Back in 2016, I shared three videos to explain the theory of “public choice,” which is simply the application of economic principles to understand the self-interested behavior of politicians, bureaucracies, and voters.
Wonky readers will enjoy this fourth video.
I’m citing public choice because the Economist, in a recent article, shared a very depressing chart about the decline of economic growth in the developed world.
As you can see, the average increase in per-capita economic output has dropped by more than 50 percent since the turn of the century.
From a policy perspective, there’s a very simple explanation.
As explained in this fascinating video, the western world enjoyed pro-growth policies of the 1980s and 1990s. You can credit Reagan and Thatcher or you can credit the “Washington Consensus.”
Unfortunately, the opposite has happened in the 21st century. The United States has moved toward statism and the same is true for Japan and most of Western Europe.
So it’s no surprise that growth has slowed in industrialized nations.
And it’s also no surprise (given the magazine’s ideological bent) that the Economist doesn’t really understand what’s been happening. Here are some excerpts from the article.
The long-run rate of growth has dwindled alarmingly, contributing to problems including stagnant living standards and fulminating populists. Between 1980 and 2000, gdp per person grew at an annual rate of 2.25% on average. Since then the pace of growth has sunk to about 1.1%. …The problem is that…reviving growth has slid perilously down politicians’ to-do lists.
Their election manifestos are less focused on growth than before… Our analysis of political manifestos shows that the anti-growth sentiment they contain has surged by about 60% since the 1980s. Welfare states have become focused on providing the elderly with pensions and health care… Support for growth-enhancing reforms has withered. …unless they embrace growth, rich democracies will see their economic vitality ebb away and will become weaker on the world stage. Once you start thinking about growth, wrote Robert Lucas, a Nobel-prize-winning economist, “it is hard to think about anything else”. If only governments would take that first step. Moreover, even when politicians say they want growth, they act as if they don’t.
At the risk of being presumptuous, it’s not just a matter of thinking about growth. It’s also understanding the policies that produce growth.
And it’s also understanding how to get those pro-growth policies when politicians have big incentives to do the wrong thing. And this brings us back to public choice.
Let’s now look at some excerpts from a column in the Wall Street Journal by Alberto Mingardi.
‘What would you do if you were the state?” So begins the greatest book of political theory you never read. “The State,” by the Hungarian-born economist Anthony de Jasay, was published in 1985… Jasay argued that particular leaders matter far less than might be supposed and that all governments ultimately seek to maximize their discretionary power.
…Politicians differ, sometimes sharply, in ideas and character. But governments—like businesses—have basic structural tendencies. The state always seeks to expand. Redistribution, Jasay maintained, is “addictive.” The moment government starts giving out goodies, the mechanisms undergirding society and the economy change. Corporations and interest groups have a new incentive to work to win the state’s favor. So businesses tend to shift resources and attention from engineers to lawyers, from serving customers to capturing decision makers. “The greater the reach of the state, the greater is the scope for profiting from its commands,” Jasay wrote.
Sadly, I don’t have any easy solutions. Once people learn they can vote themselves money, it is very hard to rescue a society.
But I know that protecting and promoting jurisdictional competition is part of the answer if we want to avoid the problem of “goldfish government.”
P.S. For more public choice-related analysis, I recommend these three videos.
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Hi John,
I just don’t see it. That pink line doesn’t seem to me to start moving up until 1988. But so be it. Maybe you can explain what I’m not seeing or maybe we just have to agree to disagree.
Considering how much disagreeing we’ve been doing, what follows are the four sentences I am the happiest to write since this all began.
Thank you for your very kind words. I return the sentiment wholeheartedly. Please forgive me for those times I’ve been less than civil. Best to you and all those you love.
P.S. I hope you saw the note I wrote to Dan a few days ago. I expressed my appreciation to him for being so open to criticism of his points of view. Although I should say that on a couple occasions I have written in support of his point of view. 🙂
Phil, the definition of ‘headway’ is imprecise. Bottom quintile incomes did start growing after 1983 (meaning 1984 onward) and they did close the gap by 1993.
Phil, I want you to know… despite any sparring back and forth, I appreciate you.
Hi John,
Thank you for trying to improve my understanding.
Unfortunately for your cause, the lowest quintile, judging by exhibit 22, doesn’t really begin to make any headway until the last year of Reagan’s second term (not 1983). And, of course, the second, third, and fourth quintiles don’t get going until the near the middle of the Clinton years. But I guess we can all celebrate how well the rich did under Reagan.
You know, I think I’ll take your word for it that what the majority of workers got in benefits made up for less in the way of wage increases. It’s not a big issue for me and I don’t feel like doing a lot more research. I’m weary of this also. I’d just like to sit down and read a good book.
If I used “socialism” as a shorthand for big government (or anything other than what it really is), that was a mistake. I think the word is used way too loosely and is hardly understood by Americans as a result.
Phil,
I recalculated the GDP by president to be per capita because it’s the right way to do it and I thought it might improve your understanding. My goal wasn’t to make Reagan look better, so I’m fine he’s ‘still’ in fourth place.
Yes, I know Exhibit 22 answers your question of who gained from Reagan growth. That’s why I told you about it. And admitted that bottom quintile incomes did poorly through 1983.
My point was that worker compensation gains have tracked close to productivity gains, when properly adjusted. I didn’t say anything about manufacturing wages or outsourcing. You do know manufacturing jobs are only 9% of the workforce…
Sigh. Yes, of course I know western European nations are not socialist states. You used ‘socialism’ as a one-word summary and I used it the same way in response. It’s just shorthand for ‘big government,’ not a literal definition.
Enough. I need a break. I don’t know about you, but this stuff takes me serious time.
Hi John,
You devoted a lot of words to per capita GDP growth (and I agree that it is a better measure (mildly better, as our population growth has been fairly consistent – not, like, say the growth of the Dow) only to have Reagan come out in fourth place, the same place my results had him in.
In any event, your exhibit 22 answers exactly the question I asked more than once: who was gaining from the GDP growth during the Reagan years? You should have asked that question yourself. Average, as I have pointed out before, can be very misleading. And, sure enough, exhibit 22 shows us that virtually all the growth during the Reagan years went to the top quintile. The lowest quintile did bump up during his last year and continued to grow in following years, but the second, third, and fourth quintiles didn’t show any increase worth talking about until the middle of the Clinton years.
I think there’s a lot more to the pay workers get (or don’t get) than non-wage benefits and a couple other tweaks. From Forbes (The Case for Raising Wages in Manufacturing, March 2, 2021):
“In the 1980s, as manufacturers began outsourcing jobs and reorienting their organizations around core competencies, wages in manufacturing began to stagnate and eventually declined: Between 2003 and 2013, for instance, real wages for manufacturing workers went down by 4.4%.
“At the same time, in response to low-wage overseas competition, American manufacturers increasingly relied on temporary, lower-paid workers. One government report estimates these workers now number over a million, half of whom – and one-third of all manufacturing production workers – “rely on food stamps or other federal assistance programs to make ends meet.” These numbers have likely only risen since the pandemic began, as a growing legion of unemployed Americans sought interim work.
“Helper and Martins remind us that manufacturing workers on average continue to earn a significant wage premium – but, as they also note, that premium has shrunk by about a quarter since the ‘80s, thanks to the rise in temporary workers, foreign competition, the decline of unions and other factors.
“Though globalization may have been the major push behind such trends – in which wages declined alongside a drop in full-time workers – not all comparable nations suffered as much as the U.S. Germany, where manufacturers pay higher wages than their U.S. counterparts, maintains 19% of its workforce in manufacturing compared with 9% in the U.S. And since 2005, Germany has increased this proportion, while in the U.S. it has decreased by 15%.
“The Case For Raising Wages
“How can the Germans get away with paying workers more? After all, they’re competing with the same Chinese manufacturers. Turns out, the Germans’ inflated wage scale may actually be part of their advantage. Helper and Martins make the case that manufacturing firms ‘with higher wages per employee have more skilled workers who also work more effectively.’ It follows, then, that manufacturers who pay higher wages might be more effective in attracting skilled workers, thereby alleviating the talent gap – and increasing productivity to a level that more than offsets their increased labor costs.
“In some ways, this idea – that the more you pay your employees, the more productive they are and therefore the more competitive your organization will be – is not new. There is, for example, Professor Wayne Cascio’s well-known comparison ‘of higher-wage (and benefits) Costco with lower-wage (and benefits) Sam’s Club” from which he concludes that “the issue is not what people cost but what they can do, their innovativeness and their productivity.’”
You’re right that socialist plans don’t work. But being any kind of economist, you should know that western European nations are not socialist states. They are capitalistic states with strong safety nets. And, no, the law of diminishing returns cannot explain why a country starting out with a much higher poverty rate than us 40 years ago could now have a lower poverty rate than us. Once they dropped below us, we should catch up to them, if anything. And to think that all this happened while they were practicing the very policies that you say STIFLE economic growth. Fascinating.
Phil,
It does reflect economic ignorance on your part. I don’t say this to be harsh. I’ve seen multiple examples of your ignorance and haven’t made a big deal of them. But it seems to me your certitude on economic issues exceeds your knowledge, and I think you would benefit from more humility. (I too would benefit from more humility, as would a great many people.)
Here’s how I know it reflects economic ignorance. If you possessed strong economic knowledge, this would have been your reaction upon seeing that Macrotrends chart. Before you even typed your words, you would have known the 1970s couldn’t be the highest-growth decade. When you saw growth rates around 11%, you would have known immediately they weren’t inflation adjusted.
Now, here’s my mistake. The true GDP per capita growth rate from 1982-1989 is the 2.7% number. The earlier number was an Excel formula mistake. The formula pointed to 1982 data, when it should have pointed to 1981. Like a typo, but in Excel. My sincere apologies for any confusion.
I often don’t give you the source of my data because I usually get it from THE source. Govt agencies like CBO, BEA, BLS, OMB, etc. Or in this case, a secondary source, the St Louis Federal Reserve’s data service called FRED (https://fred.stlouisfed.org/). I like FRED quite a bit. FRED imports source data from the govt agencies and it allows some graphing. When possible, I like to do my own calculations on the source numbers instead of relying on the numbers writers put in their articles. Some writers and publications are less trustworthy, and I prefer to dig into it myself.
I don’t really like these exercises of “GDP by president” because there are so many caveats. But if we’re going to do it, at least let’s do it right. Your figures are on a different basis than what we’ve been using. That is, growth in total GDP rather than growth in GDP per capita. The per capita view is more accurate and apples-apples. More accurate, because growth of GDP per capita more accurately reflects economic wellbeing than growth in total GDP. More apples-apples because total GDP can grow from mere population growth, and some periods have higher population growth than others.
Here is real GDP per capita growth by president since WWII. Same BEA data from FRED. Just as before, the calculation for each president excludes his first year in office but includes the year after he leaves office.
Ford 76-77 4.0%
JFK 62-64 3.9%
LBJ 65-69 3.6%
Reagan 82-89 2.7%
Clinton 94-2001 2.5%
Truman 48-54 2.3%
Trump 2018-21 1.6%
Carter 78-81 1.6%
Obama 2010-17 1.4%
Nixon 70-75 1.2%
Ike 54-61 0.9%
Bush Jr 2002-09 0.8%
Bush Sr 90-93 0.7%
Of 13 presidents since WWII, Reagan ranks fourth. Not too bad, especially since he’s only behind the go-go 60s and some weird anomaly with Ford. Reagan’s growth rate is more than one-third higher than the post-WWII average. As mentioned previously, the 1980s had the fifth highest growth rate of the 18 decades since 1840.
I agree that gains in income didn’t go much to bottom quintile folks in the early 80s. If you look at Exhibit 22 of the usual CBO report, you can see average income for the bottom quintile (net of taxes and transfers) dropped a few percentage points through 1983, while the average top quintile income increased by 6%. However, this was temporary. Bottom quintile incomes did increase after 1983, and by 1993 the cumulative gains of the bottom quintile were almost the same as the top quintile (23% vs 25%).
The point that hourly pay has not kept up with productivity is mostly a myth. I’ve seen this debunked a couple time. I forget the details, but if non-wage benefits are included and maybe there are a couple other tweaks, gains in total compensation do continue to track gains in productivity fairly well.
I don’t have a good answer for you on why the $30 poverty rate for those European countries dropped so much over the past 4-5 decades. I’d guess the law of diminishing returns is part of it (still valid even though some countries dropped lower than the US). Maybe it reflects European countries expanding their welfare states? Hard to say. What shocks me is to see Belgium at 47%, France at 49%, and so on. My instinct says don’t trust the data, but that outfit is usually pretty good. One thing I am sure about is that socialist policies DO stifle growth. The history of the world tells us so.
Hi John,
No it was not economic ignorance on my part nor an attempt to hoodwink readers (assuming there are any – not even sure how much of a reader you are if you could miss all that von Mises material in the very beginning, and in relatively short, post). But it was a mistake. I acknowledge that. I assumed that it is so obvious that not adjusting for inflation is so meaningless, that I can’t imagine any credible outfit would fail to do so. But lesson learned. So scratch that data. But, as you will shortly see, that really doesn’t help you.
Back to your data for a moment. Which is it? In an earlier post (Jan. 5) you wrote “Real (inflation-adjusted) GDP per capita increased by 3.5% per year from 1982 to 1989.” But now you tell me it was 2.7%. Were you just trying to hoodwink earlier readers or are you simply ignorant of what the real data shows?
Interestingly, you should have stuck with your higher figure, but be careful about doing too much bragging. Here is a complete list of average annual real GDP growth by postwar presidents (in descending order):
Johnson (1964-68), 5.3%
Kennedy (1961-63), 4.3%
Clinton (1993-2000), 3.9%
Reagan (1981-88), 3.5%
Carter (1977-80), 3.3%
Eisenhower (1953-60), 3.0%
(Post-WWII average: 2.9%)
Nixon (1969-74), 2.8%
Ford (1975-76), 2.6%
G. H. W. Bush (1989-92), 2.3%
G. W. Bush (2001-08), 2.1%
Truman (1946-52), 1.7%
Obama (2009-15), 1.5%
Figures from the U.S. Department of Commerce’s Bureau of Economic Analysis (Google: Hudson Institute: Economic Growth by President)
I notice that while I give you the source of my data, you did not do the same. Cite the truth. It is a form of respect for the truth.
It’s interesting that the much-maligned Jimmy Carter (and rightfully so in some ways) was closer to Reagan (also deserving of being maligned in some ways) than Reagan was to Clinton.
There is another question to consider when talking about the growth in real GDP per capita. Who is gaining from that growth? Since it is an average figure, it is perfectly possible that a great deal of that growth is going to those who are already very wealthy, enough so as to make the GDP growth look good even if the majority of Americans aren’t sharing in it. And, in fact, I have previously shared information with you to suggest that that is exactly what was going on. One more time:
“This [graph] shows the path of per capita real GDP, real labor productivity, and real hourly compensation (everything will be in real terms in this note). Per capita GDP grew by 94% over this 30-year period [my note: if you can go back to 25 years before and after Reagan, I guess I can make use of data that happened to use a 30-year time period], or an average of 2.2% a year, while labor productivity grew by a bit more, by a total of 113% or 2.5% a year. Real hourly compensation grew similarly, by 100%, for a 2.3% annual rate. In “normal” times one would expect these three measures of productivity and real incomes to grow at similar rates and to track each other, and this is basically what one observes in the pre-Reagan period.
“If the Reagan measures helped spur growth, then these growth rates should have shot upwards in the next 30 years. But one finds:
“Per capita real GDP and labor productivity still grew following Reagan, but at a slower rate than before. Per capita GDP grew only by 65% in the thirty years following Reagan (1.7% a year), vs. 94% (i.e. 45% higher) in the thirty years before.
“Growth in the economy ultimately comes from growth in labor productivity, and here the record post-Reagan is consistently weaker relative to before. Labor productivity over 1980 to 2010 consistently tracks below where it was over 1950 to 1980, and grew by a total of 90% (2.2% a year) vs. 113% (2.5%) before Reagan.
“But the really startling difference is in real hourly labor compensation:
“Instead of tracking closely to the growth in labor productivity, as one would normally expect, real hourly compensation was well below. For all workers, average real hourly compensation grew only by 39% (1.1% a year) over the thirty years post-Reagan, vs. 100% in the thirty years before. There clearly was a change, post-Reagan, but if you were a worker, it was sharply for the worse.”
From: “The Impact of Reagan: Good for the Rich, Bad for Most.”
I urge you to scroll down to the bottom graph in that article (or else you will have to take my word for it): You will find that per-capita incomes for the bottom 90 percent barely budged during the Reagan years (that’s the vast majority of the country!), not starting to make significant gains until the second Clinton term. Meanwhile the upper ten percent, and even more so the upper five percent, and still even more so the upper one percent saw their incomes skyrocketing during those Reagan years. The wealthy continued to do well during the Clinton years, but it is interesting to see that in the early 2000s the wealthiest groups plummeted (I would guess as a result of the tech bubble), but the bottom 90 percent barely dropped at all.
I’d really love an answer to the following question concerning poverty rates:
What is really interesting is to look at where some of these countries were 40 years ago.
The U.S. was at 27.0%. So we have come down 11 percentage points. But Sweden was at 58.48%, Norway 38.49%, Netherland 50.0%, Denmark 18.49%, Belgium 46.75%, Austria 16.99%, Australia 44.33%. France 48.49%, Finland 40.49%, UK 56,25%. Yes, I know about the law of diminishing returns. It’s easier to drop 11 percentage points if you start at 50% than if you start at 27%. But that argument goes out the window when so many countries actually go below us.
What’s my point? Many of these countries were still recovering from WWII devastation that we can’t imagine. But somehow, they have managed to draw near to us, or in many cases pass us, even while engaging in the kind of social democracy practices YOU SAY WILL STIFFLE GROWTH. How is that possible?
When I talked about the constitution protecting the rights of people based on socioeconomic class, you disagreed and said no one had a right to a house. But you missed the point. Protection based on socioeconomic class simply means that one can’t be discriminated against based on their class, just as they can’t be based on their religion or race. It doesn’t mean they have a right to a house.
“For example, in most states, it’s perfectly legal for landlords to refuse to rent to prospective tenants who plan to use a housing voucher to pay part of their rent, even though they would be paying the exact same amount as their neighbors. Studies have shown that this form of legal discrimination reinforces segregation and increases the risk of homelessness.”
The majority of constitutions around the world protect against such discrimination. It’s a shame ours doesn’t.
Google: “Should the Constitution Protect the Poor?”
”
Finally, this entire discussion, which has taken many turns, began with my simply questioning the idea that Reagan could be considered a “small government conservative” when one looks at his spending habits.
From Dierdre McCloskey’s “Fairy Socialism”:
“Neoliberalism is supposed to have happened in the 1980s, with Reagan and Thatcher. Yet the conservative premiers did not substantially reduce public spending. Reagan did not at all.”
[…] The Public Choice Challenge — International Liberty […]
Phil,
Your Macrotrends GDP data is not inflation adjusted, so of course it makes the 1970s look good. 1970s inflation was very high! But inflationary gains don’t actually help people. That’s why we should only compare real (i.e., inflation-adjusted) GDP per capita. I hope this is economic ignorance on your part, not an attempt to hoodwink uninformed readers.
Reagan’s record on growth was good. Here’s real GDP per capita growth for the Reagan years compared to the quarter century before and after:
2.2% Quarter century prior to Reagan
2.7% Reagan years (1982-1989)
1.4% Quarter century following Reagan
I also once looked at annual growth of real GDP per capita by decade going back to 1840. The 1980s was the fifth best decade out of 18. Here are the five:
4.2% 1940s (rebound from Depression, WWII exports)
3.1% 1870s
3.0% 1960s
2.9% 1880s
2.4% 1980s
Reagan’s record on growth was good. Respect the truth.
Reagan? If you Google “U.S. GDP per capita 1960-2023” you will find a Macrotrends site that shows very clearly that the 1970s dwarfed all other decades when it came to growth in U.S. GDP per capita. It’s not even close.