This year was good for the West. The alliance has surprised observers with its united front against Russian aggression. As authoritarian China experiences one of its weakest growth periods since Chairman Mao, the American economy keeps roaring. A wave of populism in rich countries that began in 2016 with Brexit and the election of Donald Trump appears to have peaked.
But beyond the world’s attention, rich democracies face a deep-seated, slow-burning problem: weak economic growth. Advanced economies in the year leading up to Covid-19 bip increased by less than 2%. High-frequency measurements suggest that rich-world productivity, the ultimate source of improved living standards, is at best stagnant and possibly declining. Official forecasts assume that by 2027 per person bip Growth in the average wealthy country will be less than 1.5% per year. Some places, like Canada and Switzerland, will see numbers closer to zero.
Perhaps rich countries are destined for weak growth. Many have rapidly aging populations. Once labor markets are opened to women and higher education is democratized, a major source of growth will be exhausted. Lots of low-hanging technological fruits, like the flush toilet, cars, and the internet, was plucked. However, this growth problem is surmountable. The policy could facilitate cross-border trade and boost globalization. They could reform planning to allow building and reduce outrageous housing costs. They could welcome migrants to replace retired workers. All these reforms would increase the growth rate.
growing pains
Unfortunately, economic growth has gone out of fashion. According to our analysis of data from the Manifesto Project, which has been collecting information on political party manifestos for decades, these are in the OECD, a group of mostly rich countries, are about half as focused on growth as they were in the 1980s (see chart 1). Modern politicians, for example, are less exalted than their predecessors about the benefits of free markets. They tend to express anti-growth moods, e.g. B. Positive mentions of government control of the economy.
When politicians talk about growth, they do so in an uncultured way. In 1994, a reference to the “post-neoclassical theory of endogenous growth” by Gordon Brown, Britain’s shadow chancellor, was derided, but it at least suggested a serious engagement with the issue. Politicians such as Lyndon Johnson, Margaret Thatcher, and Ronald Reagan offered politics based on a coherent theory of the relationship between the individual and the state. bipThe small clique of modern champions like Mr. Trump and Liz Truss offer little more than rehashed Reaganism.
Apathy towards growth is not just rhetorical. Britain hints at major loss of zeal. In the 1970s, the average budget included 2% worth of tax reforms bip. By the late 2010s, politics had only half as much impact. A 2020 paper by Alberto Alesina, a late Harvard University economist, and colleagues at the IMF and Georgetown University has measured the importance of structural reforms (e.g. changes in regulations) over time. In the 1980s and 1990s, policymakers in advanced economies implemented large numbers and leaned their economies. By the 2010s, however, they had lost momentum: reforms virtually ground to a halt.
Our analysis of World Bank data suggests that progress has slowed even further in recent years and may even have reversed (see Chart 2). The US government introduced 12,000 new regulations in 2021, an increase over the past few years. From 2010 to 2020, rich countries’ import tariffs doubled. Britain voted for and implemented Brexit. Other countries have turned against immigration. In 2007, almost 6 million people emigrated net to rich countries. In 2019, the number had dropped to just 4 million.
Governments have also become less friendly towards new construction, be it in housing or infrastructure. An article by Knut Are Aastveit, Bruno Albuquerque, and André Anundsen, three economists, finds that US housing construction’s “supply elasticities” — that is, the extent to which construction responds to higher demand — have fallen since the housing boom of the 2000s . This likely reflects stricter and stronger land use policies nimbles. Housing construction in the rich world is about two-thirds of its level this decade.
Politicians prefer to flaunt the proceeds of existing growth. Governments spend much more on welfare, such as pensions and health care in particular. In 1979, according to the Congressional Budget Office, the bottom fifth of American earners received means-tested transfers of less than a third of their pre-tax income. In 2018 it was more than two thirds. According to a 2019 report, health spending per person was in the OECD will grow at a compound annual rate of 3% and reach 10% bip by 2030, up from 9% in 2018.
Politics is increasingly becoming an arms race, with promises of more money for health care and social security. “Thirty or forty years ago, it was taken for granted that older people were not good candidates for organ transplants, dialysis, or advanced surgery,” wrote ethicist Daniel Callahan. “That has changed.” Greater wealth has made this possible. But politicians rarely ask if an extra dollar for health care is the best use of cash. Brits in their 90s receive health and social care, which costs the country about £15,000 ($17,000) a year, about half that of Britain bip per person. Do budgets have to increase year after year to meet growing demand, even though the cost of providing that care is likely to increase as well? If yes, where is the limit?
People may take spending on health care and pensions for granted. But it comes with downsides. More people are working in an area where increases in productivity and hence improvements in the general standard of living are difficult to achieve. Perfectly fit older people drop out of the workforce to receive a pension. Funding this will require higher taxes or cuts elsewhere. Since the early 1980s, government spending on the OECD on research and development, as a share of biphas fallen by about a third.
Much of the additional spending occurs in times of crisis. Politicians are increasingly trying to prevent bad things from happening or to compensate for them when they do happen. The massive system of loan guarantees, moratoria on evictions and debt forgiveness introduced during the pandemic brought bankruptcies and defaults to a halt. That was radical, but also the thin end of the wedge.
In America, for example, the federal government has taken on huge contingent liabilities. It guarantees an ever-increasing amount of people’s bank deposits; it issues student loans; It offers a variety of implicit and explicit backstops for everything from airports to highways. We have previously estimated that Uncle Sam is on the hook for liabilities more than six times America’s bip. This year, European governments have rushed to offer financial support to households and businesses during the continent’s energy crisis. Even Germany, usually Europe’s most disciplined donor, has provided 7% worth of funding bip for this purpose.
No one cheers when a company goes bust or someone falls into poverty. But the bailout state makes economies less adaptable and ultimately constrains growth by preventing resources from being shifted from unproductive to productive purposes. There is already evidence that tax aid provided during the pandemic has produced more “zombie” companies – those that work but create little economic value. Governments’ huge implicit liabilities also mean higher spending in tough times, fueling the trend towards higher taxes.
gray power
Why has the West turned away from growth? One possible answer relates to the aging of the population. People who aren’t working or nearing the end of their working lives tend to be less interested in getting richer. They will support things that benefit them directly, like health care, but reject those that only benefit them after they leave, like immigration or housing. Their turnout is usually high, so their views carry weight.
But Western populations have been aging for decades, including during the reformist 1980s and 1990s. Therefore, the changing environment in which policy is made can play a role. Before social media and rolling 24-hour news, it was easier to implement tough reforms. A policy’s losers—say, a company that faces increased foreign competition—often had no choice but to suffer in silence. In 1936, speaking about the opponents of his New Deal, Franklin Roosevelt felt able to “welcome” the hatred of his opponents. Victims now have more opportunities to complain. As a result, policymakers have more incentive to limit the number of losers, leading to what Ben Ansell of Oxford University calls a “national decision by committee”.
The high level of debt has also limited the political room for manoeuvre. On the GIn group 7 of the rich, powerful countries, private debt has risen by the equivalent of 30 percentage points bip since 2000. Even small declines in cash flows could make debt servicing more difficult. This means politicians are quick to intervene when things go wrong. Her focus is on keeping the show going and avoiding a repeat of the 2007-09 financial crisis, rather than accepting pain today as the price of a better tomorrow.
What would propel the West in a new direction is unclear. Aside from the misguided attempts by Mr Trump and Ms Truss, there is no sign of a postponement just yet. Would another financial crisis be enough? Will change have to wait until the baby boomers are gone? Whatever the answer, until growth accelerates, Western politicians must hope their enemies continue to make mistakes. ■
