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Office Hours: John Cochrane On Economic Growth

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Hoover Institution Senior Fellow John H. Cochrane responds to questions related to economic growth.

1) 0:32 - What's the problem with economic growth?
2) 1:45 - What's the difference between 2% and 3% growth?
3) 2:34 - Won't we eventually run out of resources if we keep growing?
4) 3:38 - With more and more automation, won't we eventually run out of jobs?
5) 4:24 - Doesn't deregulation mean less safety?
6) 5:10 - Why is the U.S. growing so slowly?

Watch the original video 'Growth is Good: Why Slow Growth Can't Be The New Normal' which discusses how America’s economy is growing at half the rate it used to. Slow growth rates have enormous effects on the quality of life over long periods of time. Getting back to rapid economic growth will alleviate budgetary problems, increase paychecks, and lead to widely shared prosperity.

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Q. What’s the problem with current economic growth?

The answer is there isn’t enough of it. More economic growth means better health, longer life, and investment in health, among many other things. It means a stronger military and safer nation. It means an environmental cleanup– you have to be able to afford a cleaner environment. It means paying off governmental debts- Medicare, social security, etc. More economic growth is a key to a whole bunch of things. It’s a key to welfare in a general sense in our society and it’s not something that is growing fast enough but we can do something about it.

Q. But we’re growing. What’s the matter with 2% instead of 3% growth?

You may say we are growing. “What’s the different between 2% and 3% growth? Little percentages don’t seem like something get excited about.” Well, there is the magic of compounding. Imagine we wait 25 years. At 2% growth that makes us 64% better. Who wouldn’t like a 64% raise, that’s pretty nice! 3% growth for the same 25 years, you get 112% better off. You double your standard of living and you double the increase. That’s the magic of compounding. There’s a big difference between 2% and 3%-- the difference between 64% more and 112% more. That’s a lot of money both for your personal well-being and for the nation to do all the things we want to.

Q. Won’t we eventually run out of resources if we keep growing?

No, I don’t think so. Remember our economy is moving more towards service economy. By growth, we aren’t going to give you 10 or 20 cars in a generation. We are going to give you iPhone, movies, health-care services. As you move to a service economy, you use a lot less resources.

As a joke version, imagine that someday stuff becomes free. Porches are $10 but you earn $100,000 rearranging your neighbor’s flowers and he earns $100,00 by doing your taxes. Those are services, especially extensions in health or environment. Those are things of great value and count for the economic growth. If we are choosing not to buy the Porches, that gives us a sense of what they’re worth to us. That’s what growth is going to look like and don’t belittle it. Those kind of services, once we have basic needs satisfied, contribute immensely to people’s happiness and well-being.

Misconception: With automation and the widespread expansion of robots in manufacturing, won’t there comes a time when there simply won’t be enough work that needs to be done?

So, everyone is worried about automation, robots displacing us, and limited jobs in the future. Just remember how many times this has happened in the past. The tractor is invented – “Oh my gosh, the 70% of Americans who work on the farm will be all out of jobs!” Turns out, they moved to the factories. “The car has been invented! What’s going to happen to all those horseshoers, teamsters and carriage builders?” Turns out, they got better jobs too. Automation is a tool and humans use tools to enhance their productivity. There will be plenty for people to do and I don’t think we have to worry that this time finally after all the other times in which new tools made us richer, it’s going to all make us poor.

Misconception: Growth at the expense of deregulation is not the solution, since deregulation leads to less safety.

Now one of the major things slowing things down is regulation. One of the things we have to do to get growth going again is to rethink our regulatory state. You may wonder doesn’t that mean dirtier air, less safety, more unstable banks? No. The question is not to get rid of regulations. The question is to regulate smarter and more efficiently. There’s a lot our economy can do to keep all the safety we need but not have everything get in the way of the process of economic growth. Most regulations are there to keep existing business going and to stop new competitors. We need the regulations that keep the safety part but lets new disruptive competitor come in and give us the economic growth that they can provide.

Q. So, why are we growing slowly?

The U.S. grew quite well after WWII but started around the turn of the century, the growth has slowed down-- primarily growth and productivity. Why? Well, economics disagree on that. One school of thought thinks that we have run out of good ideas. Another school of thought thinks we are perpetually deficient in demand and we need more stimulus. As I look at it, I see the sclerosis of regulatory and administrative state is really causing us problems. It’s just so hard to get anything done these days. Imagine they built the transcontinental railroad by hand in four years. Now you can’t even get the beginning permits submitted in four years.