Monday, October 31, 2005

On Economic Growth

from Foreign Affairs
Among the developed countries, the United States has been doing well in the growth sweepstakes -- or so you might assume if you focused exclusively on GDP. GDP statistics, however, can be very misleading. They do not really measure how well the country is doing or how much better off its citizens are becoming.

No one would look at just a firm's revenues to assess how well it was doing. Far more relevant is the balance sheet, which shows assets and liabilities. That is also true for a country. Argentina grew rapidly in the early 1990s, mainly as a result of a huge consumption binge financed by international borrowing. But that growth was not sustainable and was not sustained. Similarly, the United States has been borrowing heavily from abroad, at the rate of $2 billion a day. It would be one thing if this were being spent on high-productivity investment. In fact, it has been used to finance increases in consumption and massive tax cuts for upper-income Americans.

Consider the following thought experiment: If you could choose which country to live in but would be assigned an income randomly from within that country's income distribution, would you choose the country with the highest GDP per capita? No. More relevant to that decision is median income (the income level that 50 percent of the population is below and 50 percent is above). As the income distribution becomes increasingly skewed, with an increasing share of the wealth and income in the hands of those at the top, the median falls further and further below the mean. That is why, even as per capita GDP has been increasing in the United States, U.S. median household income has actually been falling.

There are other reasons why someone might not want to look at just per capita GDP. He might worry about his security. What happens if he gets ill? If he loses his job? What happens when he retires? He might worry about crime. He might worry about the quality of his children's schooling. How do his children fare in competition with those who can afford the best schooling that money can buy or with those in countries such as Singapore that offer a first-rate public education? He might worry about the environment. Are there government regulations prohibiting arsenic in the water?

When viewed through these lenses, the United States does not look as good. There are some dimensions in which it is outpacing others -- for instance, it boasts five to ten times the per capita prison population of other advanced industrialized countries and more working hours per week. It also has less job security, worse unemployment insurance, and fewer people covered by health insurance.

To be sure, the American dream still attracts millions from around the world. But some of that attraction may be based on a lingering myth of upward mobility in the United States and an underappreciation of the difficulties that confront the poor. And although there is still no comparing the U.S. standard of living and that of poor countries, these are not the laurels on which one wants to rest.

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