How important is economic growth? And can we do much about it?
Tyler Cowen’s new book is full of interesting ideas, with a focus on the central importance of economic growth, which he views as the overriding issue for policymakers. This claim is built on three components:
1. Tyler accepts the broad conclusions of academic research on happiness, which generally show a positive link between psychological and economic well-being. Tyler believes that greater wealth leads to greater happiness, especially when wealth is defined broadly to include a clean environment, leisure time, human rights, etc.
2. Tyler believes that future utility should be discounted at a zero percent interest rate; in other words, future utility should be regarded as being every bit as valuable as current utility.
3. Tyler advocates a value system that is closely related to consequentialism—a pluralistic approach that is mostly utilitarian, plus certain basic human rights.
When these ideas are combined, boosting economic growth becomes far and away the most important public policy concern.
I don’t recall Tyler linking his argument to John Rawls “veil of ignorance”, but it may be helpful to do so. Rawls asked us to consider what sort of policy regime we’d favor if we had to choose the regime without knowing which of the 7.3 billion humans we would become. Tyler can be seen as going one step further, asking us to contemplate the policy regime we’d favor if we did not know which of the hundreds of billions of current and future humans we’d become. When looked at from this perspective, a zero rate of interest for discounting future happiness seems obvious. His approach breaks down temporal distances in much the same way that Rawls’ original thought experiment broke down geographical distances.
There’s also a link between Tyler’s argument and Bryan Caplan’s long-time advocacy of open borders. Caplan is saying that those who favor income redistribution in advanced countries are not paying enough attention to the vastly bigger gains to be achieved if we take seriously the value of lives in distant places. Tyler argues that those focusing on domestic redistribution are paying insufficient attention to both those who live in distant places and those who live in distant (future) periods of time.
Tyler’s core hypothesis has the virtue of being important, non-obvious, and probably true. Thus my overall evaluation of the book is quite positive. He wisely avoids getting bogged down in specific policy debates—rather his goal is to point us in the right direction—to give us a useful way to think about the merits of various policy options. It’s also short and easy to read, you can finish it in a couple hours. (Or 15 minutes if you read as fast as Tyler.) But a book review would not be useful without mentioning a few reservations. (Here I rely on memory, so I may be overlooking or misinterpreting some of his points):
1. I’m not convinced that economic growth makes us happier. It seems to me that the brain is sort of hardwired to be at a certain level of happiness, at least once basic needs have been met. Even if new products like iPhones are beneficial when viewed in isolation, they have negative externalities in the sense of reducing our pleasure in other goods. To take an obvious example, people today derive less pleasure from a fuzzy screen 19 inch black and white TV than they would have in 1960. We are on a hedonic treadmill. And no, empirical studies of happiness do not refute this claim, which matches my own life experience. Ask yourself this question. Why do Americans feel so much physical pain, in a country where medical progress has eliminated most of the extreme pain experienced in the 19th century? Even I am old enough to recall cavities being filled without painkillers (at age 12). I find that the more pain I eliminate from my life, the more sensitive I am to smaller pains.
Despite this reservation, I end up in the same place as Tyler on most policy issues. Even if there is only a 20% chance that more wealth makes us happier, it’s worth striving for. And there are many indirect ways in which wealth might make us happier. It might push us to spend more on a clean environment. It might reduce the risk of human rights abuses. It might lead to medical breakthroughs that improve health. Growth should be the default option, even if we are agnostic about its benefits. I’d also argue that the sort of classical liberal society that leads to economic growth is also the sort of society that leads to pro-happiness cultural changes, for reasons essentially unrelated to growth. Thus people in free market places like Denmark are happy partly because a classical liberal society encourages people to treat their fellow human beings better than would be the case in a more bureaucratic and regulated society. Most of the occasions when I get angry at strangers occur because bad public policies have thrust me into situations I’d rather avoid, such as arguing with health insurance companies, or the DMV, or the TSA, or the IRS. I don’t tend to yell at the person who cuts my hair, or serves me in a restaurant. Rent controls and minimum wage laws encourage businesses to be cruel to tenants and employees.
2. Even if economic growth makes people happier, the rate at which it does so is almost certainly far lower than the rate at which it boosts real GDP/person. It wouldn’t surprise me if utility rose by only one or two percent each time RGDP per capita doubled—at least from levels where basic necessities are already being met. So Tyler’s discussion of compound growth may oversell the benefits of economic growth in utility terms, even if those benefits are positive. On the other hand, this argument also suggests that many moral philosophers overstate the benefits of redistribution, so the happiness skepticism cuts both ways, and doesn’t necessarily impact his policy conclusions.
In a few places, Tyler sort of slides from a zero discount rate for future utility to a zero discount rate for future real consumption. If I’m right about the diminishing marginal utility of extra consumption, especially for the affluent, then taking a bit of consumption away from the (presumably affluent) people of the year 2218 will have only a trivial impact on their utility. I wish I had saved less when young, as an extra $100 in consumption back then would have been worth more to me than an extra $2000 today.
3. I think Tyler might have done a better job clarifying the issue of redistribution. Tyler mentions (without endorsing) the provocative argument that we might be better off redistributing money to the rich, who are more likely to save and invest the funds. Unfortunately, when discussing redistribution, our society tends to focus on income, which is the wrong variable. Yes, the rich might invest an extra dollar in income, thereby helping future generations. But that’s not relevant to the real issue, which is consumption redistribution. One commenter suggested that it might be better if I invested $10,000 rather than donate the money to a family in Ethiopia. But that’s dodging the real question—don’t I have an ethical obligation to donate $10,000 of my current consumption? The rich should never feel any guilt about investing money rather than giving it to charity. Where they perhaps should feel a bit of guilt is in spending $500 million on consumption, rather than donating a significant share of those funds to the poor. I think Tyler might have benefited by making the income/consumption distinction clearer in his redistribution discussion.
4. Tyler focuses on the gains from a higher rate of long run economic growth. But we know very little about how best to achieve a sustained increase in growth. I’d guess that roughly 99% of growth initiatives boost the level of GDP (by making the economy more efficient), but not the long run growth rate. In my mental model of growth, there is a gradually increasing “global potential” in RGDP/person, which is determined by things like the state of science and technology. Then countries are arrayed at anywhere between 0% and 100% of that potential, depending on supply-side policies. A fruitful supply-side reform will generally move you closer to potential, without boosting that global potential. That’s still “growth”, but it’s not sustainable in the long run. Thus reforms in North Korea might move them from roughly 10% of potential to the roughly 60% of potential achieved by places like South Korea, and then level off. Reforms in South Korea might move them closer to Switzerland or Singapore. But to boost the global potential we need breakthroughs in basic science and technology, which are difficult to achieve. I’m pretty sure that Tyler would agree that those basic scientific breakthroughs that engender many new products and services are among the most valuable steps in promoting long run growth. On the other hand, a labor market reform that slightly boosts the labor force participation rate may also boost wealth and be worth doing, but won’t permanently impact the economic growth rate.
5. I wasn’t convinced by his defense of pluralism over simple utilitarianism, partly for reasons outlined in my earlier post. But as I also pointed out, my “rules utilitarianism” leaves me in almost the same place, for policy evaluation purposes.
6. I don’t think Tyler’s insistence that certain ethical assertions are “objective” truths is useful. It’s enough to say that we hold certain beliefs with a high degree of confidence—there’s really nothing more that can usefully be said. The denial of objective truth is not an embrace of “relativism”, it’s an acknowledgement that the confidence we have in moral claims lies along a continuum from 0% to 100%.
Some will see Tyler’s book as a defense of the more “right-wing” side of the equity/efficiency debate. But I honestly don’t see anything here that would greatly concern a center-left economist from the 1990s. One can still advocate a role for the government in the environment, antitrust law, infrastructure, funding basic research, and redistribution (with a focus on boosting opportunity for the less fortunate). On the other hand, the center-left has recently moved away from its pro-saving stance of the 1990s, with less support for progressive consumption taxes, budget surpluses, etc. I’m still strongly pro-saving, but I feel increasingly out of step with the times. (This feeling is something I often experience—I got into blogging because the profession was ignoring monetary policy back in late 2008.)
It will be interesting to see if Tyler can help to reverse this unfortunate move of the profession away from the neoliberalism of the 1990s, with its emphasis on the importance of boosting saving. I certainly hope he succeeds, even as I believe he slightly overstates the case for emphasizing growth, for the reasons listed above.
PS. For a more comprehensive review of Stubborn Attachments, check out this excellent piece by Coleman Hughes. (And then get depressed thinking about he fact that it was written by an undergraduate—I cringe when I look at my college papers.)