Growth: Why Economists Worry About It So Much, and Why You Should Too

1. Growth I – Why Economists Worry About It So Much, and Why You Should Too CEPR Basic Economics Seminar Dean BakerSeptember 22, 2005

2. Growth: Why Economists Worry About It So Much, and Why You Should Too • Definitions: What Gets Counted, What Doesn’t • The links between growth, jobs, productivity, and wages • Europe v. the United States, more leisure, less growth • Growth and regulations and public spending

3. What is growth? The mysteries of gross domestic product (GDP) • Definition of GDP – all marketed goods and services Major categories: • Consumption – cars, rent, medical care, restaurants, college tuition, daycare, etc. • Investment – spending on new plant, equipment, software, housing • Government spending –direct spending (i.e., not transfers like food stamps or TANF) on goods and services (e.g., defense spending, education spending, road construction) • Net exports – exported goods and services minus imports (note: imports cost jobs the same way exports create jobs)

4. Source: BEA, NIPA Table 1.1.6

5. Definition of GDP • What is missed by GDP • If we switch from providing goods or services for ourselves to buying them in the market, this raises GDP (e.g., daycare, domestic workers). • GDP does not include any subtractions for items that are harmful, such as crime, pollution, or environmental degradation (e.g., building a highway along a beautiful river.) It is not a comprehensive measure of well-being and is not intended to be.

6. The Link Between Growth, Jobs, Productivity, and Wages • Growth and Jobs – More Growth, More Jobs • Other things equal, the faster the economy grows, the more jobs it creates.

7. Sources: BEA, NIPA Table 1.1.6 and BLS, Current Employment Situation

8. Source: BLS, Productivity and Costs and Current Employment Situation

9. The Vicious Cycle 2000-2005 • Productivity growth has not translated into wage growth largely due to a weak labor market. In the absence of wage growth, consumption growth has been driven by tax cuts and household debt.

10. Sources: BEA, NIPA Tables 1.1.5 and 1.10 and Federal Reserve, Flow of Funds Accounts

11. Europe vs. the U.S. More leisure, less income

12. Source: OECD National Accounts

13. Source: Analysis of the Groningen Growth and Development Centre and the Conference Board

14. Source: Analysis of the Groningen Growth and Development Centre and the Conference Board

15. Factors Determining Growth in Standard Models • Standard models assume that market outcomes almost always maximize efficiency. This means that: • Higher taxes will almost always mean less growth and fewer jobs. • Higher government spending will almost always mean less growth and fewer jobs. • Trade barriers will almost always mean less growth and fewer jobs. • Government regulations (e.g., environmental regulations) will almost always mean less growth and fewer jobs.

16. Factors Determining Growth in Standard Models • Job loss in these models means that workers opt not to work because the wage is too low – not unemployment as most of us might think of it. • In economic models, workers always decide whether they prefer labor or leisure (working or not working) at the prevailing wage.

17. Factors Determining Growth in Standard Models • If government intervention lowers the prevailing wage by 1 percent (e.g., from $10.00 to $9.90) then some number of workers who would have worked for $10.00 an hour opt for leisure at $9.90 an hour. • Defense spending, like other forms of government intervention, also makes the economy less efficient and therefore also costs jobs in standard models.

18. Conclusions • In general, more growth is better. • Economic growth is not a comprehensive measure of well-being. • The difference in economic output between Europe and the U.S. is primarily due to more leisure in Europe, not a less productive economy. • It is reasonable to advocate policies that promote ends other than growth (e.g., a cleaner environment.) Conservatives do it all the time.

19. Reading List • Baker, D. 2001. “Hot Air Over the Arctic:An Assessment of the WEFA Study of the Economic Impact of Oil Drilling in the Arctic National Wildlife Refuge,”Washington, D.C: Center for Economic and Policy Research [http://www.cepr.net/publications/anwr_2001_09.htm]. • Goodstein, E. 1999. The Trade-Off Myth: Fact and Fiction About Jobs and the Environment. Washington, D.C: Island Press.

20. Growth I – Why Economists Worry About It So Much, and Why You Should TooDean Bakerbaker@cepr.netCenter for Economic and Policy Researchwww.cepr.net