Is low economic growth a sign of success?
Jan 23rd 2020Fully Grown: Why a Stagnant Economy is a Sign of Success. By Dietrich Vollrath. University of Chicago Press; 296 pages; $27.50 and £20.BETWEEN 1950 and 2000, GDP per person in America grew at an average annual rate of 2.3%. In 2000-18 that pace fell by roughly half. Often this slowdown—also seen in other rich countries—is taken as a sign that economic policy has failed, and that policymakers must inject stimulus or somehow restore capitalism’s lost dynamism. But for Dietrich Vollrath of the University of Houston, low growth is reason for cheer. In a new book he argues that America’s growth has slowed because so much in the economy has gone so well.A big chunk of America’s economic advance in the 20th century was driven by improvements in “human capital”, the size and the skills of the workforce. In 1910 only a tenth of Americans completed high school; by the 1970s four-fifths were graduating. Many more now go on to college. A baby boom after 1945 increased the workforce; women piled into paid work in the 1970s and 1980s. All this added nearly a percentage point to annual per-capita GDP growth from 1950-2000. Since then, however, human capital has shrunk, reducing growth by 0.2 percentage points a year. It is the chief culprit behind the slowdown.Human capital started shrinking, Mr Vollrath shows, for two main reasons. First, more people retired as the population aged. Second, the average level of education stopped rising quickly. Younger Americans entering the workforce are still more educated on average. But an ageing population means there are fewer of them to replace less-educated older workers.These trends, he argues, are both linked to something good: women are choosing to have fewer children. That in turn reflects the fact that they are richer and have more control over their fertility. True, more babies would have meant more well-educated workers. But to lament demographic drag is to care more about GDP than about women’s welfare.Neither physical nor human capital explains the rest of the growth slowdown. It comes from what economists call “total factor productivity” (TFP). Slowing TFP growth is often taken as a sign that technological progress has dried up. Mr Vollrath suggests another cause: economic activity has shifted towards service industries, where productivity gains are harder to achieve. Though growth-inhibiting, this is a good thing. People buy more services as they get richer.What of the various other unwelcome forces often thought to be dragging the economy down? Mr Vollrath is unconvinced. The rising market power of some firms may have reduced investment, but investment does not explain much of the growth deceleration, and corporate concentration may even have boosted productivity. Restrictive planning rules prevent people from moving house, and so from taking more productive jobs. Though that weighs on GDP, it cannot explain such a prolonged growth slowdown. Economics has “no definitive finding” about the effect of inequality on growth. And so on.Mr Vollrath backs his case with plenty of references to recent important economic papers. Impressively, the book remains digestible. The author’s number-crunching is formidable; good luck to anyone who takes issue with his forensic accounting. Yet it is not a reason to be complacent. Mr Vollrath pins much of his argument on the improvement in women’s welfare. Why then do surveys find that women became unhappier in the final decades of the 20th century? Oligopolies and regulatory capture may not affect overall GDP, but they could still worsen Americans’ welfare by making the economy unfair, or, say, by intruding on their privacy.Mr Vollrath has not established some hitherto unknown cause for cheer; ageing and the shift to services are forces long familiar to economists. But his triumph is in showing the degree to which these make economic growth an unreliable measure of success. Attempting to capture progress in a single number is a fool’s errand. ■This article appeared in the Finance and economics section of the print edition under the headline “Slower is better”Reuse this contentThe Trust Project