We progressives can’t seem to get our heads around the power of compound growth. This blind spot causes my tribe to make all sorts of cognitive errors. Mostly, we over-worry about the future. Where we should be telling our kids (and our students) that their lives will be better and richer in almost every way imaginable, we instead burden them with fears about joblessness and ecological disaster.
Those of us on the left also tend to make the same mistake in the other temporal direction, under-appreciating how much better the world of today can be along measures of work, health, shelter, and leisure when compared to that of our great grandparents.
Tyler Cowen gets the power of compounding exactly right in both his essay and his wonderfully concise book Stubborn Attachments. It is worth quoting Tyler’s essential paragraph on this point in full:
[T]he power of compound returns remains underrated. In the early 1960s, South Korea was as poor as much of sub-Saharan Africa, but since then compound returns have made for a huge difference. Or considering the years 1870 to 1990, if the United States had grown one percentage point less per year, the country would in 1990 have had the same standard of living as Mexico. More abstractly, if you can boost the growth rate by two percentage points a year (by no means a utopian scenario for many emerging economies), after a time horizon of 55.5 years income will be three times higher than it otherwise would have been. Compound growth truly matters.
Even at modest economic growth rates of less than 2 percent a year, by 2050 GDP per capita (in constant dollars) in the United States will rise from around the $60K it is now to closer to $90K. While the economies of China and India will likely be larger than that of the United States by 2050, the United States will continue to be two to four times wealthier on a per capita basis. More importantly, the United States in 2050 will be a much wealthier place as a whole than it is today, with an economy at even the low sub 2 percent growth rate growing in size from under $20 trillion to over $35 trillion.
And that is assuming low growth. Certainly much lower than I expect that Tyler, and other readers of Cato Unbound, are hoping to see. If we just muddle along, as a result of political gridlock or decisions to follow the policies of politicians with other values beyond maximizing economic growth, then our kids and grandkids will be much better off than we are.
Imagine if all of us progressives were persuaded by Tyler that the most moral thing we could do is to focus on encouraging economic growth. Raising growth rates by even a percentage point would bring about, due to the magic of compounding, the sorts of quality of life improvements that benefit everyone across the income distribution. Economic growth has historically underpinned transitions in health (antibiotics and sanitation), education (universal secondary completion and postsecondary opportunities), and connectivity (jet air travel, the internet, and smartphones). A society that is twice as wealthy is likely to be twice as likely to find a cure for cancer, provide quality housing for everyone, and produce TV shows even better than Game of Thrones. The faster economic growth can be unleashed, the sooner we will get to a world where tomorrow’s bottom 20 percent will live lives that resemble the top 20 percent of today. If economic growth is prioritized, sooner or later we are all driving Tesla’s and spending our (growing) leisure hours at the spa.
So what is the problem? Is it simply that we progressives need to get better at math? Or is it that while we liberals are wrongly worried about the future, and underappreciative of how far we’ve come, we are also appropriately cognizant of trade-offs? The real question is not whether economic growth should be prioritized. Of course it should. Rather, we need to grapple with what trade-offs we are willing to make to achieve better growth. Tyler is maddeningly difficult to pin down on the questions of trade-offs. What he does say about how his growth-first philosophy may play out is worth quoting in full. Tyler writes,
In practical terms, a regime of maximizing growth is largely capitalistic, but with government supplying important public goods, including environmental protection, which is necessary for the sustainability of civilization. I see some forms of redistribution as being growth-enhancing (e.g., programs to combat malnutrition), but I oppose income and wealth redistribution insofar as they damage the prospects for economic growth. In many instances redistribution creates excessively implicit high marginal tax rates for the recipients of the largesse, or the background high taxes may stifle private enterprise from the wealthier parts of the economy. In part the book is arguing that the economic growth concept, properly understood, will do more for poverty reduction and other social goods than will traditional egalitarianism.
What I gather is that at the point that a policy choice is made, that the growth vs. redistribution question should be called. If the policy achieves redistribution by sacrificing (or impeding) growth, then it should be discarded. Conversely, if the policy results in more growth - even at the cost of greater inequality - then it should be supported. Fair enough.
Let’s apply this growth over redistribution heuristic to some real-world issues. Two come quickly to mind: public support for higher education and minimum wage laws. I picked these two as neither touch Tyler’s other concerns around protecting the environment. They are each clear-cut cases in which traditional liberal policies will tend to prioritize redistribution over economic growth.
As a progressive, I very much want to see greater public investment in public higher education. I worry a great deal about state-level disinvestment and systemic underinvestment in our public institutions, particularly our community colleges. I’d be in favor of everyone paying higher taxes, and the wealthy paying progressively more, if those tax dollars were used to allow more people to receive a quality postsecondary education and to graduate with less debt.
Yes, I know that some non-trivial percent of public funds will be wasted on nonproductive postsecondary educational expenses. (Just as I know that some percentage of the tuition dollars that I now pay for my two kids in college will be wasted). And I’m aware that dollars spent on public higher education are dollars that are no longer available for the investments that will grow societal wealth. Each dollar that goes to a community college is a dollar less that can fund a company’s risky bet on a new technology that may ultimately give us whatever comes after the iPhone, or perhaps leads to a cure to cancer.
Still, I believe so much in the idea that higher education is the greatest opportunity-creating engine that I want to see a quality postsecondary educational experience available to everyone. I’m willing to trade some economic growth for some economic (or opportunity) redistribution. What I need is for Tyler to convince me that my desire to redirect scarce dollars to public higher education (especially community colleges) and away from all those wonderful economic growth-inducing activities is soft-headed and self-defeating. I need to see how a dollar spent today on a community college results in so much less than could be achieved if that dollar were directed by the market.
The same goes for my other example of minimum wage laws. I don’t need to spell out the arguments, as you know where this goes. I believe that everyone who works should earn a living wage. I’d like to see the minimum wage grow to a place where a full-time worker can reasonably support themselves and a couple of kids. $15 an hour seems about right to me. And I’m willing to pay more for my meals and my clean house and my kid’s childcare to get to this point.
I’m willing to invest less of my money in the stock market and more of it in the people who do the actual work that makes life in 2019 America so great. The argument against setting a higher minimum wage usually comes down the unintended consequence of suppressing employment. Higher minimum wages mean more unemployment. That debate goes round and round. Tyler should argue about the impact of minimum wage laws on economic growth, and then play out that impact into the future with compounding. I’m ready to be convinced.
Given that compounding will almost certainly result in my kids (and their kids) being much wealthier than us, even with the mediocre economic policies for growth of my fellow liberals, why should I support policies that will make those grandkids even wealthier? Unless we really screw things up, our descendants will be as better off compared to us as we are to our great-grandparents. (Which is quite a lot).
Don’t we have some room to think about spreading the wealth that the hard work of our ancestors have provided us a little bit more evenly among our fellow Americans? I’m willing to be convinced that compounding should trump all other concerns.
I just need Tyler to get specific.