What Is “Economic Growth”

I’m not sure that George Melloan has thought his recent remarks in an op-ed decrying “monetary stimulus” in the Wall Street Journal through completely:

After the 2009 slump, economic growth from 2010-17 averaged 2.2%, well below the 3% historical average, despite the Fed’s drastic measures.

Low interest rates certainly stimulate borrowing, but that isn’t the same as economic growth. Indeed it can often restrain growth. The national debt doubled during the Obama years and now stands at more than $22 trillion. Congress got the idea that credit somehow comes free of charge. So now the likes of Elizabeth Warren and Bernie Sanders think there is no limit to how much Uncle Sam can borrow.

Easy money not only expands debt-service costs but also encourages malinvestment. Hence America’s productivity growth rate has averaged only 1.3% since the recovery began, until its leap to 3.4% in the first quarter of this year on a resurgence of business confidence and productive investment.

The emphasis is mine. I agree with the assertion that borrowing or, indeed, credit expansion is not synonymous with economic growth and the reason (“encourages malinvestment”) is deadweight loss. That, too, is the reason I’m skeptical about infrastructure spending, defined as building roads and bridges. Some of it is investment, some is just throwing money into a hole. The exigencies of politics result in some of each but the balance between them is important. IMO nowadays we’re throwing far too much money into holes. Heroic measures to preserve a few weeks of additional vegetative life for the elderly? More people with degrees in journalism, art history, or interest studies? Throwing money into a hole. A better electrical grid is worthwhile infrastructure investment and it’s not something that private enterprise will do on its own. How do I know that? Because that’s not the direction in which the incentives point. But the electrical grid never appears on the list of infrastructure projects, possibly because no politician ever put her or her name on the electrical grid.

IMO the lowest hanging fruit for economic growth is to stop subsidizing people who don’t need subsidies and behaviors we don’t want to encourage but every subsidy has its political constituency.

Howsomever, if borrowing isn’t economic growth, what is economic growth?

2 comments… add one
  • steve Link

    “what is economic growth?”

    Seems like the kind of thing you could write books about, then argue over it for eternity. However you want to define it I would just like it to take into account a couple of things. It should account for both job AND wage growth, and how equally that growth is spread. Trickle down doesn’t really trickle down. I think there should also be some way to factor in growth that is being deficit financed.

    Putting on the partisan hat for a moment, this guy is complaining because Warren and Sanders might increase deficit spending IF they get elected, but not a word about Trump’s tax cut which has increased it already. How meaningful is economic activity that is deficit based and there is no indication of intention to pay it back? Next, Obama doubled the debt? Reagan tripled it. Let’s learn to talk with meaningful numbers. Fed’s drastic measures? Trump is pushing the Fed to reinstitute some of those drastic measures, at a time when we supposedly have the best economy ever. Oddly, I see no comment upon that.


  • Trickle down doesn’t really trickle down.

    If you can’t bear to allow risk-takers to suffer consequences from bad bets, that’s what happens.

    Let me answer my own question. All growth is based on borrowing. Future consumption is reduced to increase today’s consumption. Sometimes that’s a good bet and sometimes it isn’t. It depends on circumstances, both present circumstances and future circumstances.

    One of the reasons that growth is slow now is because there was too much consumption in the past. If future growth is expected to be even slower than today’s it’s not only self-destructive but sadistic to borrow from it to goose today’s growth however benign your motives.

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