Posted on 05/04/2015 9:12:26 AM PDT by Kaslin
Even small differences in economic growth make a big difference to living standards over time.
I frequently share this chart, which highlights how long it takes to double economic output based on different growth rates.
I also use real-world examples to show how some nations become much richer than other nations within just a few decades because of better policy and faster growth.
Here’s another way to approach the issue. Let’s use a hypothetical example to reinforce the importance of growth. If we went back to 1870 and assumed our economy’s nominal growth rate was one percentage point slower than it actually was (in other words, averaging 4.76 percent each year rather than 5.76 percent), our living standards today would be only 1/4th of current levels.
That’s a huge difference in national prosperity. We’d be about the level of Kazakhstan today!
In a column for the Wall Street Journal last week, Louisiana Senator Bill Cassidy and businessman Louis Woodhill used the same approach to make a similar point about the incredible importance of long-run growth. They go back even further in time and come up with an even more sobering example.
The recovery that began in 2009 is the weakest in postwar history. Millions have dropped out the labor force, frustrated by lack of opportunity. Lower-income workers are underemployed, middle-incomes have not advanced as in the past, and government dependency has increased. …ignored is what really matters: rapid, sustained economic growth. The Congressional Budget Office has estimated that the U.S. economy will grow by a meager 2.3% over the next decade… At this growth rate, Americans face a future of stagnation, inequality and despair. Here’s why: From 1790 to 2014, U.S. GDP in real dollars grew at an average annual rate of 3.73%. Had America grown at the CBO’s “economic speed limit” of 2.3% for its entire history, GDP would be $780 billion today instead of more than $17 trillion. And GDP per capita would be $2,433, lower than Papua New Guinea’s.
This is why (good) economists are so fixated on economic growth. It’s vital for our long-run living standards.
Which means, of course, that we’re also fixated on the importance of free markets and small government. We understand that an economy will grow much faster if the burden of government is constrained (think Hong Kong or Singapore).
But if the public sector is bloated, with high levels of spending, taxation, regulation, cronyism, and protectionism, then it’s very difficult for the productive sector of the economy to flourish.
Let’s augment our understanding by comparing two nations, Estonia and Croatia, that emerged after the collapse of the Soviet Empire.
Estonia has been a role model for pro-growth reform. According to Economic Freedom of the World, the small Baltic nation quickly moved to reduce the burden of government (including a flat tax) and Estonia consistently has been in the top 20 of all nations.
Croatia, by contrast, has lagged. While its economic freedom score has improved, the progress has been modest and Croatia has never been ranked higher than #70.
So what are the real-world results of what happened in these two nations?
The simple answer is that good policy yields good results. Here’s a chart, based onIMF data, showing per-capita GDP in both Estonia and Croatia.
The most relevant lesson, which I highlighted, is that Croatia was much richer at the beginning of the post-Soviet period.
But Estonia quickly caught up because of its reforms. And over the past 10 years, Croatia has fallen significantly behind.
The key takeaway is that growth matters. And if you want growth, you need economic freedom.
Which brings us back to the aforementioned Wall Street Journal column. Cassidy and Woodhill are totally correct to worry about the “new normal” of anemic growth.
Fortunately, we know the policies that will rejuvenate the economy. And maybe we’ll get a chance to implement those policies after the 2016 election.
Why Is America Richer than Kazakhstan?
Because Obama has been president for only 6 years.
Not too hard...once Estonia got out from under the soviet boot, they knew the difference between good (freedom) and Bad (communism). Croatians are mired in an antiquated culture and are too busy hating the Serbs to concentrate on the big picture.
As they say, economic freedom is necessary but not sufficient. There are a host of other factors that are almost equally important.
As of this August, the last fighting took place 20 years ago—probably half the population in Croatia is too young to have any memory of the war. I have been in Croatia and didn’t get the impression people thought about the Serbs one way or the other. One Croatian woman told me she liked the Serbs better than the Slovenes. The bigger problem probably is that many of them think things were better under Tito and therefore are more willing to accept leftist ideas. I don’t know what is antiquated about their culture any more than any other European country.
As of this August, the last fighting took place 20 years ago—probably half the population in Croatia is too young to have any memory of the war. I have been in Croatia and didn’t get the impression people thought about the Serbs one way or the other. One Croatian woman told me she liked the Serbs better than the Slovenes. The bigger problem probably is that many of them think things were better under Tito and therefore are more willing to accept leftist ideas. I don’t know what is antiquated about their culture any more than any other European country.
I was 17 when I had a summer job working on a Danish cargo ship, and we spent most of the Summer running between Ancona, Italy and both Riejka and Sibenik. A group of us once got kicked out of a strip club after getting a bit crazy from the Slivovitz and we stumbled back to the ship yelling things like "Tito sucks!" in the middle of the streets.
One time one of my shipmates got lost and fell asleep in some rowboat at the docks, and got arrested. He spend a month in the slammer before the Danish embassay got him out... when he got out he had several broken ribs and all his fingers had been broken in an attempt to get him to confess to stealing the rowboat.
Another time I got stranded there, no passport or money... tried to get the train back down to Sibinek but missed a connection and accidently wound up in Lublijiana... pretty place, but not when you're broke and lost.
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