Winship's Numerate Insight on Growth
By David Henderson
Brookings Institution economist Scott Winship makes a simple arithmetic point that is a powerful economic one: a lower growth rate starting from a high level can give us higher absolute growth than a higher growth rate starting from a low level. Why does this matter? Because our real income [he uses the word “wealth,” but all his measures are of income, not wealth] is so much higher than it was 60 years ago. So the growth rates that Tyler Cowen and many others have worried about can still give us comparable or higher increases in real income than we had 60 years ago. The article is “The Affluent Economy: Our Misleading Obsession with Growth Rates.”
As nations become wealthier, it is harder for them to sustain high rates of growth. That doesn’t mean that the United States is in decline, or even stagnating. When a nation is as rich as ours, it can realize larger absolute gains than it did in the past and larger gains than other nations even if it has lower growth rates. That’s because a growth rate of, say, 2.5 percent represents a larger increase in absolute wealth the richer an economy becomes. In 1900, a 2.5 percent increase in gross domestic product (GDP) per capita would have translated into about $150 in today’s dollars for every man, woman, and child in the United States. In 2010, it would have been roughly $1,200, reflecting the fact that in the aggregate, we are about eight times wealthier than we were 110 years ago. By focusing too much on growth rates and too little on absolute increases in wealth, we have failed to appreciate the magnitude of economic gains in recent decades.
A quibble: I’m guessing, although I have not looked at the data he cites, that Scott means seven times, not eight. I’m guessing that his data show that our real income is 8 times as much.
While some have referred to the aughts as a “lost decade,” absolute growth was higher from 2000 to 2007 than from 1959 to 1969, an apples-to-apples comparison because both periods are between business cycle peaks. Even though GDP per capita rose by only 1.4 percent per year between 2000 and 2007, less than half the 3 percent per year from 1959 to 1969, annual absolute gains were $650 per person compared to $600 in the 1960s.
HT to Scott Winship.