They’re coming to America! Some Thoughts on American Demographics and Growth

My last post looked at the changes which occurred around the end of the 1970s. Specifically it looked at the collapse of the post war settlement and neoliberal response many states took to bolster growth. Scott Sumner argues that growth slowed because technological progress slowed and neoliberal reforms helped growth to be better than it otherwise would have been. He presented data to show that rich countries which reformed most caught up with the US most. I had some problems with this interpretation of events, but concede Sumner makes his argument well (even as others do not).

First of all, as Paul Krugman points out, the differences between US and European GDP per capita since 1980 are not all about economic growth, some of it reflects different leisure choices.

In the 1970s the long-run trend of taking productivity gains out partly in the form of shorter working hours came to an end in the US, while continuing elsewhere.

Further to this I pointed to the exorbitant privilege which the US enjoys by virtue of the dollar’s status as the reserve currency of the world. This would have boosted growth using a policy tool to which nobody else has access. I also added that three of the states he highlighted as successes, Hong Kong, Singapore and the UK, were success stories that relied in large part for their success on the large role they played as regional or global financial hubs. They gained on the United States following 1980 but the growth model they followed may not necessarily be easily copied.

The United States differs from most other countries and the enthusiasm with which it embarked on neoliberal reforms and the growth which followed in part reflect this fact. I am not convinced that its neoliberal reforms are the main reason that the US has maintained the GDP per capita it enjoys over other countries which reformed less.

There was another point which I thought of addressing in my last post but left out, as the previous post was already somewhat lengthy and covered a lot of ground. The US is a country of immigrants and it continues to see immigration at which European states would (and have) baulked. One thing which immigration has ensured is the US has a younger population than most other developed countries and has done since the 1980s.

The young, as well as being more inclined to crime (which is bad), are also innovators and entrepreneurs (which is good). For a rather esoteric example, Nobel Laureates may show a tendency to be elderly but this is caused by a predilection to give awards to people before they pop their clogs. The work which wins awards is usually done when relatively young.

Immigrants too have a long reputation of starting businesses and improving their own lot. They are generally young and as the Economist said of them only a few weeks ago “it takes a lot of get up and go – to get up and go.” Entrepreneurs don’t just improve their own lives, as Tim Worstall never tires of pointing out, much of the benefit from their work accrues to society as a whole rather than the entrepreneurs as an individual, perhaps as much as 97% (link courtesy of Tim).

Take a look at the population pyramids below to get an idea of the different demographic shape of the US and France, two countries with very different performances.

This demographic difference will have helped to bolster economic performance for both the entire economy compared to other nations, and importantly for our comparisons, on a GDP per capita basis.

Although it has always enjoyed this advantage, I would argue that it is only once the catch up growth of the post war period was over that it started to affect relative performances. Think about it, if post war growth in GDP outside the US largely reflected technological catch up then other countries could still exploit the late mover advantage of adopting already developed technologies. Once European nations had caught up they had to rely on their own innovation, which was retarded by their older population and relative lack of migrants.

The benefits of migration are open to all, but open borders for people rather than goods or money has never been a neoliberal policy, as those who saw Thatcher’s treatment of migration will attest. So again, I would say that a policy adopted by the US which has little reference to the neoliberal revolution has been responsible for the US economy’s relative strength.

Rather than reflecting a decisive policy shift in the US relative to the rest of the world it seems that the higher GDP per capita enjoyed across the pond is the result of a confluence of a number of political, demographic and geopolitical factors over which governments have little control. The dominance of financial sector led growth in the countries which gained on the US (the UK, HK and Singapore) show the difficulty that there was in honing in on a successful growth model. So I would contend that a combination of the below factors are a better

  • Migration as described above.
  • Exorbitant Privilege as described in my previous post.
  • Leisure choices as described by Paul Krugman.
  • A change in monetary policy played a larger role than the reduction of marginal tax rates or the other reforms described. I am a monetary novice but this is my instinct.
  • Related to the above, the formation of a common currency in the heart of Europe was a mistake which retarded growth.

Anything to add to the above list?

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The data on population was taken from here.

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