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
Doesn’t
• 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 1.1.6 and
BLS, Current Employment Situation
Source: BLS, Productivity and Costs and
Current Employment Situation
The Vicious Cycle 2000-2005
• 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 1.1.5 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. 2001. “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
[http://www.cepr.net/publications/anwr_2001_09.h
tm].
• Goodstein, E. 1999. 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
baker@cepr.net
Center for Economic and Policy Research
www.cepr.net