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The Case for Economic Growth

Below is my opening address from last night’s panel discussion of The Case for Economic Growth. The event was brilliant – all three MPs, Chris Bishop, Dr. David Clark, and James Shaw, did an excellent job, and there was more consensus than you might have expected. We will post the video of the night’s event so you can watch for yourself, when it’s available.

Apart from longer life expectancy, better health, improved education, a cleaner environment, better opportunities for our children and a happier country, what has economic growth ever done for New Zealanders?

You might be surprised to hear that economic growth fundamentally lies behind each of these. The usual story is that these involve trade-offs with growth. In reality, economic growth is what lets us afford improvements in all of the things we find valuable.

That’s one reason that Jenesa Jerram and I wrote this short report on growth. There’s been a growing complaisance around productivity and economic growth – that if some policies come at the expense of economic growth, we do not need to worry about it too much, as a percentage point difference in economic growth rates really is not much to worry about one way or another.

We hear this every week in our opinion columns and on our current affairs programming. We saw it in some Facebook feedback on our report urging an end to growth in a finite world. We even hear it from too many parts of the government, although they won’t always be so blunt about it. But every major spending programme and regulation that is passed without a reasonable cost-benefit assessment effectively says that economic growth does not really matter that much.

What’s a percentage point of difference? Consider the period since 1970. If real per-capita economic growth rates had been one percentage point higher, we would today have higher per-capita GDP than Australia and have the fourth highest income in the OECD, rather than sitting below the median. Australian economic growth only outpaced New Zealand’s by about a third of a percentage point over the period, but over 45 years, it adds up.

Or, think about it another way. A ten percent increase in real per-capita GDP reduces the number of deaths in an earthquake by 5.3 percent: richer places can afford stronger buildings. Economic growth between now and 2034, at a 1% real growth rate, would reduce fatalities by 12%. But 63% fewer people might die under a 4% growth rate.

We should celebrate the economic growth we have had. And we should especially celebrate that, over the long term, the gains from that growth have done a lot to help not just the rich but also poorer cohorts. Incomes for the top 10% are currently about one-and-a-half times what they were in 1953, in real inflation-adjusted terms. But incomes for the bottom 90% doubled.

That isn’t to say that poverty does not still exist, but rather that it is a bit of a myth that economic growth only helps the rich. And that’s even before we start counting the access to the range of technology and improved medical services available to the poorest people in New Zealand today that not even the richest could have imagined in the 1950s.

We need to have a sense of what we are foregoing when politicians advocate policies that come at a strong cost for growth. So long as productivity continues to improve, economic growth can continue forever even in a finite world. The last 40 years have pulled billions of people out of poverty in the developing world when economic growth really spread through East Asia through to India and China. The fraction of the world living in desperate, grinding $1-a-day poverty has massively reduced – thanks to economic growth. In the long run, the single best way of helping the poor is encouraging economic growth.

Some costly policies may well be worthwhile, and as the country gets richer, we can afford to spend proportionately more on things like protecting the environment. But we also should not engage in wishful thinking about it.

The OECD’s recent report on inequality and economic growth, in my view, falls firmly into the wishful thinking camp. Their analysis claimed that inequality was harmful for growth in part because it discouraged education among the poor; they advocated education expenditures to help poorer cohorts. But when you dig into their numbers, their analysis showed no effect of education on growth; to make the case for education spending, they relied instead on other studies – studies that found inequality did not hurt growth and could instead promote it. I also favour policies better targeting education for poorer cohorts, but not because of effects on inequality statistics.

As the global economy changes and the tyranny of economic distance seems to worsen, it’s even more important that New Zealand stop its complaisance around economic growth. Many of our policies – around how we make housing needlessly expensive, around how we punish foreigners who wish to bring their capital and expertise here, and how we manage to set environmental regimes around resource use that seem neither to do much to protect the environment nor to encourage reasonable sustainable resource use – need to be re-evaluated, with strong consideration of their effects on economic growth. Growth is good; when we choose policies that come at a cost to growth, we should do it in full recognition of what that means for the future.

About Eric Crampton (88 Articles)
I'm Head of Research with the New Zealand Initiative.

1 Comment on The Case for Economic Growth

  1. You write very well, Eric Crampton.

    Like

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