Tag: economic growth

Martin Feldstein on U.S. Growth vs. Other Major Economies

Martin Feldstein has a new short paper out with some thoughts on a relatively under-researched subject: Why is Growth Better in the United States than in other Industrial Countries?

He begins:

In 2015, real GDP per capita was $56,000 in the United States. On a purchasing power basis, the real GDP per capita in the same year was only $47,000 in Germany, $41,000 in France and the United Kingdom, and just $36,000 in Italy. So the official measures of real GDP clearly point to the cumulative result of higher sustained real growth rates in the United States than in the major industrial countries of Europe and Asia.

Over the very long term, this is a truism. In order for the U.S. to be that much richer, it must have experienced faster real GDP per capita growth than comparator countries. We know from figures collated by the Maddison Project that the U.S. had around half the level of GDP per capita of the UK in the early 18th century, but by 1900 it was overtaking the UK as the richest country by income per head, and has remained in that leading position for almost all the period since.

But showing higher levels of income does not necessarily mean that the U.S. growth of GDP per capita was higher than other countries over more recent periods.

GDP Growth Was “Stronger after Tax Increases on the Wealthy”?

New York Times columnist David Leonhardt claims, “G.D.P. growth has been stronger after recent tax increases on the wealthy.”  To prove it he writes,  “The economy has performed better under Democratic Presidents during the last half century.”  

This might make sense if Eisenhower and Nixon had cut tax rates for the wealthy and JFK and LBJ raised them.  But the opposite happened.  It might also make sense if Clinton had raised the capital gains tax rate in 1997 rather than cutting it from 28% (under Reagan-Bush) to 20%. 

President Eisenhower put the highest tax rate up to 92% in 1953-54 and the lowest rate to 22%.  By contrast, President Kennedy’s 1963 plan for “getting America moving again” proposed to cut income tax rates to 14-65%.  As enacted by LBJ after Kennedy’s assassination, the top tax rate was reduced to 70% and the lowest to 15%.  These rate cuts came quickly, unlike Reagan’s – which were was unwisely postponed until 1983-84. 

Chile’s Success Story on Television

A new documentary series, “Improbable Success,” looks at countries that have thrived by implementing free-market policies. The series is currently running on Sinclair Broadcast Group stations, which are found across the country, from WJLA in Washington, D.C., to KBFX in Bakersfield, California. (Sinclair stations are variously affiliated with all major networks.) This weekend, including at noon Sunday on WJLA, host Emerald Robinson will look at Chile’s economic growth since its reforms around 1980. Experts on the show include Jose Pinera, Ian Vasquez, and Richard Rahn, along with several Chilean entrepreneurs. Last week featured Estonia; next week, Switzerland. 

Jose Pinera with Emerald Robinson

Capitalism, Global Trade, and the Reduction in Poverty and Inequality

Drawing on a new World Bank study, Washington Post columnist Charles Lane today notesa vast reduction in poverty and income inequality worldwide over the past quarter-century” – despite what you might think if you listen to Pope Francis, Bernie Sanders, and other voices prominent in the media.

Specifically, the world’s Gini coefficient — the most commonly used measure of income distribution — has fallen from 0.69 in 1988 to 0.63 in 2011. (A higher Gini coefficient connotes greater inequality, up to a maximum of 1.0.)

That may seem modest until you consider that the estimate’s author, former World Bank economist Branko Milanovic, thinks we may be witnessing the first period of declining global inequality since the Industrial Revolution.

Note that this hopeful figure applies to the world’s population as though every individual lived in one big country. When Milanovic assessed the distribution of income between nations, adjusted for population, the improvement was even more striking: a decline in the Gini coefficient from 0.60 in 1988 to 0.48 in 2014.

The global middle class expanded, as real income went up between 70 percent and 80 percent for those around the world who were already earning at or near the global median, including some 200 million Chinese, 90 million Indians and 30 million people each in Indonesia, Egypt and Brazil.

Those in the bottom third of the global income distribution registered real income gains between 40 percent and 70 percent, Milanovic reports. The share of the world’s population living on $1.25 or less per day — what the World Bank defines as “absolute poverty” — fell from 44 percent to 23 percent.

So maybe this is a result of all the agitation on behalf of a more moral or planned economy? No, says Lane, citing Milanovic:

Did this historic progress, with its overwhelmingly beneficial consequences for millions of the world’s humblest inhabitants, occur because everyone finally adopted “democratic socialism”? Was it due to a conscious, organized effort to construct a “moral economy” as per Vatican standards?

To the contrary: The big story after 1988 is the collapse of communism and the spread of market institutions, albeit imperfect ones, to India, China and Latin America. This was a process mightily abetted by freer flows of international trade and private capital, which were, in turn, promoted by a bipartisan succession of U.S. presidents and Congresses.

The extension of capitalism fueled economic growth, which Milanovic correctly calls “the most powerful tool for reducing global poverty and inequality.”

This is the good news about the world today. Indeed, it’s the most important news about our world. We hear so much about poverty, inequality, gaps, resource depletion, and the like, it’s a wonder any NPR listeners can bear to get out of bed in the morning. But as the economic historian Deirdre McCloskey says, this is the “Great Fact,” the most important fact about our world today – the enormous and unprecedented growth in living standards that began in the western world around 1700. She calls it “a factor of sixteen”: we moderns consume at least 16 times the food, clothing, housing, and education that our ancestors did in London in the 18th century. And this vast increase in wealth that began in northwestern Europe, mostly Britain and the Netherlands, has now spread to most of Europe, the United States, Japan, and increasingly to the rest of the world.

Some Blessings of Cheap Oil and Low Inflation

1. Cheaper oil lowers the cost of transporting people and products (including exports), and also the cost of producing energy-intensive goods and services.  

2. Every upward spike in oil prices has been followed by recession, while sustained periods of low oil prices have been associated with relatively brisk growth of the U.S. economy (real GDP).

   

3. Far from being a grave danger (as news reports have frequently speculated), lower inflation since 2013 has significantly increased real wages and real consumer spending.

 

4. Cheaper energy helps explain why the domestic U.S. economy (less trade & inventories) has lately been growing faster than 3% despite the unsettling Obama tax shock of 2013.

   

China Abandons One Child Policy—Ends Suffering For Millions

Today, China abandoned its 35-year-old one-child policy. Based on the now debunked threat of overpopulation that was popularized by Stanford University scholar Paul Ehrlich, the communist government subjected the Chinese people to forced sterilizations and abortions. Many newborn babies were either killed or left to die. Today, the Chinese population suffers from a dangerous gender imbalance that favors boys over girls at a ratio of 117:100, and a demographic implosion that threatens future economic growth and prosperity. In fact, as Human Progress advisory board member Matt Ridley shows in his book The Rational Optimist, population growth and economic expansion go hand in hand. The horrific consequences of the Chinese one-child policy are a reminder of what happens when governments are allowed to interfere in the deeply personal decisions of individual citizens and their families.

Still the Slowest Recovery

Friday’s disappointing jobs report reminds us that we are still in a very slow recovery from the 2007 recession. Not only were far fewer jobs created in September than economists predicted, the estimates for July and August were revised downward. And the size of the total workforce slipped to 62.4 percent of the population, the lowest level since 1977.

The Minneapolis Federal Reserve Bank has a handy tool for monitoring the depressing news, allowing you to compare this recovery to past recoveries since World War II. Output (GDP) is recovering more slowly than in past recoveries, along with employment:

Economic Recoveries

Why is the recovery so slow? John Cochrane of the Hoover Institution examined that question in the Wall Street Journal a year ago. Here’s part of his answer:

Where, instead, are the problems? John Taylor, Stanford’s Nick Bloom and Chicago Booth’s Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago’s Casey Mulligan deconstructs the unintended disincentives of social programs. And so forth. These problems did not cause the recession. But they are worse now, and they can impede recovery and retard growth.

If you put obstacles in the way of investment and employment, you’ll likely get less investment and employment.

A new e-book edited by Brink Lindsey, Reviving Economic Growth, presents ideas from 51 economists of widely varying perspectives on this crucial question.

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