No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eighteen: The “macro” view of the economy 454 of natural resources in the economy. Many policymakers argue that an increase in public spending on education will increase human capital and lead to a higher level of output. Other policymakers suggest that decreasing the welfare state will decrease the opportunity cost of going to work and thus increase the supply of labor. A consideration of the supply side naturally leads us to think about economic growth, which we’ll do in the next section. ECONOMIC GROWTH Economic growth. Is it good or bad? How much is enough? Is there ever too much growth? Why does China have such high growth, and many of the so-called Asian Tigers before it? Why do many Latin American and African countries grow much more slowly (with significant differences in growth rates within each continent)? Questions such as these abound in our public discourse and certainly have been studied by economists since the beginning of our science, as they should. Low economic growth leads to stagnating standards of living and, in the case of some third world countries, keeps people mired in poverty. Yet rapid economic growth in China has been concurrent with significant environmental costs. In mature economies, too rapid a growth rate will often (seemingly) lead to inflation, while too slow a growth rate leads to unemployment. So economists look for the “sweet spot,” or the “goldilocks” growth rate, which is neither too hot nor too cold. As a rule of thumb for the United States, a normal growth rate of ~3% is robust enough to create employment and rising standards of living. So what do we mean when we talk about economic growth? The usual way of expressing it is measuring real GDP growth, or GDP growth rates that have been adjusted for inflation. Since 1947, the U.S. real GDP growth rate has been slightly greater than 3%. While the exact number is highly dependent upon the choice of beginning and ending date, the usual secular (long run) numbers quoted range from 2-3%. As one study showed, the implications of economic growth are staggering: Between the year 1 C.E. and the year 1820, living standards in the “West” (measured with data from Western Europe and the United States) essentially doubled, from around $600 per person to around $1200 per person... Over the next 200 years, however, GDP per person rose by more than a factor of twenty, reaching $26,000. “The consequences for human welfare involved in questions like these* are simply staggering: Once one starts to think about them, it is hard to think about anything else.” * about differences in economic growth rates between countries Nobel Laureate Robert Lucas