Fixed growth

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.

Comments

[guthrie]

Also increasing the pie size won't help if the gains go to the top 1 to 20% of the population.

[Peter]

You point to measurement problems, ie. GDP was increased when Gordon Brown effectively sanctioned the printing of money with QE. And then, because you cannot find evidence that nominal growth has been caused by political ideology you talk the importance of redistribution.

Freedom is the most important measure of growth. I will leave you to find the relevant quote, but the civility of a nation is a function of the freedom of the individual constituents within it. Witness, Ghengis Khan's empire as evidence of 'growth', where he went against the advice of his family to 'exclude the plebs', and instead instituted a reforming meritocracy. The economic benefit to freedom iso that the widest pool of genes can be consulted to overcome society's challenges, rather than the increasing tendency towards a closed shop we saw under Labour - be it privately educated (but thick) gangsters' kids going on to hold positions of responsibility, or generally in their belief that people could use higher education system to jump the queue on merit. Education became subverted to meet the
ideological aim of redistribution. And ~that is what backfires.

If you want to look at evidence for economic growth look at the fortunes of countries that allow democracy, and contrast 'growth' with something more valuable anyway, and harder to
measure.

[Luis Enrique]

williem buiter on 50-year growth forcasting:

www.nber.org/3G.pdf

[Left Outside]

I have comments of vital importance on this. I am commenting to commit myself to blogging on it tomorrow. Thanks for the link on the MSM btw.

[Keith]

Peter what drugs are you on mate?

You obviously have a bee in your bonnet but do calm down dear. I cannot see the relevance of your rant to GDP growth rates, the subject of the discussion. Freedom or liberty can be given a comparative measure such as does their exist Habeas corpus or gulags in a country. There is no reason to suppose reducing economic inequality has a negative effect on personal Liberty if that is your argument. Dictatorships are set up to preserve economic and social inequality.

I agree that long term growth rates are probably impossible to affect as too many factors determine them for political gimmicks by politicians to work. Which is why taking speeches by politicians too seriously is a mistake.

[rosscoe]

Isn't part of the point with natural disasters that the clean up costs and replacement of all the assets destroyed, appear in the GDP figures as economic activity and therefore they can appear to be a good thing?, I think this highlights more of a problem with how we measure economic growth rather than an indication that economic growth is actually happening or is unaffected by such events.
With regards to policies not effecting individual growth rates, I think that the figures you showed in one of your links (noise) show this not to be the case- for example the USA has a range of possible growth that is nearly twice has high as that of France or Italy. The point with the Scandanavian countries is, I believe from Tim (http://timworstall.com/2011/03/16/raise-taxes-or-cut-spending/ ) that, though their Tax rates are high, their Tax systems are deliberately structured to let business grow and then skim as much as possible of the top (in effect by having a regressive tax system and then using some of the money raised to level out the inequalities caused) This example would seem to suggest that policy does and can make a difference, as with clever tinkering and the application of sensible policy based on evidence it is possible to have both high taxes and high growth.
Whether high taxes are morally acceptable is another argument, personally I don't think that the state helping itself to the as much as it wants of the contents of its citizens wallets should be encouraged even if it can be done without damaging the wider economy.

[chris]

Rosscoe - yes, the cleanup shows in GDP. But it doesn't follow that natural diasters are good, even in narrow GDP terms, because the resources used in the cleanup might well have been employed in other ways, which would also have raised GDP.
The point of those calculations of mine was to show that it is possible that France and the US have the same growth rate (2.5%), but that the US has had some good luck and France some bad.
Yes, it's possible that the Nordics high tax is bad for growth but that other policies are good. But these raises the question: why does no developed economy take those pro-growth policies, accompany them with low tax, and enjoy huge growth? Could it be instead that high taxes don't depress growth much, and pro-growth policies don't raise it much? Or that there are institutional constraints upon taking thre best of all worlds policies?

[Keith]

Is the answer to this matter simply that most productivity growth happens spontaneously as a result of learning by doing? Often at firm level?
Lots of small changes spread widely over the economy raise productivity a small bit every year regardless of the Governments poicies? Academic Economists and Politicians and civil servants have a mistaken belief in their ability to affect this process. Hence the effort to find a magic bullet by imitating the features of other countries economic and social organisation. Hunting for the holy grail which merely leads to fads and dissapointment.

[Glenn]

Most international development experts suggest that sudden, fast growth rates are unexpected in countries and bear no relation to market reforms. And, they tend to find their own policy solutions to unlocking growth rather than emulating ideas from outside.