Why the West fell in love with economic growth

T.his year It was good for the West. The alliance has surprised observers with a united front against Russian aggression. The US economy remains strong as authoritarian China suffers one of her weakest growth periods since Chairman Mao Zedong. The wave of populism in rich countries that began with the Brexit and the election of Donald Trump in 2016 appears to have reached its climax.

But wealthy democracies out of the world’s attention face a profound and slow-burning problem. It is the weakness of economic growth. In the year before covid-19 developed countries gdp It grew less than 2%. High-frequency measurements suggest that productivity in the prosperous world, the ultimate source of rising living standards, may be stagnant and declining at best.According to official projections, per capita by 2027 gdp Median wealthy countries will grow at less than 1.5% per year. Some countries, such as Canada and Switzerland, have numbers close to zero.

Perhaps rich countries are doomed to weak growth. Many populations are aging rapidly. When the labor market is opened to women and university education is democratized, important sources of growth are exhausted. Many of the technological achievements that are easy to obtain, such as flush toilets, cars, and the Internet, pluckedHowever, this growth problem is surmountable. Policy makers could facilitate cross-border transactions and boost globalization. They can reform plans to allow construction and reduce exorbitant housing costs. They can welcome migrants in place of retired workers. All these reforms will boost the growth rate.

growing pains

Unfortunately, economic growth has become obsolete. An analysis of data from the Manifesto Project, which collects information on political party manifestos for decades, found: OECDThe group of mostly wealthy countries is about half as focused on growth as it was in the 1980s (see Figure 1). For example, modern politicians are less likely to extoll the merits of the free market than their predecessors. They are more likely to express anti-growth sentiment, including positive references to government control over the economy.

Politicians speak in an unsophisticated way when they talk about growth. In 1994, Britain’s Shadow Prime Minister Gordon Brown’s reference to a “post-neoclassical endogenous growth theory” was ridiculed, but at least indicated a serious commitment to the issue. Lyndon Johnson , Margaret Thatcher, and Ronald Reagan have developed policies based on coherent theories about the relationship between the individual and the state. gdpA small troupe of modern champions such as Mr. Trump and Liz Truss offers little more than reheated Reaganism.

Indifference to growth is not just rhetoric. Britain hints at a broader loss of enthusiasm. The average budget in the 1970s included 2% worth of tax reform. gdpBy the late 2010s, the policy’s effectiveness was halved. In 2020, Harvard economist Alberto Alesina and imf Georgetown University also measured the importance of structural reforms (such as regulatory changes) over time. In the 1980s and 1990s, politicians in developed countries implemented a number of policies to make the economy smoother. By the 2010s, however, they had lost momentum and reforms had effectively come to a halt.

An analysis of World Bank data suggests that progress in recent years has slowed further and may even be reversing (see Figure 2). The US government has introduced 12,000 new regulations in 2021. This has increased in recent years. From 2010 to 2020, he doubled tariff limits on wealthy country imports. The UK voted in favor of Brexit and implemented it. Other countries are against immigration. In 2007, about 6 million net immigrants moved to rich countries. In 2019, that number has dropped to just 4m.

The government is also not very friendly to new construction, be it housing or infrastructure. According to a paper by his three economists Knut Erstbeit, Bruno Albuquerque and André Annunsen, the “elasticity of supply” of American housing, the degree to which construction responds to higher demand, has been declining since the housing boom.This likely reflects tougher land-use policies and stronger policies Nimbyseconds. Homebuilding in the affluent world is about two-thirds of its 10-year level.

Politicians like to splurge on the growth profits that exist. The government spends a lot on welfare such as pensions and especially health care. According to the Congressional Budget Office, in 1979 the bottom fifth of American income earners received means-tested transfers worth less than one-third of their pre-tax income. By 2018, this figure was more than two-thirds his. According to a 2019 report, her per capita health care spending in the United States was OECD Growing at an average annual rate of 3%, gdp It will increase from 9% in 2018 to 2030.

Politics has increasingly become an arms race that promises more money for health care and social protection. “Thirty years or 40 years before him, it was no surprise that the elderly were not amenable to organ transplants, dialysis, or advanced surgical procedures,” writes ethicist Daniel Callahan. “It has changed.” More wealth has made this possible. But politicians rarely ask whether higher healthcare costs are the best use of cash. Britons in their 90s receive around £15,000 ($17,000) in medical and social care annually, about half the cost of the UK. gdp per person. Even though the price for providing that care is likely to rise as well, does the budget need to increase each year to meet the increased demand? If yes, where are the limits?

People may take spending on health care and pensions as self-evidently good things. But it has its drawbacks. As more people work in areas where productivity increases, it is difficult to induce an increase in overall living standards. Elderly people in perfect health quit their jobs to receive their pensions. Tax increases or cuts elsewhere are needed to fund this. Since the early 1980s, government spending has OECD share in research and development gdpdecreased by about a third.

Much of the extra spending occurs during times of crisis. Politicians are increasingly concerned with preventing bad things from happening to people, or compensating them when they do. has stopped bankruptcies and defaults. It was radical, but it was also the thin end of the wedge.

For example, in the United States, the federal government has huge contingent liabilities. It guarantees bank deposits for more people than ever before. It allows student loans. It offers a variety of implicit and explicit backstops, from airports to highways. estimated in advance Uncle Sam has more than six times the debt of America gdpThis year governments in European countries have taken down themselves to provide financial support to households and businesses during the continent’s energy crisis. Even Germany, usually the most disciplined spending country in Europe, gdp for this purpose.

No one cheers when a company goes bankrupt or someone falls into poverty. However, bailed-out conditions make the economy less adaptive, preventing resources from shifting from unproductive uses to productive uses, and ultimately stifling growth. There is already evidence that the financial aid provided during the pandemic has created more “zombie” companies. The government’s huge implied debt also means increased spending in times of trouble, which fuels the trend toward higher taxes.

gray power

Why have the West turned away from growth? One possible answer has to do with population aging. People who are not working, or are nearing the end of their working life, tend to be less concerned with getting richer. I support it, but I oppose immigration, housing construction, and other things that only pay off after the gains are gone. Their opinions carry weight because they tend to have high voter turnout in elections.

But Western populations have aged for decades, including reformers in the 1980s and 1990s. Therefore, changes in the environment in which policy is formulated may play a role. Before social media and his 24-hour rolling news, it was easier to implement tough reforms. Companies that were policy losers were mostly forced to suffer in silence, for example, due to increased competition from overseas. In 1936, Franklin Roosevelt spoke of opponents of the New Deal and felt he could “welcome” their hatred. Victims now have more ways to complain. As a result, policymakers have more incentive to limit the number of losers, leading to what Ben Ansel of the University of Oxford called “a national decision by a committee.”

High levels of debt also limit the room for policy makers to act.across g7 In a group of rich and powerful countries, private debt gdp Even a small reduction in cash flow can make debt service difficult. This means that politicians step in quickly if something goes wrong. Their focus is on avoiding a repeat of the 2009 financial crisis since 2007, rather than accepting today’s pain as the price of a brighter future.

It is not at all clear what it is that drives the West in a new direction. Beyond Mr. Trump and Mr. Truss’ misguided attempts, there is still no sign of change. Will another financial crisis do the trick? Will we have to wait until there are no more baby boomers for change? Whatever the answer, until growth accelerates, Western policy makers must expect their adversaries to keep failing. Why the West fell in love with economic growth

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