Philip Cross: We need leaders to focus on economic growth

Article content

Like most Western nations, Canada takes economic growth for granted. That may explain why the election so far has not addressed the pronounced slowdown in our GDP growth over the past decade (see chart). The 10-year average of 1.5 per cent growth in real GDP is the worst since the Great Depression of the 1930s. Canadians need to be more aware of what a novelty sustained economic growth is in human history and how even small differences in growth rates can cumulate to significantly different economic outcomes over long periods.

Article content

In the life of our species, sustained economic growth is a brand-new experience. Economic historians agree that from the birth of Jesus to the middle of the 18th century there was little or no overall growth. Brief spurts in the rate of economic activity were soon reversed, either by the Malthusian check of population growth consuming all the extra resources or by higher incomes attracting external or internal predators. The result was an ingrained mentality that the economy was a zero-sum game, in which the only way to advance was at the expense of another. This peasant way of thinking — focusing on redistributing rather than creating income — still permeates the focus of collectivists, who misleadingly call themselves progressives despite their retrograde approach to the economy.

Article content

Capitalism’s breakthrough was to sustain higher growth over long periods. The Industrial Revolution’s initial upturn to about one per cent in per capita real income growth was not enormous by modern standards. But the difference produced by one per cent growth compounded over a century is enormous; as former Fed Chair Alan Greenspan observed, if the U.S. had grown by one per cent less a year from 1870 to 1990, it would have been no richer than Mexico. Nobelist Simon Kuznets, one of the pioneers of the study of economic development, observed that people forget “how exceptional growth of this magnitude is on the scale of human history.” As he wrote, growth had accelerated and the U.S. was doubling its GDP every 32 years.

Article content

Understanding long-term economic growth required a new way of thinking. The British economist Roy Harrod noted in 1939, while formulating one of the first models of economic growth, that the very idea of growth was a “mental revolution” for a species conditioned to treat life as “solitary, poor, nasty, brutish, and short” in the words of Hobbes. The tools to measure GDP and its growth were not developed until the 1930s, while the key concept of “productivity,” in the sense in which we now understand the term, did not enter the Oxford Dictionary until 1950.

Article content

Economists developed the concept of GDP as the sum of household consumption, business investment, government spending and net exports. Economics might have been better served if Kuznets, also one of the pioneers of national accounting, had won the argument that government spending should be excluded, since its inclusion would open the door to the populist belief that raising government spending somehow boosts overall GDP in the long run. More government spending does lift GDP in a strict accounting sense in the short term, but many studies have found that the growth of government beyond a certain point constrains overall growth.

Continued growth is neither automatic nor guaranteed, not even in rich countries. Economists at Goldman Sachs found 90 instances in the past 150 years in which there was no growth over a period of six years or more. Examples include Germany in the 1860s, Japan in the 1990s, France in the 2000s, India in the 1930s and 1940s, and South Africa after 1982. The American economist, Robert Gordon, a leading growth theorist, has written that the “process of economic growth is quite mysterious, leading us to think we know more about how to improve it than we do.”

Article content

Economists do not advocate economic growth for its own sake. As the American writer Edward Abbey commented, “growth for the sake of growth is the ideology of the cancer cell.” Economic growth has vastly increased our standard of living, extended our life expectancy and removed the spectre of famine, which as recently as the middle of the 19th century stalked European countries such as Ireland and Finland. One of the first growth theorists, Arthur Lewis, argued that another benefit of growth is that “it increases the range of human choices … [it] increases … freedom.”

Canada’s faltering growth rate over the past decade needs to be an issue in this election. Much slower growth is not the inevitable result of forces such as an ageing population. It also reflects lagging business investment, our inability to innovate and build world-class firms, and our minuscule productivity growth. Unless we openly acknowledge the importance of raising our economic growth, we are likely to continue on the path to stagnation.