Soft Bigotry of Low Expectations, U.S. Growth Version

Catherine Rampell wrote a piece having some fun with the bidding war among GOP candidates about how much they can promise to raise economic growth rates. There’s some good stuff there—including the riff on how GOP politicians are looking to “disrupt” economic statistics largely by defunding those doing the valuable work of collecting them.

But “Step 1” in her list is a pet peeve of mine. The claim is that the growth of the mid/late-20th century rested largely on the fact that the United States faced less foreign competition in those years, as trading partners’ economies in Europe and Asia were devastated by war. Let me quote a chunk of Rampell’s point here:

“If we (or others) can manage to destroy the capital stock of our economic rivals while sustaining no damage to our own—which is, you know, basically what happened in World War II—we’ll be perfectly positioned for another global-competition-free, postwar economic boom. This little artifact of the last postwar era, and how much it explains the robust mid-20th-century growth rates that my presidential rivals now pine for, has curiously eluded others’ policy plans.”

One hears variants of this argument a lot*, but it’s actually really hard to make an economic case that this dynamic—increased U.S. competitiveness stemming from war destruction in our trading partners—mattered at all for mid-century American growth.

Is the claim that exports surged and that’s why mid-century growth was good? They really did not—exports grew substantially faster post-1979 than before. And we were not shielded from import growth in the pre-1979 period, since imports grew faster than in the pre-1979 period than after.

In the long-run, GDP growth is the sum of productivity growth and labor force growth, and it’s really hard to see how the size of (say) Italy or Japan’s capital stock affects either of these things.

If declining competitiveness led to the United States being able to sell its exports for less money because other nations were now in the world market (think the rise of Japanese autos competing with the Big 3), this could potentially affect U.S. living standards. But it wouldn’t show up as a deceleration of GDP growth, instead it would be a deceleration of “command basis GDP”—a measure that calculates how falling prices for exports (and/or rising prices for imports) impact the purchasing power of Americans. And it is true that a combination of slower export price growth and faster import price growth dragged on command-basis GDP between 1947 and 2014—but the cumulative effect of this drag is less than 3 percent of command-basis GDP, or 0.04 percent per year. And almost all of this decline happened in the 70s and is about oil price shocks, not stiffer competition from war-ravaged economies.

This obviously doesn’t mean that globalization has been good for all American workers at all times. I think it has had pretty significant regressive distributional effects on the U.S. economy. And yes, chronic trade deficits continue to drag on recovery from the Great Recession, and policies that allow the dollar to fall and boost U.S. net exports should be high on the agenda.

But there’s no reason to think that in the long-run other countries’ growth improvement should inevitably weigh negatively on our growth rates.

There are plenty of reasons to think that it will be tough to match economic growth rates posted in long-past decades, and some of these reasons are pretty worrisome—like the post-1973 productivity slowdown that now seems to have just been temporarily banished during the late 90s IT boom. And jumping on the “I can promise more economic growth” bandwagon that was started by the GOP candidates would obviously be silly. But we also shouldn’t be too pessimistic about the headwinds in front of long-run U.S. growth, and increased international competition isn’t really one of them.

Why does all this matter? Well, because we know that a portfolio of policy changes starting in the late 1970s contributed strongly to the rise in inequality and the near-stagnation of typical Americans’ hourly pay. And we know that this rise in inequality was the predictable outcome of these policies. But these policies are defended by their proponents as having been necessary to spur growth, distribution be damned. And yet these policies have failed really badly—growth in the post-1979 period has been a lot slower than before—leaving us with less growth and more inequality. Too many defenders then fall back on reasons why this growth would have collapsed post-1979 anyhow—and hysteria about international competition is a big part of this fall-back argument. And it’s just flat-wrong.

*Just one example, Edward Conard’s Unintended Consequences opens with an argument that growth inevitably slowed in the U.S. following in the 1970s and 80s because “World War II destroyed Europe’s and Japan’s infrastructure. This weakened their ability to compete with the United States, and it took decades for these advanced economies to catch up. This left U.S. companies with an open playing field for growth.”

Or this podcast (around the 7:00 mark), from Sunday Times of London Economics Editor David Smith, arguing that the U.K. benefited from the war-damaged capital stock of continental Europe.