I have mentioned a couple times that economic growth is very important. But it’s easy to hear a message like that and think, “yeah, yeah, growth is important, got it,” without it truly registering.
This is a crucial concept for achieving prosperity, so let me try to make it more tangible.
Without the solid growth that occurred over the past two or three centuries, today you’d probably be living in a small hut without indoor plumbing. You might be sharing that hut with more people and vermin than you’d like.
You might worry more about getting enough food. For sure your diet would be less appetizing.
And forget travelling by air or automobile, or enjoying the communication and entertainment of phone, internet, and television. Those things would either not exist, or would be available only to a few.
That’s how important growth is.
The importance of growth is only visible if we take a long-term view. The difference between 2% growth and 3% growth is not huge – if we look at only one year. But sustained over decades, it will multiply into enormous differences.
The graph below illustrates this point. It shows how a typical US income of $40,000 would grow over a fifty-year period under four different growth scenarios. The scenarios are real annual growth rates of 1%, 2%, 3%, and 4%.
At 1% annual growth, $40,000 grows to $66,000 after fifty years. That excludes any increase due to inflation, so a real increase to $66,000 sounds pretty good. But it can be much better. At 2% growth, $40,000 grows to $108,000. At 3% growth, it grows to $175,000. At 4%, a whopping $284,000!
This is why long-term growth matters so much. Even a one percent difference in growth rates will explode over time to a huge difference in standard of living.
This is not voodoo math. The concept is not complicated. It’s just the amazing power of long-term compounding growth.
Now let’s illustrate the same point with a real-world example, comparing the highest-income region (US) to the lowest-income (Africa). According to Maddison Project data, the real growth rate of GDP per capita from 1820 to 2010 was only 0.9% per year higher in the US than in Africa. Not a big difference, right?
But that 0.9% growth difference was maintained for two centuries. As a result, African incomes increased only four-fold during those two centuries, while American incomes increased by twenty-two-fold! Stated differently, American incomes went from 2.8 times higher than African incomes to 15 times higher. This is an enormous difference with enormous consequences for standard of living.
Strong growth is how rich countries have become rich. Weak growth is why poor countries have remained poor.
More than statistics
Strong economic growth is more than sterile statistics. Strong growth provides more jobs, higher incomes, and a higher standard of living. Growth improves people’s lives!
Strong growth also helps government afford various commitments, such as Social Security and Medicare, public schools, and infrastructure spending.
Strong economic growth is also the only way we can ultimately eliminate poverty.
Growth is about caring
Many anti-capitalists believe that growth is about being greedy, or that growth benefits only the rich. Not so! Growth benefits everyone, rich, poor, or in-between.
For example, a handicapped person who is incapable of work and completely dependent on others is better off in a rich country than a poor one.
For example, growth can help a jobless person get a decent job that turns into a good career.
Given enough time, growth can lift the poor of Africa into a US or European middle-class standard of living.
Growth does help the mega-wealthy buy yachts, but it also helps poor people get better food, clothing, and shelter. As illustrated by the graph above and real-world experience, strong growth will lift more people out of poverty than any government program.
Yes, growth is about achieving overall results, but it’s also about caring for the less fortunate.
Growth is available to all
It is not an impossible dream that poor Africans could lift themselves to a US or European middle-class standard of living. It can happen.
Multiple Asian countries have done it, or are in the process of doing it. According to the Maddison Project data, Asia’s overall real GDP per capita has grown by 3.7% annually since 1950. This amazing growth has lifted a billion people out of extreme poverty.
Growth and prosperity are available to any country that follows the magic recipe, and does so for decades. The magic recipe consists of (a) economic freedom for the people, (b) a limited government structure that provides needed stability, and (c) a culture that values freedom, new ideas, and profits.
Prosperity does not come from skin color, geographic location, or an abundance of natural resources. Prosperity comes from following the recipe. Therefore, prosperity is available to all who follow the recipe.
To be clear, this opportunity is available to all nations, not just poor ones. Rich nations like the US can become even richer if they do a better job of following the recipe.
Prioritize growth over redistribution
People have eternally debated the choice between income growth and income redistribution. I hope the graph and USA/Africa comparison shown above help clarify that, in the long run, this is not a rational choice. In the long run, the power of compounded growth makes growth the clearly better choice.
Sustained long-term growth is so powerful that it will likely overwhelm any other factor, even inequality. In other words, sustained growth will give the poor a higher standard of living than redistribution. It therefore makes good sense to prioritize growth over redistribution. No country can redistribute its way to prosperity, but any country can grow its way to prosperity.
If we take a long-term view, the inescapable conclusion is that we should all be pro-growth. All of us. Growth provides the greatest good for the greatest number.
I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.