ECONOMIC GROWTH 101
OCTOBER 30, 1996
At the root of the Republican and Democratic economic plans is a fundamental disagreement over what is a sustainable rate of financial growth. NewsHour business correspondent Paul Solman examines the different theories behind the plans and the history of economic growth in the U.S.
A RealAudio version of this NewsHour segment is available.
September 6, 1996
Unemployment figures are at their lowest level in years. What does this mean for the economy and the average American?
August 5, 1996:Bob Dole unveils his economic plan.
March 21, 1996
Should government do something to ease the impact of economic change on today's working Americans?
March 20, 1996
Economics correspondent Paul Solman of WGBH-Boston investigates how different forms of capitalism produce very different results for stockholders, workers, and communities.
Browse the Online NewsHour's coverage of the economy.
Browse NewsHour segments on the federal budget.
JIM LEHRER: Now that issue of economic growth. There were two ready responses today when the Commerce Department announced the U.S. economy grew 2.2 percent last quarter. Good steady growth, said the Clinton administration, not enough growth, answered the Dole campaign, as we just heard. Our business correspondent, Paul Solman of WGBH-Boston, explains this key debate between the two candidates.
PAUL SOLMAN: It's been one of the biggest disagreements of the current campaign over how fast the American economy can grow. On the Republican side, Vice-Presidential Candidate Jack Kemp has made the case in greatest detail.
JACK KEMP: Our biggest debate with this administration on domestic policy is that they think we're at our fullest capacity, that we've reached our potential, and that 2 1/2 percent growth is enough for America. Frankly, that's just not good enough for this country.
PAUL SOLMAN: The Democrats' response is becoming mantra. The Republican remedy would cut taxes more than spending, thus raising the deficit and stalling, not revving the economy.
PRESIDENT CLINTON: It's a $550billion tax scheme that will cause a big hole in the deficit which will raise interest rates and slow down the economy and cause people to pay more for home mortgages, car payments, credit card payments, college loans, and small business loans. It's not good to raise the deficit. We've worked too hard to lower it.
PAUL SOLMAN: Growth during the Clinton administration has averaged just over 2 1/2 percent. The President seems pretty proud of that achievement. By contrast, the Republicans have countered with a number of possible growth rates, all higher. Bob Dole has talked about 3 1/2 to 4 percent growth. Jack Kemp has promised 5. Now, because of all the numbers in this debate and despite the risk of the Ross Perot infomercial folks suing us for plagiarism, we'll take this slow, one chart at a time. So first, why does growth matter that much anyway, or "Don't Cry for Me, Argentina."
Consider this: In the 1890's, as economist Lester Thurow likes to point out, the United States generated about the same of income per person as Argentina. The centuries since, U.S. income per person grew a mere 1 percent a year faster than Argentina's did, but over the course of 100 years, that 1 percent makes all the difference in the world. Today, with average U.S. income per person of about $25,000 a year, most of us can afford marvels unimaginable in the 1890's.
BRUCE SPRINGSTEEN: Born in the USA. I was born in the--
PAUL SOLMAN: In Argentina, by contrast, an average person's income is now just $8,000 a year.
WOMAN SINGING: Don't cry for me, Argentina.
PAUL SOLMAN: Consider this: Say you and I each earned $50,000 a year starting today. My income grows 2 1/2 percent a year, yours 5 percent. At those rates, in 20 years, I'll be making $82,000 a year in today's dollars, not bad. You, however, will be making $133,000, inflation-adjusted. So the rate of growth certainly does matter. For one final example, here's Jack Kemp again.
JACK KEMP: We should double the rate of growth, and we should double the size of the American economy.
PAUL SOLMAN: At the 5 percent growth rate that Jack Kemp's projecting, his goal of doubling the economy would be reached in about 14 years. By contrast, at the current growth rate of 2 1/2 percent, it will take about 26 years to double the size of the U.S. economy. And that brings us to a second critical question. What exactly is growth anyway, or thing one and thing two? Well, at the simplest level, growth is just a measure of how much more an economy produces in goods and services every year. Last year, say it was this much. This year, the same, plus a little bit. No value judgment as to whether the new stuff is good or bad--just that there's a little more of it. But for our purposes the point is that growth comes in two completely different ways is really two different things entirely. Thing one is simply more people who as they join the work force produce more stuff.
In the U.S., the work force is currently growing about 1 percent a year. So just by adding workers like this welder, the economy is growing a percent a year. But workers tend to drive off with as much as they produce, so as a whole, we're no better off. That's why a healthy economy does not grow by one thing alone. As Nobel Economist Robert Solow points out, you need something more than just labor.
ROBERT SOLOW, Nobel Economist: The thing you would like to do by way of accelerating growth is getting more production per person, per person in the labor force and ultimately per person in the population.
PAUL SOLMAN: Thing two then is production per person, better known as productivity. That's what we're really after. So when you hear numbers like 2 1/2 percent growth or 5 percent growth, take away that 1 percent growth in the labor force right off the top. Productivity is what's left and what makes an economy rich. Under President Clinton, it's running about 1 1/2 percent a year. By contrast, the Republicans are promising almost 4 percent growth in productivity. And they're clear about how they do it--by cutting taxes and letting people keep more of their income. As a mantra of Bob Dole's puts it--
SEN. BOB DOLE: It's your money. It's your money. It's your money. (applause)
PAUL SOLMAN: Republican Nobel Laureate Gary Becker explains a key purpose of tax cuts, providing the right economic incentives.
GARY BECKER, Nobel Economist: If I earn the income and I keep the income that I earn, I have more incentive to work harder. And this takes many forms--hours you work, the energy I put into work, the effort I put into thinking of new ways to be creative and make money. If I was a private businessman, would I have an incentive to start my own business, with the heavy risk involved in starting your own business, the 16-hour days that you have to work for years before you can begin to make it, the high chance that you will fail.
PAUL SOLMAN: So the argument is basically if we tax you less, you will work harder?
GARY BECKER: If you tax me less, I'll work harder. I mean, there are a lot of these subtle effects that when you add them up have a big effect on the economy.
PAUL SOLMAN: A big effect? Well, says Professor Solow-- PROF. SOLOW: You have to be realistic about how much investment you get and--or how much harder people will work. We do not observe a lot of of extra work coming from the size of incentives that we are able to, to give.
PAUL SOLMAN: So that brings us at last to the main question: How fast can we grow, or the Brady Bunch slowdown. Well, for a little bit of perspective, let's take a brief look at American history. From the beginning, say Eve to Pocahontas, the U.S. economy grew something like this--hardly at all--a pretty stable population so no labor growth, living pretty much the same way century after century so no productivity growth. Then along came the Europeans. And both the work force and productivity headed up a bit.
Total growth looked something like this--say a percent or two until 1800, and the Industrial Revolution--when it began looking more like 3 percent, all the way to World War II, with the typical ups and downs of a modern economy. After the famous Life Magazine end-of-war kiss, growth skyrocketed and was the fastest ever, better than 4 percent a year right through the era of "flower power." And then, since the early 70's, marked in our family by the advent of the Brady Bunch, growth has slowed back down to something like 2 1/2 percent a year, where, my friends, it remains today.
Now, if you take out increases in the labor force, you get productivity gains that look very roughly like this--1 1/2 percent or so from the 1800's to the Great Depression, 2 1/2 percent from the war to about 1970, 1 1/2 percent or so since. To economists who study the numbers over time, the key question is: Which of these rates of growth can we maintain without overstimulating the economy and triggering inflation?
PROF. SOLOW: We want to capture that idea of a trend. We want to capture the idea of a smooth path that the economy fluctuates not so much around as just under. You want to think of, of the capacity of the economy to produce stuff that we want. And we don't always use all that capacity. We have recessions, and sometimes we overuse the capacity. We overheat the economy. It's that path in-between that we're after, and that's the growth path of the economy.
PAUL SOLMAN: Robert Solow and probably most economists think America's current growth path is likely to average around 2 1/2 percent a year for a while, that is, 1 percent more workers each year, at least till the baby boom reaches retirement, 1 1/2 percent more productivity. But Professor Becker thinks otherwise.
PROF. BECKER: I think it would be a sad commentary if we all said because we've been growing slower, therefore, let's give up on the idea that we can grow faster, that there's no evidence that we can't grow faster.
PAUL SOLMAN: Gary Becker's estimate for greater growth is between 2.7 and 3 percent--the 1 percent by which everyone agrees the work force will grow, plus 1.7 to 2 percent productivity growth. Now, a difference of .3 percent may not sound like much, but it's huge. You have $100 billion in the next four years alone.
PROF. SOLOW: That's like saying of one of my--of a newborn grandson, this kid could grow up to be six feet tall or seven.
PAUL SOLMAN: How unlikely is a seven-footer in the Solow family--the professor's equivalent of 3 percent total growth?
PROF. SOLOW: It is wildly optimistic. And that's a pipedream.
PAUL SOLMAN: So Solow doubts Becker's low number of 2.7 percent, disbelieves his high of 3 percent. As for Bob Dole's 3 1/2 to 4, or Jack Kemp's 5, well, those to Solow are simply fantastic, especially a few years from now when the work force is pretty much expected to stop growing. At that point, nearly all growth will have to come from productivity alone. Is unprecedented productivity growth plausible? That turns out to be the key economic question of this year's presidential campaign.