If the US ceases to be the world’s economic leader, it can only blame itself.
In the last few weeks international institutions and prominent economists have warned that the global economy, especially the US, is facing the prospect of lower growth — not just a recession, but low growth for a decade or longer. Some of it will be caused by an aging population, but we are also choosing policies that will hobble our economy. You might think this would raise alarm bells and growth would become a priority, but instead it’s been met with a collective shrug — or even a doubling down on low-growth policies.
Explaining why economic growth is important used to be an unnecessary and trite bromide, like explaining the benefits of living longer or why it’s good to be nice to people. Today, economic growth requires defending.
Even if it isn’t equally shared, growth is why we all live better, longer, more comfortable lives than we did 60, 40 or even 25 years ago. Rising prosperity also makes people happier. It’s stagnation, not inequality, that breeds discontent and populism. Growth is also our best solution to climate change because productivity-driven growth is how we use fewer resources to get more output.
It’s tempting to say we are rich enough, why do we need more? Someone probably asked that question in 1800, thinking about how much better things already were than in 1700. But what if someone in 1800 had had the power to stop growth? All future generations would have been cheated out of what, in 1800, would have seemed like unimaginable comfort — including counting on their children living to adulthood.
And yet, there is a viable movement demonizing growth. Skeptics portray growth as at odds with protecting the climate, or they’re simply anti-capitalism. Even moderate policymakers in both parties increasingly value safety over growth. Economic growth is just like asset price growth in financial markets, it comes with a risk/return tradeoff. Economic historian Deidre McCloskey argues that a culture that encouraged innovative risk-taking, even among the non-wealthy, is why the UK was the first to industrialize and became the economic force it did.
Traditionally the US has chosen more growth over safety compared with Europe. It has a weaker welfare state for the middle class, a relatively open economy, fewer employment protections, less bureaucracy and more forgiving bankruptcy protections. The US has been rewarded for this, becoming the richest and most innovative economy.
As countries become richer there is a case to make that they can afford less risk, and certainly there are benefits to more stability. But policymakers today are leaning too far toward safety, losing sight of what we’re giving up.
Growth increases when you add more people, capital or productivity to an economy. A shrinking and aging US population means fewer workers and less output. We can partly compensate for this by raising productivity.
Instead, America’s recent policies are discouraging productivity in a misguided attempt to reduce risk. Coming up with a new innovation and taking it to market is always risky. New technology creates a lot of uncertainty, which means some capital is extended to the wrong places, like cryptocurrency or Pets.com instead of to the Googles or Amazon.coms. People lose jobs and money along the way.
The government has a role to play in making this process less painful to the most vulnerable, but even reasonable risks are becoming less tolerable to policymakers. Monetary policy no longer aims to just soften the business cycle, it tries to avoid recessions entirely. It keeps rates too low for too long and engages in quantitative easing more years than not. Ultimately, excessive interference in markets discourages growth and productive risk-taking because asset prices (a barometer of risk) lose meaning and capital often goes to the wrong places and props up zombie companies.
On the government side, more regulations — as well-intentioned as they may be — have gotten out of hand. We bubble wrap everything from construction sites to financial markets. When regulation goes too far it makes capital less efficient, slowing development and adding to the cost of doing business.
And we can expect more anti-growth policies in the near future. The much higher capital gains taxes Biden favors — even on unrealized gains — depresses growth because they lessen the rewards from risk-taking. Reshoring and more tariffs and subsidies favored by both parties not only deprive poorer countries of growth, they make richer countries less efficient and force them to pay more for goods and services.
Now we have industrial policy pursuing risk-free growth, choosing the best use of capital instead of leaving it to the market. But often the government makes worse choices because it lacks the discipline that comes from bearing the costs of losing money. Government investment can be useful for long-horizon, capital-intensive projects like highways or canals. But even the best-intentioned programs tend to get laden with competing political priorities and excessive regulations that make them needlessly expensive. And that means capital and talent, which is finite, go to less productive, less innovative places.
A low-growth future not only robs future generations of prosperity, it means we’ll need to pay more for the things we already consume. Less growth means less tax revenue, with a bigger share going toward paying debt instead of benefits and services. We risk a vicious cycle of higher taxes, less investment and even less growth.
Instead of trying to deliver the impossible — growth with no risk — the government and Federal Reserve should accept that risk is the cost of growth; a risky economy is what made America an economic powerhouse. A low-growth future isn’t inevitable. We can change course and let markets work.
Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”