The degrowth movement, which had a moment a few years ago, is over -- and not a moment too soon. As nations in Europe and North America face mounting debt and aging populations, politicians are again talking about how to increase economic growth.
There’s only one problem: No one is advocating policies that will actually work. Doing that would require embracing change, which is the last thing any politician beholden to populism wants to do.
The best recent illustration is former President Donald Trump’s interview last week with Bloomberg News Editor-in-Chief John Micklethwait. Trump argued that there was no need to worry about the debt created by his spending and tax-cutting plans because economic growth would bring in more government revenue. At the center of his plan are very large tariffs, which he argued would increase growth by encouraging more companies to produce goods in the US.
Most economists are skeptical. In general, tariffs cost consumers money and have a poor track record of boosting growth. Trump’s tariffs would be no different.
Even if his tariffs managed to bring manufacturing back to the Midwest -- a big if -- they would not increase growth, which comes from three sources: capital, labor and productivity. It is tempting to look at China’s growth of the last few decades, buoyed by its manufacturing industry, and conclude that America could get Chinese growth rates if the US made more things. But the Chinese economy grew so fast because it was so poor to begin with. Only a few decades ago, it was a barely industrialized economy with a mostly unskilled labor force. Simply adding capital to its economy created many manufacturing jobs that were more productive than the ones its population previously had -- agricultural work in rural areas.
As the Chinese government is now seeing, this strategy works for only so long. After a while, the benefit of adding more capital diminishes, workers stop becoming more productive, and growth slows.
The US economy reached this stage of development decades ago.
It is unclear what kinds of manufacturing jobs Trump would like to see return to the US. Vice presidential nominee JD Vance has suggested the US could use more toaster factories, which would mean more low-skilled, labor-intensive manufacturing jobs. And that could boost growth, but only under certain circumstances -- say, if most workers were currently doing something less productive, such as 19th-century agricultural work.
Meanwhile, US unemployment is already low, so there is no glut of labor looking for low-skilled manufacturing jobs. Vance would probably argue that unemployment does not tell the whole story, because the male prime-age labor force participation rate is down, and getting more men to work would help growth. He is right that men dropping out of the labor force is a serious economic and social problem. But it is not clear that this is happening because there are no jobs. And reviving the economy of the 1960s would only bring the US back to 1960s gross domestic product.
So what will make an economy grow? When a country is as developed as the US or many European nations, there are only two things: more people and better productivity.
The first is unlikely in this political climate. On the second, the challenge is how to create conditions to allow innovation to flourish, since innovations result in a more productive economy. The US has historically grown faster than other rich nations for several reasons: deep capital markets, more spending on research and development, a more fluid labor market -- and an exceptional ability to innovate and adapt.
There is some debate about how directly involved in innovation the government should be. The role of the private sector, which relies on market prices and the rewards from taking risks, is critical to developing innovations, bringing them to market and spreading them through the economy. The government can facilitate market innovations by offering tax credits, say, or just getting out of the way by reducing regulations.
This year’s Nobel Memorial Prize in Economic Sciences was awarded for work on why some countries grow faster than others. The work was mostly about developing countries, but it is also instructive for developed countries.
In both cases, institutions can encourage growth in the private sector and facilitate an economy that can better adapt to change -- by promoting more flexible labor markets, for example, and bankruptcy laws that don’t punish failure too harshly. Another factor is culture, namely an openness to change and risk. Canada has institutions as good as America’s, but it grows at a slower rate because it tends to be more risk-averse.
The populist surge in America, with its desire to either return to the past or slow down the change of the present, is what threatens America’s future growth. Trump’s tariff plan rejects what has made the US economy successful. Economic growth comes from embracing the future.
Allison Schrager
Allison Schrager is a Bloomberg Opinion columnist covering economics. The views expressed here are the writer‘s own. -- Ed.
(Tribune Content Agency)
