According to the US St Louis Fed database, from 1960 to 2017 the UK economy grew at an average rate of just under 2pc a year, in per capita terms. Since 2010, when we would have expected robust catch-up growth following the Great Recession, that has slowed to 1.3pc a year. Many economists muse that this slower rate is a “new normal.”
These seemingly modest differences mask massive divergences in living standards over time. If the UK had grown at just 1.3pc a year since 1960, we’d be 33pc poorer than we found ourselves in 2017. Looking forwards paints a starker picture. If 1.3pc annual growth is entrenched, we will be 50pc richer by 2050. But if we could get that annual growth rate up to 2pc or even 2.5pc, then we would more than double GDP per capita over that period.
This power of compounding is why Nobel Prize winner Robert Lucas said: “Once you start thinking about growth, it’s hard to think about anything else.” Yet UK economic debates overwhelmingly focus on short-term macroeconomic management or policies to redistribute money, rather than growth. Budget measures get pored over for weeks despite changing income levels for the affected by a couple of percentage points at most. Our debate time for this rather than ideas to enhance innovation suggests we aren’t growth conscious enough.
This is even more true given the extended benefits of material growth. Sustained growth delivers better health outcomes, improved environmental quality, more leisure time, and beneficial spillovers to the world’s poorest countries. Raising the growth rate makes our aging challenge easier too — improving the debt outlook for a given level of public services, or allowing more to be spent on public services for a given debt outlook.
Yet, depressingly, the Government’s Office for Budget Responsibility projects productivity growth over the long-term as a fait accompli. It doesn’t bother even modelling different scenarios for it when making public finance forecasts. Among our establishment, the belief we cannot do much to change our growth fate dominates. This, again, is hardly suggestive of growth being a policy priority.
That pessimism should be challenged. In his recent Stubborn Attachments book, George Mason University economist Tyler Cowen persuasively argues that maximising sustainable long-run growth should be our overwhelming societal objective.
That does not mean temporary stimulus spending or letting environmentally destructive activity rip. Both would give us an economic sugar-rush at the cost of long-term well-being. No, he defines prosperity as “wealth plus” — economic well-being that incorporates leisure time, health and our broader ambitions as humans. Starting from the premise that we should regard future generations as important suggests we should care much more about dynamic growth than static income redistribution.
What would a growth maximising strategy do? Sustainable growth ultimately comes from productivity growth which itself is a by-product of innovation. Creating an environment conducive to new ideas then is crucial. Embedding that principle into policymaking, there’s obvious low-hanging fruit, as outlined by Eli Dourado in a recent essay for the Cato Institute.
A pro-growth society would embrace the idea of “permissionless innovation”. Entrepreneurs would be free to experiment in new areas without requiring government consent. The creative destruction caused by the likes of ride-sharing company Uber is a good example of this phenomenon.
Regulation would be less prescriptive but deal in outcomes rather than delivering conformity. No more would governments decree where supermarkets can open, how many children child-care facilities can serve, the composition of food products or the banning of goods when scientific evidence suggests they are low risk.
A pro-innovation government would not try to buck market signals by reviving struggling towns and regions. Instead, it would remove barriers to new growing clusters developing. It would reform land-use planning regulations to allow booming cities to expand and densify and devolve economic tax and spending powers to generate experimentation in delivering public services.
A government determined to pursue sustained growth wouldn’t insulate industries from global competition, or businesses from new upstarts. It wouldn’t seek to invent taxes on Amazon to help bookstores, or subsidise individual sectors. Instead it would set broad pro-market conditions, shifting tax systems from work and investment to land and consumption, delivering significant basic research funding for major environmental and sustainability challenges, and put transport modes on a level playing field (pricing roads and removing rail subsidies).
A growth-friendly country would welcome unlimited numbers of immigrants with high propensities for entrepreneurial activity. It would deal with pollution in the most market-friendly way possible too, facilitating contracts or attempting to “price” broader economic costs using targeted taxes.
Perhaps most controversially, a growth-maximising government would spend far less transferring money via welfare or pensions. Even much spending on health is not high value-added in terms of living standards, but reflective of showing society cares. A pro-growth polity might be cruel (in the short term) to be kinder in the future, with lower spending and marginal tax rates overall, but spending relatively more on genuine public goods, research and investment.
Spelling out such an agenda shows how far we are from a government that tries to expand the economy as far as possible. A host of greens and commentators might believe we worship at the altar of growth. But, in politics at least, the pews in that church are nearly empty. We’re all worse off for it.
