The Case for Optimism in the New Year: Still Standing on the Shoulders of our ForebearsPosted: January 3, 2013 Filed under: Columns, Economic Growth and Productivity, Taxes and Budget 2 Comments »
With all the silliness going on in Washington these days, and with recovery from recession slow here and halting in many other developed nations, we could easily adopt a pessimistic attitude that obscures the prospects lying right at our feet. At the beginning of a new year, I think we instead need to pause and reflect on our graces and blessings, even as we confront the obstacles we have placed in the way of realizing our potential.
First, let’s not translate politicians’ largely self-imposed requirement to make some tough economic choices into the false premise that we lack resources to do anything new, much less better. Are we poor? Hardly. We’re richer than almost any country anywhere and anytime. If we’re growing more slowly than we expect, that only means we’re getting richer more moderately. With average gross domestic product per household now exceeding $125,000, we can easily get misled by focusing on gloomy statistics that exclude or don’t count for improvements.
Here are some among the many pieces of evidence that we often ignore: the ever-better health care that we receive annually through almost any insurance plan, whether employer- or government-provided; the steady increase in life expectancy; and the improvement in the quality of our computers, telecommunications, automobiles, and other durable goods.
Is the public sector in decline? Well, it might be dysfunctional, and it might not be growing as fast as it did in recent decades, but consider: federal and state government spending, including tax subsidies, exceeds $50,000 per household. That amount is greater than the average real income of households from all sources, public and private, in the early 1960s. Transfer programs are more than 50 percent larger than when Ronald Reagan became president. Look closely at every proposed budget, Democratic or Republican, and you will see that they project incomes will increase by about 30 percent—or $5 trillion in today’s dollars—in about a decade. Meanwhile, government spending and revenues will grow by a similar share, perhaps a bit less under one political party than the other. (I hesitate to say that it will grow more slowly under Republicans, since history often belies that conventional wisdom.)
Compare what is required to get the budget in order with what economic growth normally makes possible. Want to reduce budget deficits by, say, 5 percentage points of GDP or about $1 trillion annually in another decade? That’s just a fraction of the rise in incomes that we expect and hope to achieve, yet it’s far more than either political party has come close to suggesting, and probably more than necessary. To top it off, deficit reduction does not mean reduced wealth any more than paying off a credit card does. It merely means that we accept paying more of our bills now rather than passing the liabilities onto our children.
Why the optimism surrounding economic growth? We stand on the shoulders of those who have gone before us. They passed onto us all their knowledge and left us with a country rich in citizens and communities, institutions and inventions, rights and resources. We have a long-established history of entrepreneurial ingenuity; a flexible labor force; the world’s most thriving set of charities, associations, and universities; and, for all our petty bickering, a people united by belief in our republic, and not, as in so many countries, divided by clan or tribe or religion. Even our barriers of race and gender have been falling away, much to the benefit of everyone, not just those who suffer from discrimination.
Not that countries can’t go into decline. Argentina early in the 20th century, Bosnia more recently, and Yemen today provide warnings. The overpromised political systems of Japan, Western Europe, and the United States provide new threats, as does population and labor force decline in some countries. The young are falling behind previous generations in their accumulation of wealth, many people of color have stopped catching up as they did in the past, and our educational systems are showing few gains. Too unequal a distribution of income and wealth also threatens growth for both social and economic reasons (on which I will elaborate little here other than to note how much modern growth everywhere has been correlated with a thriving middle class).
Yes, all these problems threaten us at a time when our political institutions appear to have languished and gone into decline. Yet, even that problem, I believe, reflects a search for a fundamental government transformation that has occurred only a few times in our vibrant, yet still young and ever-challenging, democratic experiment.
At the beginning of another year, therefore, let’s resolve to recognize within our challenges the extraordinary opportunities we, too, possess for bequeathing a better world to our children.
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As you mention, inequality is too high. While some transfers happen below the surface (such as charitable provision of hospital services), a more direct transfer of purchasing power to families with children could do a lot of good in increasing equality, as would a move toward more employee ownership of capital. Indeed, with automation there will eventually be too few purchasers to with money to buy all that is produced unless some kind of shared ownership society on a fairly worldwide basis is created.