Friday, July 30, 2010

Don't scorn Germany and Japan; learn from them

Los Angeles Times article "Don't scorn Germany and Japan; learn from them" (July 29th, 2010) offers a truly unbelievable statement.

Japan's economy has been and remains successful. So is Germany's. They have reached an economic steady state in which they don't need roaring growth rates to provide for their people.


This is, perhaps, the most dense quote that Corrections has yet reiterated. Not only is it not true, but it throws to the wind the most important idea that economics has to teach us in the macroeconomic realm: only growth matters. Indeed, as Robert Lucas put it well:

Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the “nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.


Why is economic growth so important? Yearly GDP growth rates seem to range, generally speaking, between 2% and 6%. Is there any real significance between one and the other? The answer is best introduced with a bar graph of compounded (not simple average, but compound-average) growth rates from a few selected countries from 1988-2008 (click to enlarge):



To understand why these differences are large, take Afghanistan in 1960. It had a GDP/capita that was 4.73% that of the United States's GDP/capita. How many years would it take Afghanistan then to catch up with the United States in 1960 using different growth rates? (To account for population growth, population growth would need to be subtracted from GDP growth, unnecessary to the point here). The number of years required using each country's growth rate is graphed below (click to enlarge).



Similarly, if we wanted to see how many years it would take for Afghanistan in 1960 to catch up to the United States GDP/capita in 2008, we can plot the same graph:



The difference between the author's lauded Japanese growth and a high-growth country like China, Ireland, or South Korea is the difference between Afghanisan transversing from what it was in 1960 to what the United States is today, in a generation, rather than as a long-term joke. The above figures make it obvious how important economic growth is, due to its exponential nature.

As an aside, the notion of Germany and Japan being at a "steady states" is simply first-tier ignorance, an article more worthy of Pravda in the 1960's than the Los Angeles Times today.

2 comments:

  1. It seems that a part of the problem is the assumption that the growth of the economy is driven by "demand". Were this the case then truly massive hiring of people to dig holes and fill them in would end unemployment and initiate prosperity. An alternative view is that the economy is driven by the activities of entrepreneurs (in enterprises of all sizes) who create products that people want and are willing to work to earn money to purchase. Perhaps the key to prosperity is to get out of the way of the people who, left to their own devices, would invent new businesses, products, processes and ultimately wealth. If the government really wants green energy then pass the laws that exempt profits earned by green energy from any taxation for 30 years. Instead of massive spending and a future of unremitting massive debt inevitably leading to massive taxes - control federal and state spending, cut costs to match income and let free people do what they do when unshackled - generate wealth. The US will never be able to compete with countries with massive populations of peasants working for pennies a day - unless we create businesses that build on our own economic advantages, invent new technologies that our culture and skills and mentality give us a first mover advantage in creating. There is a world of limitless wealth out there waiting to be created. We will be able to engineer life forms to produce what we now have to dig and find for natural resources, we will be able to manufacture nanomachines producing a huge range of as yet unimagined products, we will be able to grow the one global industry we truly dominate, pharmaceuticals, to produce products that transform human health (most healthcare costs are bricks and sticks, doctors and nurses who preside over therapeutics or nature getting you well but it is the therapeutics that cost 10% of the healthcare that actually can get you well and drive down system costs). There is so much wealth to be created - but it is also true that bad governmental policies can strangle that creation. The industrial revolution did not have to start and gather steam in England - there were other places with the pieces - but English policies allowed it to happen while the French and Germans kept the government foot on the neck of the pesky merchants and lost the initiative. We do not need to copy other countries, we need to go back to being a capitalist America.

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  2. It seems that a part of the problem is the assumption that the growth of the economy is driven by "demand". Were this the case then truly massive hiring of people to dig holes and fill them in would end unemployment and initiate prosperity. An alternative view is that the growth of the economy is driven by the activities of entrepreneurs (in enterprises of all sizes) who create products that people want and are willing to work to earn money to purchase. Perhaps the key to prosperity is to get out of the way of the people who, left to their own devices, would invent new businesses, products, processes and ultimately wealth. We do not need to copy other countries, we need to go back to being a capitalist America. Instead of massive spending and a future of unremitting massive debt inevitably leading to massive taxes - control federal and state spending, cut costs to match income and let free people do what they do when unshackled - generate wealth. There is a world of limitless wealth out there waiting to be created - engineering life forms to produce what we now have to dig and find for natural resources, manufacture of nanomachines producing a huge range of as yet unimagined products, transformation of healthcare costs by curing illnesses with improved therapeutic and a million other products. Government should control its spending, get off the back of the economy and let the American people generate wealth. Silent Cal Coolidge did exactly this in rapidly reversing the deep depression of 1920 and igniting the roaring 20s. Roosevelt did the opposite and took what was "the Depression" around the world and made it into the "Great Depression" here. We are reliving history with the current Obama stagnation.

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