Capitalism and Western Civilization: Growth

William H. Young

Over the past decade, the average rate of growth of Gross Domestic Product (GDP) was about 2 per cent per year, down from the average rate of about 3 percent per year between 1970 and 2000. That may seem like a small difference, but it’s not. If the trend can’t be reversed, the federal government could lose as much as $50 trillion in revenues by 2050 (Bret Swanson, “The Growth Imperative,” Forbes, May 27, 2011), about the looming cost of unfunded liabilities. Let’s examine the history and potential of GDP growth rates.

Robert J. Samuelson explains, in The Great Inflation and Its Aftermath (2008), that after World War II, government and big companies pledged to provide economic security for workers—jobs, health insurance, and pensions. This established what unions and progressives considered their new “social contract” with capitalism for an “American standard of living.” With a worldwide trade advantage, that economic bargain worked well during the 1950s and 1960s; GDP growth averaged about 4 percent per year. Government budget surpluses balanced deficits. 

But beginning in the 1960s, the flawed ideas of academic economists who advocated “advanced” Keynesianism—government spending and budget deficits to produce full employment—were accepted by the political leaders of both parties and led to what Samuelson dubs the "great inflation.” Annual inflation grew to 15 percent by 1980, beginning a decline in personal savings and a debt mind-set that would last for decades. The terms “stagflation” and “misery index” (the sum of high inflation and high unemployment at the same time) dominated the American news and psyche in the 1970s. 

Ronald Reagan was swept into the presidency in 1980 and introduced free-market capitalism and limited government. He reduced marginal income tax rates to induce capital investment and incentivize work. Paul Volcker brought inflation under control. Samuelson calls the subsequent period “the restoration of capitalism.” “An economic expansion…lasted from early 1983 until the late summer of 1990. At the time, it was the second longest peacetime expansion in U. S. history.” 

The GDP growth rate averaged 3.1 percent over the 1970s, 3.2 percent over the 1980s, and 3.3 percent over the 1990s, according to Growth and Renewal in the United States  by Joseph Manyika et al, (McKinsey Global Institute, February, 2011). Productivity, and thus wages and living standards, continued to stagnate after the 1970s. Except for the Internet boom of 1996‒2000, economic growth did not return to postwar levels because, Samuelson argues, government deficits continued to grow and set peacetime records, as private savings and business investment declined. Between 2001 (the end of the Internet bubble) and 2010, the average annual GDP growth rate fell to 2.1 percent. 

Politicians on the left and right view the economy and visualize solutions for economic growth through the prisms of their ideologies. They make bogus claims about the effects of past administrations and offer anecdotes and illusions to their bases and factions. The left would return, through income redistribution, to the spending policies of the 1960s that began our economic decline. The right promises a return to the 1980s and implausible benefits of tax cuts that will pay for themselves. In The Great Stagnation (2011), George Mason economist Tyler Cowen calls these the redistribution exaggeration” and the “tax cut exaggeration.” Cowen adds, “For the past forty years, most Americans have been expecting more than their government is capable of delivering….Instead of admitting its limitations, or trying to manage our expectations, government starts lying to us about what is possible.” 

The late economist Mancur Olson showed, in The Rise and Decline of Nations (1982), that factions (special interests, to many of whom government has conferred preferences and benefits) seek to redistribute rather than create wealth and, over time, impose social and economic rigidities and costs which cause nations to lose vitality. Factions “interfere with an economy’s capacity to adapt to change and to generate new innovations and therefore do reduce the rate of growth.” Less productive government consumption for benefits to factions constitutes an ever-rising share of GDP. 

In An Empire of Wealth  (2004), historian John Steele Gordon explains that the annual GDP growth rate averaged 2 per cent over the twentieth century in America. “Viewed from the perspective of the past few centuries, technologic progress, and the economic growth it creates, seems…a never-ending engine—an economic perpetual motion machine.” But drawing upon studies of how long such economic growth lasts, Gordon asks: “To paraphrase Professor Robert Barro, is two percent and two hundred years [since our mid-nineteenth-century metamorphosis] all that a wealthy nation…gets?” Cowen also argues that this era’s technological breakthroughs have not produced much economic activity compared to earlier inventions such as the automobile and electricity.

The Race Between Education and Technology (2008) by Goldin and Katz shows that since the 1970s, America’s educational system has not produced anywhere near the number of skilled workers necessary to keep pace with technological advance, which has led to increased wage inequality rather than new jobs. An ever-growing demand for technically competent workers able to develop new innovations and create employment for others and economic growth is not being met. 

According to the Council on Competitiveness, manufacturing once provided 28 percent of all jobs but now constitutes only 9 percent, with an especially sharp decline occurring since 2001. Manufacturing has “the highest multiplier effect among economic sectors, pays higher wages, and drives innovation” and GDP growth. A tiny fraction of lost manufacturing jobs have recently returned (“U. S. Manufacturing and the Skills Crisis,” The Wall Street Journal, February 27, 2012). But more than 600,000 such jobs remain unfilled because American high school graduates with the requisite training cannot be found—and despite innumerable government and college retraining programs over decades. Adam Davidson’s “Making it in America” (The Atlantic, January/February 2012) describes those skills. 

“The U. S. is rapidly losing high-technology jobs as American companies expand their research-and-development labs in China and elsewhere in Asia,” reports James R. Hagerty in The Wall Street Journal, January 18, 2012. The R&D spending by the 3M Co. is among the highest in the corporate world. 3M CEO George Buckley told investors last year that “3M is expanding labs overseas in preparation for a world where the West is no longer the dominant manufacturing power. Given the moribund interest in science in the U. S., this is strategically very important” 

These developments do not bode well for stronger GDP growth. And the sustainability ideology that dominates college campuses would turn America to a zero-growth economy. We need governmental leaders who will acknowledge the reasons for stagnation, apply corrective measures (and remove unnecessary restraints) to enhance growth based on economics rather than politics, and determine the tolerable level of government expenditures commensurate with growth. 

Benjamin M. Friedman observes in The Moral Consequences of Economic Growth (2005) that: “The experience of economic growth or stagnation leaves its mark on a society for a long time thereafter.” It “creates a legacy from which a society can benefit—socially, politically, morally—for decades. And conversely, a significant stretch of years during which incomes stagnate imposes a burden that may well persist long after an economy has once again begun to grow.” Our leaders should level with the American people about the economic choices they face. For in the end, economic reality rather than political demagoguery will determine their future. 

The academy urgently needs to change course and provide more high school as well as college graduates with the skills and productivity needed to expand, not limit, economic growth. And a perspective on economic growth should be part of the university liberal education advocated by NAS. 

Next week’s article will examine the mismatch of jobs and workers in America.

 

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This is one of a series of occasional articles applying the lessons of Western civilization to contemporary issues relevant to the academy.

The Honorable William H. Young was appointed by President George H. W. Bush to be Assistant Secretary for Nuclear Energy and served in that position from November 1989 to January 1993. He is the author of Ordering America: Fulfilling the Ideals of Western Civilization (2010) and Centering America: Resurrecting the Local Progressive Ideal (2002).

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