Ilan Noy points us to this paper by him and colleagues which estimates that even terrible natural disasters “do not display any significant effect on economic growth.” This reminds me of an old paper by John Landon Lane and Peter Robinson which found that, give or take noise, western economies grew at similar long-run rates. “There are few, if any, feasible policies available that have a significant effect on long run growth rate” they concluded.
Taken together, these papers raise an intriguing possibility. Could it be that trend economic growth is so deeply embedded in institutions that it is much less malleable by man or nature than we think?
The three obvious counterfactuals to this aren’t necessarily convincing:
1. The great slowdown in western economies after 1973. But was this really a reduction in trend growth or just a long cycle*? The late R.C.O Matthews claimed in 1968 that high post-war growth was “a gigantic cyclical boom”. And booms turn to bust.
2. Japan’s “lost decade(s)” after 1989. This might tell us that something does affect long-run growth - financial crisis. Or it might just tell us that growth always slows down once a nation has closed the income gap with rich countries.
3. China’s economic growth has soared after the reforms initiated by Deng Xiaoping in the late 70s. But if you release the handbrake your car will shoot forward, even if it has only a feeble engine.
On the other hand, we have pitifully few examples of a rich liberal democracy making a transition from ordinary to high long-term growth. You would struggle to identify a Thatcher revolution from looking at UK GDP numbers, for example. Isn’t this a clue that growth isn’t so amenable to policy?
This is not to say that nothing affects growth. Technical progress should do - though it's unclear whether this is as manipulable by policy as endogenous growth theory claims. So do revolutions - though the historical record suggests not necessarily for the better.
All of this suggests we should be sceptical about Tim’s ideas for increasing our trend growth rate. Whether this is because these ideas, reasonable as they seem, will not in fact work, or whether it is because there are institutional constraints that prevent governments from adopting them is another matter.
Which brings me to a thought. One conventional view on the right - which includes Blairism - has been that we should worry less about how we cut up the economic pie and more about ensuring that we increase its size. But what if we just cannot, reliably and in the long-term, do this? Doesn’t redistribution then become relatively more important?
* Don’t get me started on Kondratieff waves.