Reducing growth now is bad juju

Apropos of the comment left by Glen Whitman of Agoraphilia below[1], I link to Tyler Cowen's entry over at Crooked Timber's recent symposium on Social Democracy, er The Primacy of Politics.

In the course of eulogizing the European Social Model, Tyler says:

The importance of economic growth is obvious, but rarely are the long-range implications of lower growth taken seriously.

If a country grows at two percent per annum, rather than one percent, the difference in wealth or welfare in a single year is relatively small. Over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990.

Growth laggards fall behind. If we compare a one percentage point differential in the growth rate, and start at real income parity, we need a time horizon of 110.4 years to establish a 3:1 ratio of superiority of per capita income. If we are comparing a two percentage point boost in the growth rate we need a time horizon of only 55.5 years to establish a 3:1 superiority in per capita national income.

Nobel Laureate economist Robert E. Lucas put it succinctly: “…the consequences for human welfare involved in questions like these are staggering: once one starts to think about [exponential growth], it is hard to think about anything else.”

That is part of my rationale for favoring Borrow and Spend (and leaving a constant tax rate) versus Tax and Spend, when the question in both cases is 'More Spending, how do you finance it'. My bet is that for the same reason Tyler gives, that so long as economic growth is maintained, the future output will be higher than the principle plus interest of the additional debt. Or, conversely, you pay more in lost economic growth due to extra taxation than you save in interest. That's the bet anyway, and given industrial society, I think its a good one.

Comments, reasoning, and theories debunking my view are much welcome. :)

(footnote below)

fn1. Interesting that the first comment on my ill-thought out rant is off of a footnote and not about the substance of the post itself. :)

Share this