Progressive Social Goals and Economic Growth

Posted by {"login"=>"dvollrath", "email"=>"[email protected]", "display_name"=>"dvollrath", "first_name"=>"", "last_name"=>""} on October 23, 2015 · 13 mins read

Someone pointed me towards this Washington Post essay by Michael Strain, of the AEI, on "Why we need growth more than we need democratic socialism". It's something of a rebuttal to Bernie Sanders' positive statements regarding the social democratic systems that are in place in Denmark, Sweden, and several other countries. Strain takes issue with this, suggesting that we cannot purse the progressive social goals that are part of this social democratic system because we would sacrifice economic growth, and that would be bad. The TL;DR version of my post is that Strain is wrong. Wrong about the nature of economic growth, and wrong about the effect of progressive social policies on growth.

To start, Strain engages in some ham-fisted hippie-punching. Except he's punching Swedes and Danes, so I guess he's Scandanavian-punching?

Yes, yes, while it didn’t turn out so well under Stalin and Mao, something of the dem-soc variety may work for the good people of Scandinavia.

This is a breathtakingly ridiculous connection to draw. Strain is lumping Stalin's USSR and Mao's China together with post-war Denmark and Sweden. These are economies and political systems fundamentally different in kind, not in degree. I'm fairly sure calling Stalin or Mao's system "democratic" would be a stretch. "Socialist" is also wrong for their economies. I know, it's confusing, they used "socialist" right there in the name of the USSR! Sometimes labels are wrong. Chilean sea bass ain't Chilean or a bass.

The USSR and China were committed communist countries, with a lack of private ownership, and centrally planned economies. In contrast, Denmark and Sweden have free, fair elections, a free press, freedom of assembly, freedom of religion, and do not deliberately let giant swathes of their population starve. Oh, they also happen to have marginal tax rates of about 50% at the top, free health care, child care, and education. Which, sure, makes them exactly like the USSR or China under Mao.

Now that we've dealt with that, we can actually look at what Strain has to say about growth.

For one, demographic pressures are pushing the potential growth rate of the economy below its historic average. The nation is headed for a period of naturally slower growth, which means that we need to take pro-growth policies even more seriously now than in previous decades.

Why? If the economy is naturally slowing down due to demographic changes, then what precisely is the issue I am worried about? No one gets utility from the growth rate. If we have people getting utility from retiring, and the growth rate is lower, then explain why I should care. Is this an argument that the demographic pressures will put a greater burden on those still working to pay for Social Security and Medicare? Then we should be having an argument about the optimal tax rate, or benefits, or eligibility ages.

True, public policy cannot deliver 6 percent growth, no matter how great a deal Trump makes with the economy. But policy can get rid of a bad regulation (or 20) here, encourage people to participate in the workforce there, make savings and investment a bit more attractive, make entrepreneurship and innovation a bit more common, make the government’s footprint in the economy a bit smaller — on the margin, a range of policies can increase the rate of economic growth. And when you add up all those marginal changes, good policy can make the economy grow at a non-trivially faster rate.

If by "non-trivially" you mean by about 0.2% faster a year, then I might believe that. But notice that Strain tries to sound reasonable ("public policy cannot deliver 6 percent growth"), but never bothers to try and say how much pro-growth policies can actually raise the growth rate. Does he think pro-growth policies - and what precisely are those, by the way - mean growth of 3%, 4%, or 5%? The answer is that it would be a little over 2%, just a smidge higher than growth is today. And that is assuming that Strain's non-specified growth policies actually have an incredibly massive effect of potential GDP. There is no magic fairy dust to make growth accelerate dramatically. It's even plausible that pro-growth policies that raise the profit share of output to induce innovation would lower measured productivity growth simply due to how we calculate that productivity.

And the measured growth rate of GDP doesn't even matter, really. What matters is the availability of innovations that improve living standards. Strain almost gets this right in the next quote:

Over the past two centuries, growth has increased living standards in the West unimaginably quickly. Many more babies survive to adulthood. Many more adults survive to old age. Many more people can be fed, clothed and housed. Much of the world enjoys significant quantities of leisure time. Much of the world can carve out decades of their lives for education, skill development and the moral formation and enlightenment that come with it. Growth has enabled this. Let’s keep growing.

No, innovation has enabled this. So let's keep innovating. The fact that all these welfare-improving innovations contributed to a rise in measured GDP to rise does not mean that causing measured GDP to rise will raise welfare. Innovations can allow us to produce more with the same inputs (raising GDP) or allow us to produce the same amount with fewer inputs (possibly lowering GDP). Strain confuses measured GDP growth with innovation. They are not the same. What we want, as he says, is policies that foster innovations that improve human living standards. Whether they also happen to raise GDP growth rates is a side issue. Think of it this way. If the BEA came out tomorrow and said they had discovered that they had mistakenly understated GDP by $1 trillion a year since 1948 due to a calculation error, would your living standard be instantly higher? No. But if tomorrow someone announces that they've invented a 60% efficient solar panel, that would change your living standards.

Growth facilitates the flourishing life. By creating a dynamic environment characterized by increasing opportunity, growth gives the young the opportunity to dream and to strive. And it gives the rest of us the ability to apply our skills and talents as we see fit, to contribute to society, to provide for our families. A growing economy allows individuals to increase their living standards, facilitating economic and social mobility.

Oh, come on. This is vacuous drivel. Replace every instance of the word "growth" here with the word "liberty", or "dignity", or "patriotism", or "human rights", or "unicorns" and this paragraph is true. Replace it with "universal free college" and you've got Bernie Sanders' stump speech. This paragraph is the equivalent of Gary Danielson saying "LSU would be helped by a touchdown on this drive." It's meaningless.

If we are interested in raising living standards for everyone, which Strain is saying he is for, then we need to promote the introduction and diffusion of innovations. Is there some either/or choice between promoting innovation and progressive social policies? Do we have to sacrifice innovation if we pursue progressive programs? No and no.

What we know about innovation is that it depends on market size and the stock of people who can do innovation. See any of the econosphere's recent run of posts on Paul Romer's original work on endogenous growth. By pursuing the progressive policies Strain is so wary of, we can positively affect both market size and the stock of innovators.

First, the policies let relatively poor families access the existing set of innovations, and the diffusion of these welfare-improving innovations accelerates. Think of Whole Foods. Whole Foods is an innovation in access to relatively healthy food. (Yes, some specific items are just overpriced bulls***, and some specific items are not healthier than other brands, but in general Whole Foods and stores like it make a healthier diet more accessible. I'm married to a nutritionist, I've had this conversation more than once.) Many poor families eat unhealthy food because it is cheap. Those progressive social programs give these families the purchasing power to access the innovation that is healthier food. Innovations are useless if no one can afford them.

Second, the incentives for innovation are based on the size of the market. Practically, this means that innovation is geared towards producing ideas for people with money. A concentration of income into a small group means innovation is skewed towards that group. Hello, Viagra. If we're lucky, perhaps the innovations being sold to that small group have some spillovers in producing innovations that are available for the mass of people. But if you expand purchasing power of the mass of people, this raises the incentives to innovate directly for this mass of people. Rather than hoping we get lucky, the market will actively work to produce innovations that improve welfare of most people, not simply the small group with the most purchasing power. Under certain conditions, a concentration of income actively slows down innovation because there simply aren't enough people with sufficient purchasing power to make it worth innovating (see Murphy, Shleifer, Vishny).

Finally, those progressive social policies that Strain is worried about expand the stock of people who can do innovation. Kids in poor families who receive income support do better in school. Support for vocational school or college raises the supply of people who are capable of innovation. Alleviating income uncertainty through health insurance and income support means that individuals with risky business ideas can pursue them without fearing they won't be able to take their kids to the doctor.

So it is important to focus on another of the many fruits of economic growth: It provides the money to make targeted spending programs possible. In a nation as rich as ours, no one should fall too far — no one should go hungry, everyone should have a baseline level of education, no one should be bankrupted by a catastrophic medical event. Slow growth impedes progress toward social goals that require targeted spending, both because of the political climate it fosters and because those goals, even only those that are advisable, are expensive.

This, again, presumes that there is an either/or choice between growth and progressive social policies.

Hungry people are less productive. Uneducated people are less productive. People bankrupted by catastrophic medical events are not productive. Reaching those social goals is as much a contributor to growth, as growth is to achieving those social goals. These social goals are not a black hole into which we dump money. They have ramifications - positive ones - on our economy. If Strain wants the U.S. economy to grow faster, then invest in it. Invest in it with better educational opportunities, the elimination of extreme poverty, and the alleviation of the uncertainty associated with medical care. Educated, fed, securely healthy people are productive innovators.