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5/6/2015 The Policy Circle

https://www.thepolicycircle.org/brief/economic-growth/ 1/16

KEY FACTS

Over the past two hundred and fifty years orso, economic growth has skyrocketed,especially where free enterprise has beenallowed to flourish. What fundamentallychanged was the attitude people had aboutbusiness and entrepreneurship:

Decreased economic productivity meansfewer goods and services produced overallbut, more importantly, it represents a humantragedy because fewer people are working.Most people derive happiness and meaningfrom their work.

While you may read about the new jobs beingcreated in the monthly jobs report, it isimportant to remember that the number ofpeople who have dropped out of the laborforce is at a record high, representing over 92

TABLE OF CONTENTS

History

Facts to Know

What Role Should Government Play?

Principles of Reform

Engage: Solutions for your Elected Representatives

Thought Leaders in Economic Growth

Questions for Discussion

History

Economic growth – the increase in the amount of

goods and services economies produce – has

exploded over the last two and a half

centuries.Thanks to the free enterprise

system, millions have been lifted out of poverty. This

dramatic growth has afforded billions of people lives

of unprecedented opportunity, health, and happiness.

In this fascinating video

(https://www.youtube.com/watch?

v=jbkSRLYSojo&feature=player_embedded) (4:47),

watch Swedish academic and medical doctor Hans

Rosling plot the evolution of 200 countries over 200

years in just 4 minutes. You’ll watch how the U.S. led

the way in increased life expectancy and economic

growth, and how the rest of the world is following us.

In this quirky whiteboard video


ECONOMIC GROWTH AND HUMANFLOURISHING

Economic growth drives our living standards. It drives innovations that make our lives better, keep our

children healthier, and create opportunities to lift everyone. But what is economic growth? What

policies affect growth?



million people.

Cutting taxes on business would give

companies—both American and foreign—more

of an incentive to invest in the United States

rather than abroad, and more investment will

lead to more growth.

v=7NfLUCBZ1is) (7:56), Don’t Eat Your Dog, Arthur

Brooks, president of the American Enterprise

Institute, outlines a compelling moral case for

capitalism and explains how economic growth is

pulling billions of people out of poverty.

This animated short video


v=sTNqRpjshFU#t=225) (4:14) captures how

individuals and society alike benefit from economic growth.

Throughout most of human history, people barely scraped by. As the eminent intellectual, Deirdre

McCloskey explains in her seminal book Bourgeois Dignity

(http://press.uchicago.edu/Misc/Chicago/556659.html) (2010) that the average person anywhere in the

world in 1800 lived on the equivalent of $3 per day — a subsistence level of poverty that is now found only

in the developing world. It had been that way as long as anyone could remember and no one expected it to

change. Local economies could barely support the basic needs of their citizens, and the human condition

was abysmal, rife with sickness and starvation, and those who wanted to improve their lot in life had very

few options. Wealth was concentrated among a tiny few, mostly those with political power, and secured by

force.

But then something truly revolutionary happened. Beginning in England and the Netherlands, and

eventually in America, average people began to get richer, and their situations improved dramatically.

Over the past two hundred and fifty years or so, economic growth has skyrocketed, especially where free

enterprise has been allowed to flourish. As you can see in the chart below, this miraculous rise takes off

shortly after the onset of the Industrial Revolution and the birth of the United States.

Economic growth over the past 1,000 years



(Source: American Enterprise Institute (http://www.aei.org/publication/the-most-important-economic-chart-in-

western-civilization-and-how-it-happened/))

As McCloskey points out in her book, the average Frenchman in 2010 consumed about $100 per day, the

average American about $120 per day. This represents on average a sixteen-fold increase in wealth since

1800. And even though the Chinese consume only about $13 per day, that represents a four-fold increase

since the Cultural Revolution in 1978 — an astonishing growth rate by any standard. She further explains

how, of the 6.7 billion people populating the world in 2010, 5.7 billion were doing extremely well by

historical standards.

This unprecedented economic growth fueled by free-market capitalism represents the largest and most

successful anti-poverty program in human history. But why did it happen? There are certainly many

economic factors that contributed to this remarkable transformation, but according to McCloskey

(http://www.nationalreview.com/article/253676/needed-economics-grownups-interview), what

fundamentally changed was the attitude people had about business and entrepreneurship:

“What changed was the sociology. That is, what changed was the attitude of the rest of the society toward

businesspeople, and with that new attitude came a change in government policy. It was suddenly alright —

most clearly in the most bourgeois country on earth, the U.S.A. — to get rich and to innovate.”



In the United States today, though, growth seems to be slowing. During the 2000’s, economic growth was

slower than in previous decades and the recovery from the crash of 2008-09 has been slower than

previous recoveries. Analysts have begun to talk about “secular stagnation”: The idea that our economy’s

growth potential going forward is lower than our past growth rates. If that’s right, we can expect living

standards to rise more slowly—and political conflict over the distribution of resources to increase.

Facts to KnowEconomic growth in the U.S. has been gradually declining and wages have stagnated for many Americans.

The economy has rebounded since the crisis of 2008-09, but the recovery has been weak and wages for

most people have not been rising. Median household income in 2013 is lower than it was in 1989, and the

long-term unemployment rate remains dangerously high at 1.86%, or 2.9 million

(http://www.bls.gov/news.release/empsit.nr0.htm) people. The total unemployment rate is 5.8%, or 9

million people.

Decreased economic productivity means fewer goods and services produced overall but, more

importantly, it represents a human tragedy

(http://www.nytimes.com/2012/05/13/opinion/sunday/the-human-disaster-of-unemployment.html?

pagewanted=all&_r=0) because fewer people are working. Most people derive happiness and meaning

from their work. Work allows them to support themselves and their families, giving them independence

and an outlet for productive activity. Unemployment is correlated with increased rates of drug and alcohol

abuse (http://money.cnn.com/2013/11/26/news/economy/drugs-unemployed/), divorce, and even

suicide (http://www.pbs.org/newshour/making-sense/suicide-and-the-older-unemploy/). The

emotional strain associated with job loss is often tremendous, as people lose much of their identity when

they lose their jobs.

Effects of the sluggish economy on individuals:

Families, on average, have had no gain in income for six years,

(http://www.bloombergview.com/articles/2014-11-06/one-chart-explains-democrats-loss)

resulting in financial stress and decreased consumption. A rising cost of living amid stagnant wages

has a lot to do with these worries and pressures.

Young people have an unemployment rate that is more than double the national rate, at 13% for

those under the age of 25.

The Middle Class is demoralized. As Pete Wehner reminds us (http://ygnetwork.org/wp-

content/uploads/2014/05/Chapter-1-Introduction-The-Problem.pdf), “A Pew Research Center

analysis of government data . . . found that since 2000, the middle class has shrunk in size, [and]

fallen backward in income and wealth . . . An overwhelming majority of self-described middle-class



adults (85 percent) said it is more difficult now than it was a decade ago for middle-class people to

maintain their standard of living.” Longer working hours combined with stagnant wages cause many

to fear that they could fall out of the middle class altogether. (See median household income graph

in KEY METRICS TO KNOW section.)

The poor are really suffering. The average income of the bottom fifth of earners has fallen 16%

since 1999, compared to 2% for the richest fifth (http://fivethirtyeight.com/datalab/five-years-

of-recovery-havent-boosted-the-median-household-income/).

Effects of the sluggish economy on civil society:

Business: When companies face weak economic growth, they do less hiring, leading to increases in

the unemployment rate. They also have fewer opportunities to grow. Banks are reluctant to lend

money, and many private investors are too. Companies that are afraid to make capital investments

in the U.S. often focus their resources on emerging markets — those economies around the world

that are growing at a faster rate. And when times are tough on consumers, businesses that could

otherwise succeed go bankrupt or don’t even get off the ground.

Non-profits: Surprisingly, charitable giving hit an all-time high in 2013

(http://www.nbcnews.com/business/economy/charitable-giving-hits-record-high-thanks-

wealthy-n132496). This increase was driven mostly by very wealthy individual donors who are

benefitting the most from our economic recovery.

Schools: Philanthropic giving to education increased in 2013. But tighter budgets

have meant many state and local governments have had difficulty funding

(http://www.usatoday.com/story/money/business/2014/11/02/24-7-wall-st-

states-slashing-education-spending/18046297/) many of their educational

commitments.

Religious groups: Giving to religious groups has declined overall, although they still

receive the biggest share of total giving, with 31 percent of total giving in 2013.

Costs to the taxpayer:

Almost everyone believes the government has an obligation to provide a safety net for those in need –

including those who need temporary assistance due to economic hardship or health problems. But it is

important that this net be carefully designed so as not to trap people in dependency. Rep. Paul Ryan

recently issued an important report (http://budget.house.gov/waronpoverty/) that shows that our

byzantine anti-poverty system is anything but that well-designed safety net.

Unemployment insurance: A weak economy has meant elevated numbers of people receiving

unemployment benefits, and repeatedly led Congress and states to lengthen time limits for receipt

of those benefits.



Welfare payments: During the recession the number of people on Temporary Assistance for Needy

Families or TANF (the main welfare program in the U.S.) and especially on food stamps

(http://www.heritage.org/~/media/images/reports/2012/07/b2708/bfoodstampreform2012chart1.ashx?

w=500&h=636&as=1) has increased and remained higher than it was beforehand.

Disability Insurance: The rise in disability applications (Social Security Disability Insurance or SSDI)

closely tracks the rise in the unemployment rate. There is no reason these two things should

correlate: The modern workplace is safer, healthcare is better, and there are more flexible jobs than

ever before. It would seem this would lead to a decrease in disability claims. However, there is

strong evidence that workers discouraged by the job market are claiming disability status as an

alternative to looking for work. At the end of 2011, there were 10.6 million

(http://online.wsj.com/news/articles/SB10001424052970204296804577121392750460030?

mg=reno64-

wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052970204296804577121392750460030.html)

Americans collecting SSDI, up from 7.2 million in 2002. The share of the U.S. population receiving

SSDI benefits has risen rapidly (http://www.nber.org/bah/fall06/w12436.html) over the past two

decades, from 2.2 percent of adults age 25 to 64 in 1985 to 4.1 percent in 2005. Some state

governments also contribute to the increase in disability payments, preferring to lighten their state-

funded welfare rolls by dumping “eligible” individuals onto the federally-funded SSDI program.

How is a nation’s economy measured?

Gross domestic product (GDP) is defined as “a measure of economic activity in a country. It is

calculated by adding the total value of a country’s annual output of goods and services.” (Source:

Economics A-Z, The Economist (http://www.economist.com/economics-a-to-z/g#node-21529906))

GDP per person (2013, in U.S. dollars)

Canada: $51,958

China: $6,807

France: $41,421

Germany: $45,085

India: $1,499

United Kingdom: $39,337

United States: $53,143

(Source: World Bank data (http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?

order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=desc))

Real GDP growth in the US



(Source: White House Council of Economic Advisors)

(http://www.whitehouse.gov/blog/2014/04/30/advance-estimate-gdp-first-quarter-2014)

Economic Growth in the United States Since 1960

Decade Average Annual Growth Rate (%)

1960-1969 3.1

1970-1979 2.2

1980-1989 2.1

1990-1999 1.9

2000-2009 0.7

(Sources: Bureau of Economic Analysis, Census Bureau)

Taxes:

Individual (http://www.bankrate.com/finance/taxes/tax-brackets.aspx) tax rates in the US have



been increasing. As of 2013, the top marginal rate in 2014

(http://taxfoundation.org/article/2014-tax-brackets) is 39.6%, which affects taxpayers with an

adjusted gross income of $406,751 ($457,601 for couples).

The US has the second highest effective corporate tax rate in the developed world at 27.9%,

behind only New Zealand, according to the World Bank and International Finance Commision

(http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-

Reports/Paying-Taxes-2014.pdf).

Debt: Current US Debt is almost $18 Trillion

Median Household Income is the dollar amount that divides the income distribution into two equal

parts, so that half of households have incomes above that amount, and the other half have incomes

below that amount.

As illustrated in the chart below, the income of the median U.S. household was $51,900 in 2013. “That’s

essentially unchanged from 2012, after adjusting for inflation, and is 8 percent lower than in 2007, before

the recession began. Median income hasn’t shown a statistically significant increase since the recession

ended in 2009 . . . [this] makes clear how little progress the American middle class has made — not just over



the past few years, but over recent decades. Median household income was lower in 2013 than in 1989

and is 8.7 percent below its 1999 peak.” (Source: FiveThirtyEight (http://fivethirtyeight.com/datalab/five-

years-of-recovery-havent-boosted-the-median-household-income/))

NOTE: a lot of great data about the unemployment rate, but is it too academic; what one metric is the most

important?]

The long-term unemployment rate takes account of people who want to work, but can’t find a job.

The measure includes active jobseekers who haven’t held a job in over six months. As of October

2014, there are 2.9 million (http://www.bls.gov/news.release/pdf/empsit.pdf) individuals in this

category, accounting for 32% of the unemployed. (It is important to remember that many of these

jobseekers give up and end up falling out of the job market altogether. And when people drop out of

the labor force, it makes the unemployment rate look better.)



The unemployment rate takes into account those individuals who want to work, but haven’t found a

job. (If someone is out of a job but is not actively searching for one, they are not included in the

unemployment rate.) Economists generally assume that the lowest sustainable unemployment rate

is approximately 5.5%. As of October 2014, the unemployment rate is 5.8%

(http://data.bls.gov/timeseries/LNS14000000), representing 9 million unemployed people.

Economists also pay attention to the number of persons employed part time for economic reasons

(sometimes referred to as involuntary part-time workers). These are workers who would have

preferred full-time employment but were instead working part time because their hours had been

cut back or because they were unable to find a full-time job. There were 7 million

(http://www.bls.gov/news.release/pdf/empsit.pdf) of these workers in October 2014.

There are 2.2 million marginally attached workers, people who want to work and have looked for

work in the past year, but are not counted in the unemployment rate because they have not looked

for work in the previous four weeks (often because of family responsibilities or school attendance).

However, this number also includes 770,000 (http://www.bls.gov/news.release/empsit.nr0.htm)

discouraged workers, who have looked for work in the last year but have given up because they

believe no jobs are available for them. The number of discouraged workers has remained relatively

steady for the past year. While these discouraged workers do not show up directly in the

unemployment rate, they have an effect on another indicator of the strength of the labor market:

the employment-to-population ratio, which remains well below pre-recession levels. The graph



below shows the percentage of people who are working (but not in the military). As you can see, the

labor market is markedly worse than it was a decade ago.

The labor force participation rate measures the active members of the economy–those who are

working and those who are actively looking for work. The labor force participation rate is currently

at a 36 year low (http://www.businessinsider.com/labor-force-participation-rate-september-

2014-2014-10). So while you may read about the new jobs being created in the monthly jobs

report, it is important to remember that the number of people who have dropped out of the labor

force is at a record high, representing over 92 million people.



Source: The Federalist (http://thefederalist.com/2014/01/10/thank-labor-force-dropouts-not-new-jobs-

for-a-falling-unemployment-rate/)

What Role Should Government Play?Contemporary liberals tend to place a higher emphasis on economic equality than economic growth, and

thus to be more interested in redistributing income from the rich to the poor than in trying to make the

economy larger. They are less likely to emphasize, as well, the role of initiative in making individuals and

societies better off. And they think that experts are capable of identifying promising industries and

companies and encouraging them, often to ill effect. (Tax breaks for “clean energy” are a good example of

this.)

Conservatives by contrast tend to think that the trial-and-error process of bringing new products and

companies to market is more likely to yield progress; that no one person or group of experts is capable of

planning an economy’s development; and that it makes more sense to make sure that people have the

incentive and opportunity to better themselves.

These differing assumptions about human nature lead to divergent policy prescriptions.

Here are some videos:

Learn Liberty – The Surprising Answer for How to Handle The Next Recession

(http://www.learnliberty.org/videos/surprising-answer-how-handle-next-recession/)



Learn Liberty – Adam Smith and the Follies of Central Planning

(http://www.learnliberty.org/videos/adam-smith-and-follies-central-planning/)

Story of the Pencil (https://www.youtube.com/watch?v=IYO3tOqDISE)

Principles of ReformThe Rule of Law: Respect for the rule of law–especially property rights–is a critical precondition for

economic growth. When governments do not secure property rights, extra-legal economic activity

(the black market) thrives, and economies stagnate and decline. Growth depends on government

actions being as predictable and impartial as possible.

Competition and Openness: Governments often encourage the formation of industry cartels allied

with them, but competition does more to spur innovation and promote consumer welfare–not to

mention to keep corruption in check. To foster economic growth the government be open to having

new entrants bring competition to markets (think of Uber in transportation or charter schools in

education).

Government Restraint: The more of a society’s resources are allocated by the government, the less

the market can direct to their most productive uses. Excessive government spending, taxes, and

regulation stifle growth and should be kept limited.

For more on these principles and the value they create see The Index of Economic Freedom.

(http://www.heritage.org/index/book/chapter-2)

Engage: Solutions for your Elected RepresentativesCutting taxes on business would give companies—both American and foreign—more of an incentive to

invest in the United States rather than abroad, and more investment will lead to more growth.

A more educated and specialized workforce—achieved by raising academic standards and creating more

opportunities for learning—would increase the productivity of the workforce and over time enlarge the

economy.

Shifting immigration policy to bring in more high-skilled workers would have the same effect.

PRIVATE SECTOR ROLE: In each of these cases it’s up to individuals and businesses to make the

most of their opportunities. Entrepreneurs and investors take risks to expand their businesses and

hire more workers–even creating new fields of work that had not existed before. The private sector

(for-profit companies) is responsible for roughly 84% of all jobs in the U.S. These businesses are the

real drivers of economic growth, adding to society’s wealth rather than merely transferring it

from one group to another as the government does. Nonprofits can play a role too, for example in

providing educational services and advocating for the removal of obstacles to growth.



GOVERNMENT ROLE: Supporters of the free-market believe that the government shouldn’t

directly manage or direct the economy but create the conditions for the private sector to succeed

and for more people to be able to participate in markets. They also tend to think that for structural

reasons–for example the lack of competitive discipline–government often becomes unaccountable

and ineffective. One measure of this is that our government cannot even account for the number

of agencies and programs it runs (http://dailycaller.com/2013/05/03/the-government-has-no-

idea-how-many-agencies-it-has/).

Thought Leaders in Economic GrowthMilton Friedman (http://www.econlib.org/library/Enc/bios/Friedman.html) was perhaps the most well-

known advocate of free markets in the last century. A Nobel prize-winning economist, he also wrote for a

general audience. Friedman radically changed how the economics profession viewed the Great Depression

of the 1930s and the inflation of the 1970s, in both cases showing that mistakes by the central bank were

larger factors than market failures.

“The world runs on individuals pursuing their self-interests. The great achievements of civilization

have not come from government bureaus. Einstein didn’t construct his theory under order from a,

from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way.” –Milton

Friedman

Milton Friedman on Government Spending (http://www.learnliberty.org/videos/adam-smith-

and-follies-central-planning/)

Friedman Answers Questions (https://www.youtube.com/watch?v=rQLBitV69Cc)

The Role of Government in Society (https://www.youtube.com/watch?v=LucOUSpTB3Y)

Thomas Sowell (http://en.wikipedia.org/wiki/Thomas_Sowell) is an extremely influential contemporary

supply-side economist who also writes articles (http://townhall.com/columnists/thomassowell/) for a

popular audience. He is also well known for his book, A Conflict of Visions, which provides a philosophical

treatment of modern politics.

“Competition does a much more effective job than government at protecting consumers.” –Thomas

Sowell, Compassion Versus Guilt and Other Essays

Hernando de Soto (http://www.ild.org.pe/index.php/es/about-us) is a Peruvian economist who is known

for his work on the informal economy. He argues that sustainable economic growth requires that all

individuals have easy access to a strong legal system that protects their property rights. He argues that

respect for the rule of law is critical for developing communities to create opportunity and prosperity. His

book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, is an excellent

primer on why private property rights are so critical.



To learn more about policies that could encourage economic growth, explore the links below:

In this touching video (https://www.youtube.com/watch?v=28PJPSms_xU) by the Values &

Capitalism project, learn how an American toy company is fighting poverty in Honduras by giving

their workers the means to help themselves.

The CATO Institute, a libertarian think tank, has organized a collection of free-market economists

and authors in this online forum (http://www.cato.org/conference-forum/reviving-economic-

growth) to address the question, “If you could wave a magic wand and make one or two policy or

institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change

and why?” To see their answers, click on their photos.

In May of 2014, YG Network released a collection of important essays

(http://ygnetwork.org/roomtogrow/) that outline creative conservative approaches to solving the

economic problems faced by the middle class:

While the Left seeks to impose order on the chaos and complexity of a free society through the use of centralized

government programs, the Right seeks to protect, defend, and revitalize the space between individuals and the

state. This is the space in which families, communities, civic and religious institutions, and private businesses are

constantly finding new solutions to new challenges, and it is the space that is most threatened by the growth of

government.

For conservatives, the role of government is to enable and sustain markets and other arenas of common action,

ensuring competition, aiding the development of physical infrastructure and human capital, protecting consumers

and citizens, and allowing the poor and vulnerable to participate along with everyone else. In practice, this means

avoiding centralized programs that impose wholesale solutions from above in favor of those that enable a bottom-

up, incremental, continuous learning process.

The conservative reform agenda aims to replace a failing liberal welfare state with a lean and responsive 21st-

century government worthy of a free, diverse, and innovative society. The following chapters are an attempt to

show what such a government might look like, and how it could help the poor to rise, lift burdens off the shoulders

of working families, end cronyism and special privileges for those at the top, and prepare America to flourish again.

“

–Excerpt from Room to Grow: Conservative Reforms for a Limited Government and a Thriving Middle Class.

Chapter summaries can be downloaded here (http://ygnetwork.org/roomtogrow/).

Additional sources of U.S. Economic Data:

Bureau of Economic Analysis (http://www.bea.gov/), U.S. Department of Commerce

Bureau of Labor Statistics (http://www.bls.gov), U.S. Department of Labor



Economic Indicators (http://www.gpo.gov/fdsys/browse/collection.action?

collectionCode=ECONI), Prepared by President’s Council of Economic Advisors, Prepared for

Congressional Joint Economic Committee

Census Bureau, Economic Statistics (http://www.census.gov/econ), U.S Department of Commerce

Questions for DiscussionHow high of a priority should raising economic growth be?

Is America still capable of returning to the higher growth rates of its past?

What are the most important steps to take to boost economic growth?

What are the biggest obstacles that government puts in the way of economic growth?

State Information

Illinois

Indiana

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