When it comes to what ails the economy, there is a miracle cure. Its called growth.
For the last 50 years real income per person in the United States has grown at a rate of about 2.3% per year. That may not sound like such a big deal, but it adds up year after year. So much so that real incomes will actually double every 31 years.
If we think of the average year for childbirth as close to 31, then income will double for every generation.
Lets assume youre in an average-income family earning about $50,000 a year. If your children also earn an average income, by the time they grow up and reach your age theyll be earning $100,000 a yearin current dollars.
If your grandchildren follow the same trajectory, by the time they reach your age theyll be earning $200,000. Thats what Barack Obama calls rich. Your great-grandchildren will earn $400,000which is enough to put them in the top 1% of the income distribution, were they alive today!
Provided our descendants dont do dumb things and stop this miracle from continuing to produce its bounty, the future just gets better and better.
As economist Steven Landsburg has noted:
If that 2.3% growth rate continues, then in fewer than 400 years, your descendants will earn about $1 million per daya little less than Bill Gates current income, but at least in the ballpark. I want to make clear that these are not some future inflation-ravaged dollars were talking about; theyre the equivalent of a million of todays dollars.
What about poverty? If we roughly define the poverty level as a family with 50% of the average income, then the level for the great-grandchildren of todays poor will be $200,000. In other words, if tomorrows poor have a poverty-level income, theyll be rich. And, of course, 400 years from now theyll be fabulously wealthy.
Now heres something that may surprise you: The economic growth that you and I take for granted is in fact very rare. For almost all human history, there was no growth at all.
Landsburg traces the beginning of the modern human race back about 100,000 years. If thats right, mankind was living at the subsistence level for 99,800 of those years.
People in the Middle Ages were living no better than people at the time of ancient Rome. And people in Roman times were living no better than people living 10,000 years earlierbefore the Agricultural Revolution.
Civilizations rose and fell, and there was war, technological innovation and even international trade. Yet, through it all, the average person lived on a little better than the equivalent of $1 a day. If they were lucky, they might have had $2 a day. And if they were really lucky they might have had as much as $3 a day.
But thats about itunless you were a king or a queen, and even then you didnt have much by modern standards.
Then, Landsburg writes, in the late 18th centuryjust a couple of hundred years ago, maybe 10 generationssomething happened. People started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three-quarters of a percent per year.
A couple of decades later, the same thing was happening around the world. After thousands of years of stagnation, life started improving from one year to the next. And before long, people started taking improvements for granted.
Today, we expect our cars, our computers, our medicines and our entertainment systems to keep dazzling us with something new. But thats not how it was before the Industrial Revolution. That three-quarters of a percent annual growth rate, once it got underway, must have seemed miraculous.
But it got better. By the 20th century, per capita real incomesthat is, incomes adjusted for inflationwere growing by 1.5% per year, on average, and since 1960 theyve been growing by the 2.3% mentioned earlier.
Unfortunately, economic growth has not reached everyone. About 1 billion people in the world still live on $1 a day. Another billion live on $2 a day. Roughly one-third of all the people on the planet are living no better than their ancestors lived for millennia.
Heres another surprise: Given what we know, youd think that economists, politicians and almost everybody in the public-policy community would be spending every waking minute thinking about:
1. What causes growth?
2. What makes growth rates higher rather than lower?
3. What can we do to encourage growth and make sure it continues?
But in fact, politicians rarely mention the subject, and neither does the public-policy community. As for economists, interest in economic growth has been anemic.
True, Adam Smith wrote an entire book, An Inquiry Into the Nature and Cause of the Wealth of Nations, that had much to say about the value of free markets and the cost of unwise regulation.
But he never gave a satisfactory explanation why some nations grow and others do not. Neither has anyone else.
I think culture has a lot to do with it. But that, of course, is an abominable idea on most college campuses.
What little economists do know about growth has been summarized by John Hood, president of the John Locke Foundation, who has reviewed 528 economic studies published from 1992 to 2013. Of these, 112 focused on state and local taxes.
Only two of these studies found a link between higher tax burdens and stronger growth.
Seventy-two of them, on the other hand, showed that taxes negatively impacted economic growth.
The evidence also indicated that states do not invest effectively and that regulations harm the economy.
While education outcomes appeared to be correlated with economic growth, education expenditures did not. Of 79 studies on the subject, only 30 found a positive relationship between spending on education and growth, while 34 had mixed or insignificant results and 15 had negative results (due to the offset in growth from the additional taxes).
A study that looked at the growth of major state government programsfrom public safety to education to housing subsidies and health carefound that raising taxes to fund that additional spending almost always hurts economic growth. But slowing that spending and reducing tax rates, the study found, leads to higher investment and employment.
Of 123 articles on regulatory policy, there was a positive economic effect from less, not more, regulation 67% of the time.
And heres the final surprise, given President Obamas rhetoric about concern for those at the bottom of the income ladder: Almost every policy initiative of his administration has been anti-investment, anti-work, anti-production and therefore anti-growth.