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

Chapter Eighteen: The “macro” view of the economy 455 There are no doubt concerns that the tremendous economic growth in modern times has contributed to materialism, as the sheer quantity of goods (and our constant exposure to them from television and the internet) is enough to cause us to desire more than we really need. This is exactly opposite the mindset that we want to have—to be content whatever our circumstances are. Yet, economic growth (and the associated technological change) has eradicated many of the ills of this fallen world. We no longer have smallpox, and since 1990, over one billion people have been lifted out of extreme poverty! While GDP is a good general metric to evaluate how a country is doing, economists often use GDP per capita, or the amount of output that is available for each person on average, as a better measure of the well being of a nation. So, for example, while China’s GDP is arguably greater than the United States (on the basis of purchasing power), it is a much poorer country on a per capita basis. To see why this is a good measure, watch this video: Real GDP Per Capita and the Standard of Living So that we might understand why economic growth matters, consider the following representative calculations, using our formula from chapter 16 on calculating future values: FV = PV x ( 1+ i ) t Let’s assume that the rate of growth in total compensation to employees (which includes their wages and benefits) equals economic growth over longer periods of time. What would the difference look like over a generation of 40 years for a family of four in poverty as well as a new college graduate? Let’s start with a college graduate—say a business student—with a starting salary of $50K. If economic growth is 2%, his or her total compensation will rise over their working life to $110K . 1 If this new graduate advances into higher paying positions, the total will be even higher. Yet growth of 3% is far more dramatic, with a final salary of $163K! Think of the quality of life difference in just one generation with simply 1% more economic growth. Some economists think that with wise economic policies it is possible for even higher rates of growth. If we had 4% economic growth over a generation, this business student would end up making $240K! And that is with no advancement. While this is nice to think about for most of us, it is even more important for someone who is poor. In 2016, a family of four is considered below the poverty line if they make less than $24,300. What would the difference be for