilean or a bass.
The USSR and China were committed communist countries, with a lack of private ownership, and centrally planned economies. In contrast, Denmark and Sweden have free, fair elections, a free press, freedom of assembly, freedom of religion, and do not deliberately let giant swathes of their population starve. Oh, they also happen to have marginal tax rates of about 50% at the top, free health care, child care, and education. Which, sure, makes them exactly like the USSR or China under Mao.
Now that we’ve dealt with that, we can actually look at what Strain has to say about growth.
For one, demographic pressures are pushing the potential growth rate of the economy below its historic average. The nation is headed for a period of naturally slower growth, which means that we need to take pro-growth policies even more seriously now than in previous decades.
Why? If the economy is naturally slowing down due to demographic changes, then what precisely is the issue I am worried about? No one gets utility from the growth rate. If we have people getting utility from retiring, and the growth rate is lower, then explain why I should care. Is this an argument that the demographic pressures will put a greater burden on those still working to pay for Social Security and Medicare? Then we should be having an argument about the optimal tax rate, or benefits, or eligibility ages.
True, public policy cannot deliver 6 percent growth, no matter how great a deal Trump makes with the economy. But policy can get rid of a bad regulation (or 20) here, encourage people to participate in the workforce there, make savings and investment a bit more attractive, make entrepreneurship and innovation a bit more common, make the government’s footprint in the economy a bit smaller — on the margin, a range of policies can increase the rate of economic growth. And when you add up all those marginal changes, good policy can make the economy grow at a non-trivially faster rate.
If by “non-trivially” you mean by about 0.2% faster a year, then I might believe that. But notice that Strain tries to sound reasonable (“public policy cannot deliver 6 percent growth”), but never bothers to try and say how much pro-growth policies can actually raise the growth rate. Does he think pro-growth policies – and what precisely are those, by the way – mean growth of 3%, 4%, or 5%? The answer is that it would be a little over 2%, just a smidge higher than growth is today. And that is assuming that Strain’s non-specified growth policies actually have an incredibly massive effect of potential GDP. There is no magic fairy dust to make growth accelerate dramatically. It’s even plausible that pro-growth policies that raise the profit share of output to induce innovation would lower measured productivity growth simply due to how we calculate that productivity.
And the measured growth rate of GDP doesn’t even matter, really. What matters is the availability of innovations that improve living standards. Strain almost gets this right in the next quote:
Over the past two centuries, growth has increased living standards in the West unimaginably quickly. Many more babies survive to adulthood. Many more adults survive to old age. Many more people can be fed, clothed and housed. Much of the world enjoys significant quantities of leisure time. Much of the world can carve out decades of their lives for education, skill development and the moral formation and enlightenment that come with it. Growth has enabled this. Let’s keep growing.
No, innovation has enabled this. So let’s keep innovating. The fact that all these welfare-improving innovations contributed to a rise in measured GDP to rise does not mean that causing measured GDP to rise will raise welfare. Innovations can allow us to produce more with the same inputs (raising GDP) or allow us to produce the same amount with fewer inputs (possibly lowering GDP). Strain confuses measured GDP growth with innovation. They are not the same. What we want, as he says, is policies that foster innovations that improve human living standards. Whether they also happen to raise GDP growth rates is a side issue. Think of it this way. If the BEA came out tomorrow and said they had discovered that they had mistakenly understated GDP by $1 trillion a year since 1948 due to a calculation error, would your living standard be instantly higher? No. But if tomorrow someone announces that they’ve invented a 60% efficient solar panel, that would change your living standards.
Growth facilitates the flourishing life. By creating a dynamic environment characterized by increasing opportunity, growth gives the young the opportunity to dream and to strive. And it gives the rest of us the ability to apply our skills and talents as we see fit, to contribute to society, to provide for our families. A growing economy allows individuals to increase their living standards, facilitating economic and social mobility.
Oh, come on. This is vacuous drivel. Replace every instance of the word “growth” here with the word “liberty”, or “dignity”, or “patriotism”, or “human rights”, or “unicorns” and this paragraph is true. Replace it with “universal free college” and you’ve got Bernie Sanders’ stump speech. This paragraph is the equivalent of Gary Danielson saying “LSU would be helped by a touchdown on this drive.” It’s meaningless.
If we are interested in raising living standards for everyone, which Strain is saying he is for, then we need to promote the introduction and diffusion of innovations. Is there some either/or choice between promoting innovation and progressive social policies? Do we have to sacrifice innovation if we pursue progressive programs? No and no.
What we know about innovation is that it depends on market size and the stock of people who can do innovation. See any of the econosphere’s recent run of posts on Paul Romer’s original work on endogenous growth. By pursuing the progressive policies Strain is so wary of, we can positively affect both market size and the stock of innovators.
First, the policies let relatively poor families access the existing set of innovations, and the diffusion of these welfare-improving innovations accelerates. Think of Whole Foods. Whole Foods is an innovation in access to relatively healthy food. (Yes, some specific items are just overpriced bulls***, and some specific items are not healthier than other brands, but in general Whole Foods and stores like it make a healthier diet more accessible. I’m married to a nutritionist, I’ve had this conversation more than once.) Many poor families eat unhealthy food because it is cheap. Those progressive social programs give these families the purchasing power to access the innovation that is healthier food. Innovations are useless if no one can afford them.
Second, the incentives for innovation are based on the size of the market. Practically, this means that innovation is geared towards producing ideas for people with money. A concentration of income into a small group means innovation is skewed towards that group. Hello, Viagra. If we’re lucky, perhaps the innovations being sold to that small group have some spillovers in producing innovations that are available for the mass of people. But if you expand purchasing power of the mass of people, this raises the incentives to innovate directly for this mass of people. Rather than hoping we get lucky, the market will actively work to produce innovations that improve welfare of most people, not simply the small group with the most purchasing power. Under certain conditions, a concentration of income actively slows down innovation because there simply aren’t enough people with sufficient purchasing power to make it worth innovating (see Murphy, Shleifer, Vishny).
Finally, those progressive social policies that Strain is worried about expand the stock of people who can do innovation. Kids in poor families who receive income support do better in school. Support for vocational school or college raises the supply of people who are capable of innovation. Alleviating income uncertainty through health insurance and income support means that individuals with risky business ideas can pursue them without fearing they won’t be able to take their kids to the doctor.
So it is important to focus on another of the many fruits of economic growth: It provides the money to make targeted spending programs possible. In a nation as rich as ours, no one should fall too far — no one should go hungry, everyone should have a baseline level of education, no one should be bankrupted by a catastrophic medical event. Slow growth impedes progress toward social goals that require targeted spending, both because of the political climate it fosters and because those goals, even only those that are advisable, are expensive.
This, again, presumes that there is an either/or choice between growth and progressive social policies.
Hungry people are less productive. Uneducated people are less productive. People bankrupted by catastrophic medical events are not productive. Reaching those social goals is as much a contributor to growth, as growth is to achieving those social goals. These social goals are not a black hole into which we dump money. They have ramifications – positive ones – on our economy. If Strain wants the U.S. economy to grow faster, then invest in it. Invest in it with better educational opportunities, the elimination of extreme poverty, and the alleviation of the uncertainty associated with medical care. Educated, fed, securely healthy people are productive innovators.
This whole post is nonsense. The USSR was a socialist country, and Stalin’s claim late in his reign that it had reached the first stage of Communism was renounced by his successors. Sweden and Denmark are merely advanced capitalist countries with social welfare states. If measured RGDP growth didn’t matter, you would change the name of your blog. The late 1990s was a boom time; today isn’t.
“Is this an argument that the demographic pressures will put a greater burden on those still working to pay for Social Security and Medicare? Then we should be having an argument about the optimal tax rate, or benefits, or eligibility ages.”
-Okay, this is the only true part of the post.
“Do we have to sacrifice innovation if we pursue progressive programs? No and no.”
-But we do sacrifice RGDP growth. Cf. Greece, 1980s.
“But if you expand purchasing power of the mass of people, this raises the incentives to innovate directly for this mass of people.”
-And how do you “expand purchasing power for the masses of people”? Not by stealing from the innovators, that’s for sure.
“Under certain conditions, a concentration of income actively slows down innovation because there simply aren’t enough people with sufficient purchasing power to make it worth innovating (see Murphy, Shleifer, Vishny).”
-You’re conflating “a concentration of income” with an absence of purchasing power. That’s pretty dishonest of you.
“Kids in poor families who receive income support do better in school. Support for vocational school or college raises the supply of people who are capable of innovation.”
“Hungry people are less productive. Uneducated people are less productive.”
-So are fat people and students.
“If Strain wants the U.S. economy to grow faster, then invest in it.”
-This is Stalinist thinking.
“Invest in it with better educational opportunities, the elimination of extreme poverty, and the alleviation of the uncertainty associated with medical care. Educated, fed, securely healthy people are productive innovators.”
-Most poor people in the U.S. are either disabled or students. Most extremely poor are institutionalized. You aren’t going to be able to do much about these with progressive policies. And eliminating education wouldn’t lead to a growth rate change, but it would lead to a positive temporary level change. Bricks-and-mortar education doesn’t matter to growth. Expanding the parasitical system would make Americans worse off than killing it. This will be decisively demonstrated in Caplan’s new book.
*disabled or students or retired or taking care of children.
I liked some of your points on the difference between growth and innovation. But technically you are both half right. Yes, the improvements in living standards come from innovation, but this is because we are talking about innovative solutions to improving human welfare. It isn’t just the innovation itself, but the innovation and production of said solutions. And really, I am pretty sure that is what Strain was alluding to.
“This, again, presumes that there is an either/or choice between growth and progressive social policies.”
Well, actually it is greatly about emphasis. But let’s take a look at the actual policies of the only Socialist running. On his web page, Sanders recommends a higher corporate tax rate, a higher tax rate on income, a doubling of the minimum wage, an increase in power for unions, an about face on free trade, a youth jobs program, mandatory leave, and various redistribution policies.
The opponents to these ideas tend to oppose them in great part because they believe they will slow growth, slow innovation and slow the advancement of human welfare. There is no need to argue such points in this comments thread, but let us just agree that their arguments are quite convincing to many people, myself included, especially if executed poorly.
“Hungry people are less productive. Uneducated people are less productive. People bankrupted by catastrophic medical events are not productive. Reaching those social goals is as much a contributor to growth, as growth is to achieving those social goals.”
Here you respond to vacuous drivel in kind. We do not have a starving, calorie deficiency issue in America.
Granted education, all else equal, is probably a good thing, but of course all else is not equal. Education takes time and money. I could build a strong case that we spend way too much now for education, that way too many people are going on to get useless degrees today, that the education system has become a rent seeking black hole, that government run education leads to horrible outcomes especially for the poor, and that we could on net be more productive with less time and money spent for better education.
Again, Sander’s site is recommending free college for everyone. Color me skeptical. Sounds like a guaranteed way to flush away even more untold billions into special interest groups with no accountability for cost effective results. I am also skeptical of the cost effectiveness of universal preK. So yes, these ideas DO cost money, and could quite possibly be at the expense of growth, innovation and human problems ability. We don’t need to argue the details, just that skeptics can legitimately see these types of policies as either/or.
“These social goals are not a black hole into which we dump money. They have ramifications – positive ones – on our economy. If Strain wants the U.S. economy to grow faster, then invest in it. Invest in it with better educational opportunities, the elimination of extreme poverty, and the alleviation of the uncertainty associated with medical care. Educated, fed, securely healthy people are productive innovators.”
I disagree as above. I think they often are indeed a black hole in which we pour money. Socializing medicine, education, retirement, may or may not be good ideas. A lot depends upon the execution, and a lot depends upon our goals and contextual frames. However, you are assuming paying for the program is the same as getting the result, confusing intention with outcomes. You also assume there are no negative feedback effects of alleviating the need to be productive by guaranteeing security. There are tradeoffs, there are feedback effects, there are externalities and there are unintended consequences.
Again, let’s not debate the particulars. But can you at least agree that the position that socializing these has a significant potential to backfire?
Interesting response to Michael Strain. I’d love to hear your thoughts on John Cochrane’s economic growth policy recommendations. http://johnhcochrane.blogspot.com/2015/10/economic-growth.html
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It follows from Strain’s argument that those Reaganites who celebrated the events of 1989 as the triumph of capitalism were wrong. Under Strain’s definition of “socialism”, German reunification for instance was not a case of a capitalist country swallowing a socialist country, but a case of one socialist country merely annexing another.
In fact it follows from Strain’s argument that the whole Cold War was a struggle between two military alliances made up by socialist countries: 1) the Warsaw Pact and 2) NATO. (High-tax Denmark, for instance, is a founder member of NATO, as is the equally high-tax Norway.)
It follows from Strain’s argument that those Reaganites (such as Strain himself, I’m sure!) who celebrated the events of 1989 as the triumph of capitalism were wrong. Under Strain’s definition of “socialism”, German reunification for instance was not a case of a capitalist country swallowing a socialist country, but a case of one socialist country, West Germany, merely annexing another, East Germany.
In fact it even follows from Strain’s argument that the whole Cold War was a struggle between two military alliances made up by socialist countries: 1) the Warsaw Pact and 2) NATO. Very-high-tax Denmark, for instance, is a founding member of NATO, as is very-high-tax Norway.