David R. Henderson  

Winship's Numerate Insight on Growth

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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."

An excerpt:

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.

Another excerpt:

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.


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CATEGORIES: Growth: Consequences



COMMENTS (6 to date)
Tom Nagle writes:

Thanks Scott and David. This is one of those ideas that is obvious once pointed out, but that we were missing. People are extrapolating China's growth rate into the future to estimate when the Chinese will be a rich as Americans. But they too would have to innovate faster as they become wealthier to sustain the same growth rate. More likely, China's growth rate will fall to a level comparable to the US and Europe as wealth increases.

roystgnr writes:

The trouble is that people's perceptions of economic growth really are based on relative values, not absolute values. The marginal utility of wealth decreases as absolute wealth increases, and in fact the translation from money to personal utility seems to be roughly logarithmic! For the most part this is good news - e.g. the decade of the 2000s saw a huge chunk of the world move from stark poverty into mere relative poverty, and it's good that this was a huge improvement for them. But this does imply a huge handicap for rich countries that want to make lives better by getting even richer.

Vadim writes:

Is this really an insight?

Regardless of what income level you are at, you should still aim for the highest growth rate. Higher growth rates will always produce more absolute wealth than lower growth rates at any income level. So focusing on growth rates is entirely appropriate.

Doug writes:

Yeah, but if have log-utility or something close to it then you need constant proportional growth to keep consistent gains in utility. Constant arithmetic growth leads to diminishing utility growth.

Prakash writes:

This is a very important point. I always wanted to see a ranking of countries by growth volumes and not just by growth rates. However, due to the influence of finance looking at yields, growth rates get disproportionate press.

Jesse writes:

Vadim, I believe you missed the point. When comparing growth across time or across nations, levels can be better than rates. This is insightful since everyone is using rates.

Of course comparing to yourself, setting goals, rates or levels are the same.

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