Where We Are and Could Be

Early in the book, Cowen points to a poll conducted by Russ Roberts. He asked journalists how much economic growth there’s been since 1900. The majority said standards of living increased by 50%, while the reality is that (estimated conservatively) US standard of living has increased by a factor of 5 to 7.

Some quick facts from the 1900 United States Census Bureau drive home this reality:

• 95% of US households had 1+ occupants per room, and 23% had 3.5 persons per sleeping room
• 24% of US households had running water, 18% had refrigerators, 12% had gas/electric lighting
• 5% of US households had telephones, none had TV or radio

Today we take for granted that all of these statistics are now over 99%. It’s clear how much more well off we are as consumers. What isn’t captured here is how strenuous jobs were, how poor medical care was, and how little time people had to do what they wished. (These untypical economic measures constitute the “plus” part of the “Wealth Plus” measure that Cowen talks about).

So how did we get to where we are today? Here’s a plot of US growth rates since 1929 (the gdp figures are in billions of chained 2012 dollars):

With some notable dips (in 1932, 1946, and most recently in 2009) the US economy has seen steady positive growth, hovering at 3% YoY growth on average. So…is this good? What if it had been higher? While a single year’s growth may make a small difference, if slow growth continues over a long span of time then there are serious consequences for wellbeing. Cowen claims: “redo U.S. history, but assume the country’s economy had grown one percentage point less each year between 1870 and 1990. In that scenario, the United States of 1990 would be no richer than the Mexico of 1990.” It’s revealing to compare hypotheticals, and to see how much worse off — and also how much better off — we could be at different rates of growth:

What’s striking to me is how much wealthier our economy would be at 5% average annual growth. Our economy would be nearly 4.5 times as big as it is now! What our lives would look now had the economy grown at this rate is hard to envision, given how much the average American life changed since 1929 at our current growth rate. What is easier to envision, however, is how long it would actually take to 3x the size of our economy at different rates of growth:

It is easier now to understand why our GDP would be so much higher at a 5% hypothetical growth rate compared to what it is now. At a 5% growth rate, we would 3x the size of our economy in under 25 years! In contrast, at 2% growth it would take just over 50 years, while at a 1% growth rate it would take over 100 years.

Real Growth Rates, High and Low

While it is enlightening to look at various hypothetical growth rates, it’s equally illuminating to look at different countries’ economies and what kind of story their growth rates reveal. It’s of course tough to compare economies at different stages in their development. A developing economy like India is going to have much more tumultuous rates of growth than a developed economy like Japan. As economies modernize, it becomes harder to maintain the high rates of growth of a country who is just starting down their road to development. Still, it’s interesting to make comparisons to economies that are roughly at the same stage. Here I plot a graph of high-growth nations since 2000, and compare them to the American growth rate in red:

These three countries’ growth rates exhibit all of the turbulence we would expect from developing economies. Many would argue Ethiopia is farther behind the path to development than these other countries, but I wanted to choose an African country that epitomizes the impact of a high growth rate. While we see some precipitous dips (i.e. Ethiopia in 2010), across the board we see unprecedented growth in these countries. If we consider the impact of 5% growth on living standards in our hypothetical example earlier, we begin to understand the astonishing impact of growth that is occurring right now in these nations.

For comparison, I also plotted US growth. Of course, it makes little sense to compare US growth to these economies, given that the US is much farther along in its economic development. It is illuminating, however, to compare US growth to other economically developed nations:

We quickly see a different growth story for these nations. As I mentioned earlier, the historic US growth rate has hovered at 3%. However, these countries emphasize the fact that we cannot take economic growth in the developed world for granted. Especially in the decade following the financial collapse, the British, French, and Japanese economies have exhibited declines in their growth rates, in contrast to the United States economy which has resumed modest growth levels after 2009. While the 5% growth level in the hypothetical scenario—brought to life by countries like India, China, and Ethiopia—captivates us in terms of its potential for the quality of human life in those nations, the specter of 1% growth level—suggested by the countries in the graph above—should haunt developed nations and compel them not to sit on their laurels.

I’d like to paint one more picture of growth. After introducing his “Principle of Growth”, which is that we should maximize our rate of sustainable growth, Cowen asserts that this principle was unquestionably applied once in human history: during the East Asian economic miracles. In no small words, Cowen states that the economic successes of these countries represent “the highest manifestation of the ethical good in human history to date.” Here is a look at four countries that embody this miracle:

While their histories and economic trajectories are unique, these countries underwent an unprecedented transformation in living standards in a roughly 40 year span. These countries stand today among the most developed and economically vibrant nations in the world, and are for many true symbols of the power of economic growth and its capacity to bring prosperity to society.