There’s a fashionable line of attack against Liz Truss’ single-minded focus on growth: what about the poor? And the planet? By chasing GDP growth, according to this review, Truss is proving to be a politician who knows the price of everything and the value of nothing.
This review is wrong. The new British Prime Minister is absolutely right to believe that economic growth should be his top priority. The problem is that she doesn’t seem to know how to go about it.
Let’s start with the case of economic growth. Gross domestic product is not, and never has been, an attempt to measure the well-being of a society. It is easy to list activities that promote well-being but not growth, and many others that promote growth but not well-being.
Nevertheless, it is striking how countries with high GDP also have fulfilled citizens. Choose your topic, from life expectancy to infant mortality, opportunities for women to protection of basic human rights, cleaner streets, reduced crime, even better art, from television to the opera. One way or another, people who live in wealthy countries are likely to enjoy the good stuff more.
Of course, causation probably works both ways in many of these cases. Healthy people, safe cities and empowered women are both causes and consequences of economic growth. When you look through the prism of complex, sophisticated, and multifaceted efforts to measure well-being, there’s a lot to suggest that growth is good. For example, the Social Progress Index combines “60 social and environmental outcome indicators” to produce “a nuanced picture of what a prosperous society looks like.” This valuable effort holds few surprises. The 25 “most successful societies” are the Nordic countries, Western Europe, the United States, Canada, Australia and New Zealand, as well as Japan and South Korea. Apart from a few petrostates, the list of countries with the highest GDP per capita contains roughly the same names.
Focus on the less fortunate places and you will see that Burundi, South Sudan, Central African Republic, Democratic Republic of Congo, Somalia and Chad are among the bottom ten. The bottom ten according to GDP per capita or according to the social progress index? Both, of course.
GDP per capita is not a measure of social progress. It happens to be extraordinarily closely correlated with social progress.
Let us also not forget the prescient argument of Benjamin Friedman, in The Moral Consequences of Economic Growth (2005), that “economic growth – that is, an increase in the standard of living for the vast majority of citizens – most often promotes greater opportunity, tolerance of diversity, social mobility, ‘commitment to fairness and dedication to democracy’. The stagnation of growth – which many wealthy countries, particularly the UK, have experienced since 2008 – clearly risks the opposite. If in doubt, look around.
Economic growth promotes all of these good things, and it has another advantage: it tends to last. The best predictor of economies that will be complex, sophisticated, productive, and wealthy next year is the list of economies that were complex, sophisticated, productive, and wealthy last year. Grow faster now, and there’s reason to expect you’ll be richer indefinitely.
This is therefore the case for prioritizing economic growth — not to the exclusion of everything else, but as the central objective of policy. Truss and his Chancellor Kwasi Kwarteng deserve credit for recognizing this. Prioritizing growth in the recent past would have avoided some obvious policy mistakes, such as Theresa May’s insistence on leaving the EU customs union and single market, or George Osborne’s disastrous obsession with balance the budget in the face of a deep recession.
But while recent governments have shown how to curb growth, we know much less about how to increase it. And Truss’ statements so far do not inspire confidence.
His diatribe on the “disgrace” of cheese imports suggests someone who has failed to understand the importance of free trade in goods for a successful modern economy. His heartbreak at seeing solar panels on farmland speaks to a soul that values bucolic tradition over life-saving technology that is becoming more productive at an astonishing rate – not to mention a strange taste for brutal intervention.
Its vast and unlimited energy price cap is a kick in the teeth for market forces. By some measures, the biggest fiscal event in living memory, he feels closer to Mao than Thatcher. And that’s pointless: a truly pro-growth government would have achieved the same social goal by letting prices rise, but providing a compensating cash subsidy to every household. This would allow the price system to encourage the efficient use of old technology and the adoption of new.
Its tax cuts and enterprise zones may spur growth, but the currency and debt markets seem to be at odds. Most policy buffs suspect that fundamental reforms in housing construction, infrastructure and education are likely to be needed. Better access to major markets on our doorstep could also help, but this ship seems to have sailed.
It’s good to have a Prime Minister focused on the goal of growth, but what we really need is for her to show signs of being able to put the ball in the back of the net.
Tim Harford’s new book is ‘How to make the world add up‘
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