The perception of doors
Is a lack of faith preventing us from building a better economy, and a better world?
There is a famous paper by Robert Lucas (an economist who’s just about famous enough that non-economists may have heard of him) in which the author works through some ideas about economic development and plays around with models of growth. Before he gets going, though, he indulges in a bit of reflection and contributes one of the better passages you’ll find in a piece of economics research. After setting out some figures which illustrate the enormous gaps in income and growth rates we see across countries, Lucas writes:
I do not see how one can look at figures like these without seeing them as representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly? If not, what is it about the “nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
Right? We know that it’s possible to structure a society in such a way that its inhabitants enjoy incomes ten or twenty or fifty times those in the world’s poorest countries. Imagine how much suffering could be alleviated if some of whatever magic it is that richer countries have captured could be shared with poorer countries? Today, imagining is easier than it once was. Lucas’s paper was published in 1988, at a time when the first stirrings of a period of rapid growth in developing economies were becoming apparent. Incomes have gone up a bunch since then, in Asia and Emerging Europe especially. Hundreds of millions of people have been pulled out of extreme poverty. Hundreds of millions of others remain stuck in poverty, of course, and Lucas’s questions apply as much now as ever. But what the past three decades illustrate is that gaps in incomes are indeed possibilities; there are doors waiting to be unlocked, which open onto fantastical worlds that somehow, miraculously, we are able to access.
Yet Lucas’s passage has embedded within it a very common sort of plutocentrism, in which we, the citizens of the rich world, assume that what doors there are to open in our own societies have been opened. But do we know this? What makes us think that we’re operating at our potential, or even particularly close to it? Piles of painstaking and fascinating economic history work notwithstanding, we have no idea whether the confluence of factors in 18th-century Britain which sparked an economic revolution was the first of its kind in history, or whether humankind had been on the doorstep of industrialization in other times and places, perhaps decades or centuries before, but for one reason or another failed to step through, condemning untold generations of people to continue scratching out a meager living from the earth when they might instead have been doing who knows what else.
Or reflect for a moment on the state of the American economy in the 1930s. Toward the end of that decade Alvin Hansen began arguing that America had become mired in a state of secular stagnation. Before, rapid population increase and a flow of exciting innovations created the conditions for massive investment and robust growth. But the boom times had ended, he thought, and with a dwindling stock of exciting new investment opportunities the government needed to borrow and spend just to keep the economy from slipping into a slump. You may know of secular stagnation from a different context, a modern one. Over the past decade, Larry Summers has argued that America and perhaps many other economies as well face a chronic demand shortage, caused by an insufficient appetite for investment among the individuals and companies and governments that have been piling up loads of wealth over the past generation. We can speculate about the reasons these monied people and institutions aren’t more eager to invest: maybe it’s about slower population growth and innovation, like Hansen assumed, or maybe it’s something else. Whatever it is, the policy recommendation is the same: without government borrowing and spending we can expect to stay mired in a slump.
Except, Summers’s commitment to fiscal stimulus occasionally seems to waver. Not long ago, for instance, he began warning that plans for fiscal relief bills might go too far, tweeting for instance that: “We are going to have to watch this economy very carefully. I do think conventional wisdom is underestimating the risks of hitting capacity.” Now to be fair to Summers, his more considered writing does not seem particularly ambiguous on whether lots of fiscal support under conditions like those we now face is a good idea. But his recent comments do seem to betray a certain lack of faith in the idea that we really could be doing much better as an economy—an idea central to the secular stagnation hypothesis. Which is striking, really, when you think about what happened in America after Hansen began sharing his ideas. By 1939, real output per person in America had risen back above the level pre-Depression. For comparison’s sake, this was roughly where the US was in 2013, relative to 2007. Then, over the five years that followed, real output per person rose by 82%. Do you know by how much per capita GDP rose in the five years after 2013? Not 82%! If it had, real GDP per person in 2018 would have been in the neighborhood of $95,000. At about $57,000 we fell just the littlest bit short.
These figures raise the question: does that gap between $57,000 and $95,000 represent one of Lucas’s possibilities? Were there doors that we breezed by without a second look in the aftermath of the Great Recession which, had we only tried the knob, might have permitted us entry into a future in which the typical American earns about 80% more? Obviously, reasonable people think not. But why? It is true that the aforementioned 82% growth in real output per person in the early 1940s occurred as a consequence of wartime mobilization. The level of output attained in 1944 was not really sustainable, and during demobilization the US gave back some of the previous gains in income. But not all of them. Not even close. As of 1959, real incomes in America were roughly double what they had been in 1939. Ours, today, are only about 20% above the level of 2000.
Is there anyway to know whether we might have done much better in recent years? In response to Summers’s tweet about capacity, I noted that no, no one really has any idea what kind of output is realistically achievable over the short- to medium-term. A few people answered back that while we don’t know exactly, we have at least some ballpark notion. But do we? The economics-minded among us sometimes suggest that inflation ought to be a guide of sorts as to how far we are from our potential—the more underused capacity there is about, the lower inflation ought to be—but it isn’t, not really. Prices cratered during the Depression, but recovered impressively between 1933 and 1937, and while deflation resumed during the recession of 1937-38 price declines were far milder and far less persistent than they had been early in the decade: not at all what one would have expected from an economy running at something like half capacity. Which isn’t all that surprising. Existing unused capacity may depress prices, but potential capacity need not; unsold housing inventory may drag down home values, for example, but the mere fact that we have everything we need to build vast quantities of new housing does not.
Suppose there is an opportunity today to unlock unimagined economic potential, as America did from the 1930s to the 1960s. What is stopping us from seizing it? The problem seems, at least in part, to be a set of constraining beliefs. There is a limit to how optimistic you can be about America’s growth potential and still be taken seriously in Washington, for one thing. If you ventured that growth in real output per person in America could be pushed as high as 3% per year you’d be laughed at, even though that’s exactly what the country managed from 1940 to 1960. (In the new millennium, average annual growth in real output per person has instead run a bit short of 1%.) Macroeconomic pessimism too can become a self-fulfilling prophecy, both on the demand side and the supply side. If people don’t believe there is a boom coming for which they need to prepare, they won’t make the enabling investments. If the Federal Reserve doesn’t believe that fast growth is possible, it won’t allow the rise in spending needed to realize that growth-which-might-be.
[This, by the way, is the massive but poorly understood problem with inflation hawkishness. Suppose I’m wildly overestimating things and the door we’re hoping to open permits us entry to a world in which real incomes are just 10% higher than they otherwise would be. That’s trillions of dollars in aggregate income that we’re missing out on, year after year after year. There is simply no way that annual inflation rates of 3% or 5% or even 20% could impose economic costs anywhere close to the amount of income we are potentially forgoing by just...not seeing whether we could do a bit better.]
Beliefs about the proper role of government are clearly a constraint as well. There is simply no getting around the fact that massive government intervention was needed to unlock the door that America opened around 1940. During the war itself, of course, it managed the economy far more directly than would be possible, or in all likelihood desirable, today. But in the years after, it poured money into public education, research and infrastructure, and it engaged in quite a lot of what we would refer to today as industrial policy. It meddled with markets in many other ways, too, some of which were surely counterproductive. But the experience of the postwar decades and of the more recent “neoliberal” era places a pretty hard constraint on what can be claimed in terms of the growth-boosting effects of free markets. The more certain you are that neoliberal reforms contribute positively to growth, the harder it is to make the case that this positive effect is anywhere near big enough to matter relative to other things.
Which isn’t all that surprising, is it? What, exactly, is the motive power driving forward an economy which isn’t being pushed to test its limits by some overarching purpose, like the need to win a war, hot or cold? It is our individual desire to have more, is it not? We trust that people would like to have more things, and so we assume that they will endeavor to boost their incomes, and as they do the economy produces more and different goods and services which if all goes to plan are effective enough a lure to keep desirous individuals on the treadmill. But, on the one hand, the market cannot provide everything people might wish to buy. Our household has gotten to the point where our two incomes leave us a little disposable income after the bills are paid and some money is put away for retirement and the college tuition payments we expect to have to pay a few years down the road. And it seems like what we’re meant to do at this point is...Acquire? Upgrade the furniture and get rid of the plastic dishes we still often use and, I don’t know, buy a hundred throw pillows? And we do indulge in things here and there. I’ve got my eye on a new acoustic guitar. In the spring I’m going to get a new wheelbarrow to replace the wobbly one we’ve been relying on for years. These are exciting times.
But I’ll tell you what I would really be willing to spend a lot more money on. I’d happily fork over a lot more for much better transit and regional rail in the Washington area. I’d pay a mint to be able to draw zero-carbon energy off the grid, and also for the power to not go out when it storms. I would absolutely sign up to buy high-quality, pre-K through post-secondary public education for everybody. Wouldn’t it be cool to do that? Like instead of saving up for my kids’ tuition because I can, all the while knowing that others cannot, what if I paid that money in taxes and then maybe others could attend university too? Or hey, if you could hit the store and pick out a nice new nobody-lives-in-poverty, I would snap that right up. I’d go to Costco and get enough to fill up half the cellar.
But I can’t go buy that stuff! Those are things you have to purchase collectively. And if you set up your political system and your economy in such a way that things which people might really value cannot be purchased, then people will buy stuff they value less—but which can be provided by the market—instead. And then the economy will produce less of value than it otherwise might, and perhaps people who can will save more too because savings are a useful thing to have in a society as unforgiving as America’s, and that is at least partly how a country ends up stagnating, secularly.
And beyond that, is it not apparent that the acquisitive impulse of private individuals provides diminishing locomotive power, economically speaking, as incomes rise? How sad would it be if that were not the case? Rich people spend a smaller share of their incomes than poorer people do; the allure of all the non-essentials that we can buy, while real and powerful enough, simply isn’t as intense as the drive to meet basic needs. And that’s the way it should be! This would be a very depressing society indeed if people felt as moved to buy Le Creuset cookware and time at the doggie spa for Fido as they did to obtain sufficient food, decent housing, and the most basic of consumer luxuries. But as our society operates now we force ourselves into an absurd choice: either people will desire material things as hungrily as ever as incomes rise indefinitely, or we stagnate because people—for good and proper reasons—lose their desire to consume as readily from their income as they earn more.
What’s so bad about stagnating, if that’s where we find ourselves? Maybe nothing. Maybe the task now is to work harder at redistribution so as to eventually move all of humankind over the consumption threshold into the realm of ho-hum consumerism, and then to just...post memes and such. I don’t think that’s right, though. For one, secular stagnation leaves us with the illusion of scarcity, and that seems to prevent us from being as generous with redistribution as we ought to be. For another, and I don’t know if you’ve noticed this, but people seem to want more out of life than things. When society does not offer them purpose, they go hunting for it, and sometimes their search leads them to places which are individually and socially destructive.
Perhaps more importantly, why shouldn’t society offer them purpose? What’s through that door that we seem reluctant to push open isn’t just more income or output, after all. It’s possibility. It is the capacity to do extraordinary things. It’s the economic wherewithal to prevent destructive climate change, to lift every person out of poverty and give them the tools to realize their full potential, to make our communities beautiful and functional and a genuine pleasure to see and experience, to produce great works of art and culture, to go to the moon or Mars or wherever else if we like, and who knows what other things. Your imagination may be better than mine. We have the luxury of determining for ourselves a purpose and going out and realizing it.
The really funny thing is, we likely need the purpose to escape this period of stagnation. American per capita output didn’t just happen to grow by 82% between 1939 and 1944. The country was pushed into growth by horrific events and a galvanizing mission. We found reserves of economic strength we hadn’t realized were there as we pursued a collective goal: the defeat of fascism. What’s going to galvanize us now? What’s the thing that will convince us that we really must test our potential, invest heavily in our capacity to generate things of value, develop and draw on the talents that 330 million people—or indeed 7-odd billion—have to offer? What do we want for ourselves, and believe to be worth doing? What’s the point of all this? What’s our purpose? Secular stagnation sounds like a problem that’s been imposed on us, some strange ailment we need to cure. It isn’t. It is an indication of a society adrift. It is, in a sense, secular stagnation.
How can we persuade ourselves to have a little faith? Is there some way to get this listless society to dream big dreams and make big plans? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
Ryan, I’m sure you’ve been told before - but I am genuinely impressed by your ability to write about these issues (often loaded with jargon and sounding remote from our everyday) in such a deep and inspirational way. Thank you, and please keep these posts coming!