This year has been good for the West. The alliance surprised observers with its united front against Russian aggression. While authoritarian China suffers one of its weakest periods of growth since Chairman Mao, the U.S. economy thunders on. The wave of populism in rich countries that began in 2016 with Brexit and the election of Donald Trump appears to have peaked.
However, away from the world’s attention, rich democracies face a deep, slow-burning problem: weak economic growth. In the year before covid-19, the GDP of developed economies grew by less than 2%. High-frequency measures show that the rich world’s productivity, the main source of improved living standards, is at best stagnating and possibly declining. Official forecasts show that by 2027 GDP per capita growth in an average rich country will be below 1.5% per year. In some places, such as Canada and Switzerland, the numbers will be closer to zero.
Perhaps rich countries are destined for weak growth. Many have rapidly aging populations. When labor markets are opened to women and university education is democratized, an important source of growth will be depleted. A lot of the low-hanging fruit of technology, like flush toilets, cars, and the Internet, has been plucked. However, this growth problem is solvable. Policymakers could facilitate cross-border trade and thus boost globalization. We could reform planning to enable building and reduce outrageous housing costs. We could welcome migrants to replace retirees. All these reforms would increase the growth rate.
Unfortunately, economic growth has gone out of fashion. According to our analysis of data from the Manifesto Project, which has collected information on political party manifestos for decades, countries 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 are less likely than their predecessors to extol the benefits of free markets. They are more likely to express anti-growth sentiments such as positive mentions of government control of the economy.
When politicians talk about growth, they do so in an unsophisticated way. In 1994, Gordon Brown, Britain’s shadow chancellor, referred to a “post-neoclassical theory of endogenous growth” that was derided, but at least indicated a serious engagement with the issue. Politicians such as Lyndon Johnson, Margaret Thatcher, and Ronald Reagan offered policies based on a coherent theory of the relationship between the individual and the state. The small company of GDP’s modern champions, such as Mr Trump and Liz Truss, offer little more than re-warmed Reaganism.
Apathy towards growth is not just rhetorical. Britain is hinting at a greater loss of enthusiasm. In the 1970s, the average budget contained tax reforms worth 2% of GDP. By the end of 2010, the policies had half the effect. A paper published in 2020 by Alberto Alesina, the late Harvard University economist, and his colleagues at the IMF and Georgetown University measured the importance of structural reforms (such as regulatory changes) over time. In the 1980s and 1990s, politicians in advanced economies implemented a large number that made their economies more elegant. By 2010, however, they had lost their power: the reforms practically stopped.
Our analysis of World Bank data suggests that progress has slowed even further in recent years and may even be reversed (see Figure 2). The US government will introduce 12,000 new regulations in 2021, which is more than in recent years. From 2010 to 2020, rich countries’ tariff restrictions on imports doubled. Britain voted for and carried out Brexit. Other countries have turned against immigration. In 2007, almost 6 million people migrated to rich countries via the Internet. In 2019, the number dropped to just 4 million.
Governments have also become less friendly to new construction, whether housing or infrastructure. A paper by three economists, Knut Ara Aastveit, Bruno Albuquerque and André Anundsen, notes that the “elasticity of supply” of US housing – ie. the extent to which construction is responding to higher demand – has declined since the housing boom of 2000. This is likely to be a reflection of tighter land-use policies and stronger nimbys. Housing construction across the rich world is about two-thirds of its level in that decade.
Politicians prefer to waste the proceeds of existing growth. Governments spend much more on social welfare such as pensions and especially health care. According to the Congressional Budget Office, in 1979 the bottom fifth of American recipients received means-tested transfers worth less than a third of their pretax income. By 2018, the figure was more than two-thirds. According to a 2019 report, health spending per person in the OECD will grow at an average annual rate of 3%, reaching 10% of GDP by 2030, up from 9% in 2018.
Politics is increasingly an arms race with promises of more money for health and social protection. “Thirty or 40 years ago, it was taken for granted that the elderly were not good candidates for organ transplants, dialysis, or advanced surgical procedures,” wrote Daniel Callahan, an ethicist. “That has changed.” Greater wealth made this possible. But politicians rarely ask whether an extra health care dollar is the best use of cash. Britons in their 90s receive health and social care that costs the country about £15,000 ($17,000) a year, about half of Britain’s GDP per person. Do budgets have to increase year on year to meet growing demand, even though the cost of providing that care is likely to increase as well? If so, where is the limit?
People may see spending on health care and pensions as a given. But it comes with disadvantages. More people are working in a field where it is difficult to achieve an increase in productivity and thus an improvement in the general standard of living. Fully able-bodied older people give up work in order to receive a pension. Higher taxes or cuts elsewhere are needed to finance this. Since the early 1980s, OECD government spending on R&D as a share of GDP has fallen by about a third.
Much of the additional spending comes in times of crisis. Politicians are increasingly concerned with preventing bad things from happening to people, or making amends for them when they do. A massive system of credit guarantees, eviction moratoriums and debt forgiveness introduced during the pandemic has stopped bankruptcies and defaults. It was radical, but also the thin end of the wedge.
In America, for example, the federal government has taken on huge contingent liabilities. It provides an ever-increasing amount of people’s bank deposits; forgives student loans; offers a wide range of implicit and explicit safeguards for everything from airports to highways. We previously estimated that Uncle Sam is on the hook for liabilities worth more than six times US GDP. European governments have failed this year to offer financial support to households and businesses amid the continent’s energy crisis. Even Germany, usually the most disciplined spender in Europe, has set aside 7% of GDP for this purpose.
No one is happy when a business fails or someone falls into poverty. But the bailout state makes economies less flexible, which ultimately limits growth by preventing the diversion of resources from unproductive to productive uses. There is already evidence that the fiscal aid distributed during the pandemic has created more “zombie” companies – those that are viable businesses but generate little economic value. Large implicit government liabilities also mean higher spending in times of trouble, which reinforces the trend towards higher taxation.
Why has the West turned away from growth? One possible answer relates to the aging of the population. People who are not working or near the end of their working life tend to be less interested in getting rich. They will support things that directly benefit them, such as health care, and oppose those that only benefit them after they leave, such as immigration or housing. Their voter turnout is usually high, so their views carry weight.
However, the population of the West has been aging for decades, even in the reformist 1980s and 1990s. Thus, changing the environment in which policy is made can play an important role. Before social media and 24-hour news, it was easier to implement difficult reforms. Political losers—say, a company exposed to greater competition from abroad—often had no choice but to suffer in silence. In 1936, Franklin Roosevelt, speaking of the opponents of his New Deal, felt that he could “welcome” the hatred of his opponents. Victims now have several ways to appeal. As a result, policymakers have a greater incentive to limit the number of people who lose out, resulting in what Ben Ansell of the University of Oxford calls a “state decision by committee.”
The high level of debt has also limited the room for maneuver for policymakers. In the g7 group of rich and powerful countries, private debt has increased by the equivalent of 30 percentage points of GDP since 2000. Even small declines in cash flow could make debt servicing more difficult. This means that politicians intervene quickly when things go wrong. They focus on keeping the show going—to avoid a repeat of the 2007-2009 financial crisis—rather than accepting today’s pain as the price of a brighter future.
What would push the West in a new direction is not clear. Apart from the failed attempts by Mr Trump and Mrs Truss, there is no sign of movement yet. Would another financial crisis do the job? Will change have to wait until the baby boomers are gone? Whatever the answer, until growth accelerates, Western policymakers must hope that their enemies will continue to make mistakes.
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From The Economist, published under license. Original content can be found at https://www.economist.com/finance-and-economics/2022/12/11/how-the-west-fell-out-of-love-with-economic-growth