Euro-envy, the welfare state, and economic growth

Many Democrats wish the U.S. was more like Western and Northern Europe. Good idea?

Asia is set to have the world's wealthiest residents, with city-state Singapore heading the rich list.

Hong Kong, Taiwan and South Korea will do well, too, according to by a new survey that predicts which countries will be home to the wealthiest citizens by 2050. ...

By 2050, the Wealth Report estimates the world's wealthy citizens will be dominated by Asia: Singapore ($137,710), Hong Kong ($116,639), Taiwan ($114,093) and South Korea ($107,752). The only western economy projected to remain in the top five is the U.S., with an estimated per capita income of $100,802. ...

Old World economies will have the worst growth performance in the next 40 years, the report predicts: Spain, France, Sweden, Belgium, Switzerland, Austria, the Netherlands, Italy and Germany are at the bottom of the list. But Japan and its aging population will have the weakest projected growth of all economies, Knight Frank estimates.

In general, the size of a country's welfare state and it's rate of economic growth are inversely proportional, because a cushy welfare state (and correspondingly high tax burden) reduces the incentive to work, invest, and start new businesses.

That said, government spending isn't always harmful. Government capital investment increases economic growth. Governments should favor spending on intellectual capital (education and scientific R&D) and physical capital (transportation and communications).

The late Milton Friedman has a little to say about #2 on the list, Hong Kong:

The world's poor are becoming richer

In the past few years, global poverty has been declining throughout the world—especially China:

The best estimates for global poverty come from the World Bank’s Development Research Group, which has just updated from 2005 its figures for those living in absolute poverty (not be confused with the relative measure commonly used in rich countries). The new estimates show that in 2008, the first year of the finance-and-food crisis, both the number and share of the population living on less than $1.25 a day (at 2005 prices, the most commonly accepted poverty line) was falling in every part of the world. This was the first instance of declines across the board since the bank started collecting the figures in 1981.

The estimates for 2010 are partial but, says the bank, they show global poverty that year was half its 1990 level. The world reached the UN’s “millennium development goal” of halving world poverty between 1990 and 2015 five years early. This implies that the long-term rate of poverty reduction—slightly over one percentage point a year—continued unabated in 2008-10...

Government spending in context

Economic growth rate climing again!

People fretting about a new recession over the summer were wrong:

The nation's economy gained some much-needed strength in the third quarter, as the pace of growth nearly doubled compared to the previous three months.

The nation's gross domestic product, the broadest measure of its economic health, grew at a 2.5% annual rate in the quarter after adjusting for inflation. That's up from the disappointing 1.3% growth in the second quarter and the anemic 0.4% pace in the first three months of the year.

I was right. Warren Buffett was right. If this continues (and it will) it might barely keep Barack Obama in office for four more years.

Warren Buffett on the U.S. economy

As always, Warren Buffett—the most successful investor alive—is optimistic about the long-term future of the United States economy:

Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

Now is the best time for national capital investment

Right now is the best time in decades for the government to engage in long-term capital investment. Investments in education, transportation, communication, and research & development would strengthen the economy in both the short run and the long run. Furthermore, the government's cost of borrowing is the cheapest in my lifetime.

Richard Voith argues the point in The Washington Post.

How to increase innovation and economic growth

The Economist highlights advice from the Organisation for Economic Co-operation and Development (OECD) on how to promote technological innovation, which in turn increases productivity and thus economic growth:

Many governments are facing not only slow economic growth but also big deficits and heavy debts. ... Innovation, the OECD argues, offers a way out. It is already the chief engine of productivity in the rich world, and thus holds out the tantalising prospect of sustaining economic growth on the cheap. ...

But what is the best way for governments to boost innovation? Sensibly if predictably, the OECD urges investment in education, research and “knowledge-supporting infrastructure” (such as broadband internet networks and smart electricity grids). Skimping on this while money is tight, says the agency, will cause growth to suffer in the long term.

The agency also offers several more novel prescriptions. It suggests that governments should not merely encourage the supply of innovation (for example, by funding research) but also try to stimulate demand. Economies, after all, benefit not from the invention of new products or services, but from their diffusion. In countries that are good at commercialising new ideas, such as America and Norway, even newly founded firms coin valuable intellectual property.

If governments want to see a blossoming of clean technology, therefore, they should use taxes to put a price on environmental externalities (such as carbon) rather than coddle pet technologies. ... The report recommends opening domestic research programmes to foreign firms, to take advantage of bright ideas from abroad.

The OECD encourages governments to rethink their policies in the light of globalisation and the information economy. It notes that “intangibles” such as knowledge networks and open business models now make up much of the value of firms in rich countries and that many companies produce profitable innovations with little or no research in-house.

Money is the root of much good

Despite the widespread belief that "money is the root of all evil," The Economist points out that money's virtues outweigh its vices:

There is a tendency to look back on the pre-industrial era as an idyll. But if you think life was great before sordid commericalism appeared, you should try being a peasant. Life was a combination of back-breaking work, few human rights, illiteracy, short life expectancy and little chance for advancement (especially for women). It is no coincidence that all these things have improved in our more sophisticated economy. ...

Societies that have destroyed their money, like Zimbabwe, have not moved into a post-materialist world; they are full of famine, disease and brutality.

Most people recognize that it is better to be wealthy than to be poor. However, far too many people think of the world's wealth as being fixed—that if you have more money, it forces me to have less. That is not the way the economy works. Humanity grows wealth over time. The more productive we are—through harder work, better education, greater innovation, and more efficient use of resources—the faster the economy grows and the wealthier we all become.

Without money, wealth, and economic growth, we would not have refrigeration for food, airplanes for travel, running water for sanitation, or computers for learning. Man's desire for money, and his willingness to employ his productive resources in order to obtain it, gradually makes the world a better place.

Recession expected to end by Q4 2009

Based on the "US Economic Growth by Quarter" bets at Intrade.com, here are the probabilities that real GDP growth will be positive in a given quarter. It looks like people are expecting the recession to be over by the fourth quarter of this year, give or take a quarter.

The American vs. French economy

A lot of people on the far left are almost filled with glee claiming that American-style capitalism has failed. They leave out a few facts. First, this is just the downside of the business cycle. Our economy will be back to normal before you know it. Second, it was a quasi-governmental agency, the Federal Reserve, that is primarily responsible for the housing bubble, and thus the housing bust. Third, even in this downturn Europe's economy is doing worse than ours.

The benefit of the American economic system is that it produces greater economic growth (and thus greater overall wealth) in the long run, but the trade-off is that you get greater economic disparity.



Note: In the video, she claims that "the American way makes everyone better off." This overstates the case. The American way makes most people better off. In general, Americans are better off in the middle and top of the economic ladder, but worse off at the bottom.

How will the global recession affect China and India?

The Economist examines the possibilities:

THE speed with which clouds of economic gloom and even despair have gathered over the global economy has been startling everywhere. But the change has been especially sudden in the world’s two most populous countries: China and India. Until quite recently, the world’s fastest-growing big economies both felt themselves largely immune from the contagion afflicting the rich world. Optimists even hoped that these huge emerging markets might provide the engines that could pull the world out of recession. Now some fear the reverse: that the global downturn is going to drag China and India down with it, bringing massive unemployment to two countries that are, for all their success, still poor—India is home to some two-fifths of the world’s malnourished children.

Will Americans lose their appetite for risk?

The Wall Street Journal worries that this economic crisis will cause Americans to lose their frontier spirit:

The greatest danger in the current economic crisis is that the United States will lose its historic appetite for risk. The mood now is that risk-taking got us into this mess. Risk, though, is the quintessential American trait that built the nation — from the Battle of Bunker Hill to the rise of the microchip. If we let risk give way to a new ethos of commercial reserve and regulatory restriction, the upward arc of the U.S. ascendancy will flatten.

The willingness of people to take risks is essential for entrepreneurship and a thriving free enterprise system. That said, I don't think a short-term slump will have a long-term effect on the essential character of the American people.

Middle class economic stagnation is a myth

A new study by the Minneapolis Fed says the myth of long-term middle class economic stagnation is due to flaws in measurement:

• The U.S. Census Bureau reports that median household income stagnated from 1976 to 2006, growing by only 18 percent. In contrast, data from the Bureau of Economic Analysis indicate that income per person was up 80 percent.
• Three data issues adversely impact reported median household income gains: the choice of price index, a change in the mix of household types and the measure of income used.
• After adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here...refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

Hat tip: Greg Mankiw.

Two centuries of American real per-capita GDP growth

Chris Blattman has a message for all the pessimists out there:

This is the best estimate of real income per capita in the United States since 1820.

Over these years we had violent financial crashes of various types, bank panics, piles of recessions and a huge depression, many foreign wars and one enormous domestic war, had a central bank and didn’t, were on the gold standard and weren’t, had governments topple in scandal and multiple leaders assassinated, and what did it all amount to in the medium to long run? In per-capita income terms: Nothing. The overall trend does not bend or shift. Every bad year was followed by a good year that returned us to trend.

The US average growth rate of real per capita incomes over the last 190 years has been 1.8% a year, and the same rate over the last 10 years has been…. 1.8% a year.

Stare at that graph: The Great Depression was traumatic in countless ways, but astonishingly, it’s not clear that we are any worse off today than we would be if the whole thing never occurred. Anyone who made such a claim in the 1930s would have been scoffed at, but that’s what happened.

We may be headed for a tough time over the next few years, but we'll get through it. We always do. And no, it's not different this time.

Note: The graph is showing real per capita GDP growth. That is, per capita GDP growth adjusted for inflation.

Do tax cuts increase economic growth?

The claim made by politicians who support "supply-side economics" is that tax cuts increase economic growth. In general they do to a point, but the EconoSpeak blog adds a caveat:

The claim that tax cuts lead to more output via incentive effects presumes that we are talking about fiscally neutral reductions in taxes and government spending. What we got from the Reagan and Bush 43 administrations – and what is proposed by McCain – is a reduction in taxes that is much larger than any proposed reduction in government spending (government spending as a share of GDP actually rose under Bush43). The impact of this fiscal stimulus was a reduction in the national savings rate, which lowers long-term growth.