There’s a fashionable attack on Liz Truss’ determined focus on growth: what about the poor? What about the planet? In chasing GDP growth, the critics say, Truss shows himself to be a politician who knows the price of everything and the value of nothing.
This criticism is misplaced. The UK’s new prime minister is absolutely right in saying that economic growth should be her top priority. The problem is, she doesn’t seem to have a clue how to go about it.
Let’s start with the argument for economic growth. Gross domestic product is not, and never has been, an attempt to measure the well-being of a society. It is easy to list activities that promote well-being but not growth, and many more activities that promote growth but not well-being.
Yet it is striking how countries with a high GDP also have thriving citizens. Choose your problem, from life expectancy to infant mortality, from opportunities for women to the protection of basic human rights, cleaner streets, less crime, even better art, from TV to opera. Somehow, people living in wealthier countries are likely to enjoy the good more.
Of course, in many of these cases, causation probably runs both ways. Healthy people, safe cities and empowered women are both causes and consequences of economic growth. When you look through the lens of complex, sophisticated, multidimensional efforts to measure well-being, there’s plenty to suggest that growth is good. For example the Social progress index combines “60 social and environmental outcome indicators” to provide “a nuanced picture of what a successful society looks like”. This valuable effort comes with few surprises. The 25 most “successful societies” are the Nordic countries, Western Europe, the US, Canada, Australia and New Zealand, and Japan and South Korea. Apart from a few petrostates, the list of the countries with the highest GDP per capita contains almost the same names.
Focus on less fortunate places and you’ll find Burundi, South Sudan, the Central African Republic, the Democratic Republic of the Congo, Somalia and Chad in the bottom ten. The bottom ten by GDP per capita, or by the Social Progress Index? Both of course.
GDP per capita is not a measure of social progress. It happens to be extremely closely correlated with social progress.
Nor should we forget Benjamin Friedman’s prescient argument The moral consequences of economic growth (2005), that “economic growth – meaning rising living standards for the vast majority of citizens – more often than not promotes increased opportunities, tolerance for diversity, social mobility, commitment to justice and commitment to democracy.” The stagnant growth – which many rich countries, especially the UK, have seen since 2008 – clearly threatens to do the opposite. If in doubt, look around you.
Economic growth promotes all of these good things, and it has another benefit: it tends to last. The best predictor of which economies will be complex, sophisticated, productive and wealthy next year is the list of economies that were complex, sophisticated, productive and wealthy last year. Grow faster now and there is reason to expect to be richer indefinitely.
That is the case when setting priorities economic growth – not to the exclusion of everything else, but as a central goal of policy. Truss and her Chancellor Kwasi Kwarteng deserve the credit for recognizing this. Prioritizing growth in the recent past would have prevented some obvious policy blunders, such as Theresa May’s insistence on leaving the EU’s customs union and internal market, or George Osborne’s disastrous obsession with balancing the budget. despite a deep recession.
But while recent governments have shown how to slow growth, we know far less how to increase it. And Truss’ statements have so far failed to inspire confidence.
Her rant about the ‘shame’ of cheese imports suggests someone who has not understood the importance of free trade in goods for a prosperous modern economy. Her sadness at the sight of solar panels on farmland speaks of a soul that values rural tradition over a vital technology that is becoming more productive at an astonishing rate — not to mention a strange penchant for heavy-handed intervention.
Its huge and open energy price ceiling is a kick in the teeth for market forces. By some measures the biggest fiscal event in living memory, it feels closer to Mao than to Thatcher. And it’s not necessary: A truly pro-growth government would have achieved the same social goal by raising prices but giving every household a compensatory cash subsidy. That would allow the pricing system to encourage the efficient use of old technology and the embrace of the new.
Its tax cuts and business zones may boost growth, but the currency and debt markets don’t seem to agree. Most politicians suspect that fundamental reforms of housing, infrastructure and education are likely to be needed. Better access to major markets on our doorstep could also help, but that ship seems to have sailed.
It’s good to have a prime minister focused on the goal of growth, but what we really need is for her to show signs that she can put the ball in the back of the net.
Tim Harford’s new book is ‘How to add up the world‘
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