Growth I – Why Economists Worry About It So Much, and Why You Should Too CEPR Basic Economics Seminar Dean Baker September 22, 2005

Growth: Why Economists Worry About It So Much, and Why You Should Too Definitions: What Gets Counted, What Doesnt The links between growth, jobs, productivity, and wages Europe v. the United States, more leisure, less growth Growth and regulations and public spending

What is growth? The mysteries of gross domestic product (GDP) Definition of GDP – all marketed goods and services Major categories: –Consumption – cars, rent, medical care, restaurants, college tuition, daycare, etc. –Investment – spending on new plant, equipment, software, housing –Government spending – direct spending (i.e., not transfers like food stamps or TANF) on goods and services (e.g., defense spending, education spending, road construction) –Net exports – exported goods and services minus imports (note: imports cost jobs the same way exports create jobs)

Source: BEA, NIPA Table 1.1.6

Definition of GDP What is missed by GDP –If we switch from providing goods or services for ourselves to buying them in the market, this raises GDP (e.g., daycare, domestic workers). –GDP does not include any subtractions for items that are harmful, such as crime, pollution, or environmental degradation (e.g., building a highway along a beautiful river.) It is not a comprehensive measure of well-being and is not intended to be.

The Link Between Growth, Jobs, Productivity, and Wages Growth and Jobs – More Growth, More Jobs –Other things equal, the faster the economy grows, the more jobs it creates.

Sources: BEA, NIPA Table and BLS, Current Employment Situation

Source: BLS, Productivity and Costs and Current Employment Situation

The Vicious Cycle Productivity growth has not translated into wage growth largely due to a weak labor market. In the absence of wage growth, consumption growth has been driven by tax cuts and household debt.

Sources: BEA, NIPA Tables and 1.10 and Federal Reserve, Flow of Funds Accounts

Europe vs. the U.S. More leisure, less income

Source: OECD National Accounts

Source: Analysis of the Groningen Growth and Development Centre and the Conference Board

Source: Analysis of the Groningen Growth and Development Centre and the Conference Board

Factors Determining Growth in Standard Models Standard models assume that market outcomes almost always maximize efficiency. This means that: –Higher taxes will almost always mean less growth and fewer jobs. –Higher government spending will almost always mean less growth and fewer jobs. –Trade barriers will almost always mean less growth and fewer jobs. –Government regulations (e.g., environmental regulations) will almost always mean less growth and fewer jobs.

Factors Determining Growth in Standard Models Job loss in these models means that workers opt not to work because the wage is too low – not unemployment as most of us might think of it. –In economic models, workers always decide whether they prefer labor or leisure (working or not working) at the prevailing wage.

Factors Determining Growth in Standard Models –If government intervention lowers the prevailing wage by 1 percent (e.g., from $10.00 to $9.90) then some number of workers who would have worked for $10.00 an hour opt for leisure at $9.90 an hour. –Defense spending, like other forms of government intervention, also makes the economy less efficient and therefore also costs jobs in standard models.

Conclusions In general, more growth is better. Economic growth is not a comprehensive measure of well-being. The difference in economic output between Europe and the U.S. is primarily due to more leisure in Europe, not a less productive economy. It is reasonable to advocate policies that promote ends other than growth (e.g., a cleaner environment.) Conservatives do it all the time.

Reading List Baker, D Hot Air Over the Arctic:An Assessment of the WEFA Study of the Economic Impact of Oil Drilling in the Arctic National Wildlife Refuge, Washington, D.C: Center for Economic and Policy Research [ tm]. Goodstein, E The Trade-Off Myth: Fact and Fiction About Jobs and the Environment. Washington, D.C: Island Press.

Growth I – Why Economists Worry About It So Much, and Why You Should Too Dean Baker Center for Economic and Policy Research