Understanding Economic Growth


One of the major topics I discuss on this blog is:

  • Economic growth, in particular the fact that the U.S. economy has grown at the relatively slow rate of 2.1% per year since the end of the Great Recession in June 2009. It appears, however, that the economy may now be starting to pick up speed.

There are plenty of “experts” who say that it is unrealistic to expect economic growth to continue indefinitely at the same level (3% on average) which has prevailed since the end of WWII because:

  • Resources are limited. The earth is finite but it is also vast. It is unlikely that any mineral or even energy source such as fossil fuels will be depleted for hundreds, if not thousands, of years. If and when any particular resource becomes scarce, human ingenuity will be able to find a replacement.
  • Population growth is slowing down. It is likely that human population worldwide will level off this century somewhere between 9 and 10 billion. This is highly desirable but is unlikely to slow down economic growth. As income and education levels rise, productivity and GDP per person will also increase.
  • Growth tends to be debt financed which is unsustainable.  I agree with this reservation. This is the one problem, if not solved, which has the potential to derail continued steady progress.

The remarkable human progress of the last 200 years is likely to continue indefinitely.  In particular:

Conclusion. The world has enjoyed remarkable human progress in the last two hundred years, in the form of steady economic growth, and this progress is likely to continue indefinitely into the future.

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Can America’s “Fourth Revolution” Be Avoided?


My last post, “America’s Fourth Revolution,” presented a persuasive argument by the political scientist, James Piereson, that our currently dysfunctional political system will be unable to solve our most fundamental problems of massive debt, accompanied by a rapidly aging population and slowing economic growth. This will result, according to Mr. Piereson, in a severe crisis leading to a fourth revolution, overthrowing the New Deal liberal consensus which has prevailed since 1932.
It is commonly understood that entitlement spending: Social Security, Medicare and Medicaid, is the main driver of our rapidly growing national debt. A recent report from the Centers for Medicare and Medicaid Services, summarized in the Wall Street Journal, shows that U.S. healthcare spending is likely to rise from just under 18% today to 19.6% of GDP in 2024.
Capture2Barron’s editor, Thomas Donlan, has just reported that the Director of the Congressional Budget Office, Keith Hall, stated in a recent hearing of the Senate Budget Committee that if spending for Medicare and Medicaid, as a percentage of GDP, fell by 25% over ten years, and then stayed in line with GDP after that, the U.S. would have a budget surplus of 2% of GDP in 2040 instead of the otherwise projected deficit of 6.6% of GDP. Furthermore debt held by the public would fall to 24% of GDP, a remarkable achievement.
This is significant because one country, The Netherlands, spends 12% of GDP on healthcare, and every other country in the world (except for the U.S.) spends less than 12%.
Conclusion: all the U.S. needs to do, so to speak, is to bring healthcare costs in line with the rest of the world and our entire deficit spending problem would be solved! Nobody is claiming that this will be easy but it certainly is within the realm of possibility. It is also far superior than waiting to act until we have another fiscal crisis and thus risking a huge change, a revolution, in our way of life.