The True Cause of Prosperity and a Return to the “Old Normal” of Slow Growth
This time on Financial Sense, we spoke with Mark Levinson, author of An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy, about his take on economic growth and the real causes of prosperity.
Two Eras of Growth
In his book, Levinson breaks down the history of American prosperity into two periods: the period from WWII until 1973, and from 1973 to the present.
Within each era, we saw economic performance that was distinctly different from the other. After WWII, we had fast economic growth, while after 1973, growth rates slowed around the world.
If we look at all wealthy economies at that time, Levinson noted, in the period between 1948 and 1973, we see very rapid economic growth driven by very rapid productivity growth. As a result, living standards improved.
“After 1973, things were quite different,” he said. “We had much slower economic growth, productivity growth fell very significantly, and people felt like they were crawling ahead.”
In the 1948 to 1973 period, the world economy was robust almost everywhere, however, that hasn’t been the case since the '70s.
What Really Drives Economic Growth?
Though some of the post-1948 growth can be attributed to rebuilding from the war, a lot of this growth occurred because of one-time factors.
Spending on education, agricultural advancements, and major changes in transportation drove productivity higher.
“All of those things contributed to really significant productivity growth in the years after the war,” Levinson said. “That was all low-hanging fruit, and the problem was, we exhausted it.”
After 1973, several factors were thought to be driving the downturn in productivity growth.
“At the time, everyone assumed this (downshift) had to do with oil,” Levinson said. “The United States was enveloped in an oil crisis, and so were many other countries. And it was assumed that the very sharp recession, and then the slow growth that followed, were related to oil. But that was really not the case.”
The real factor was slower growth in productivity, Levinson noted. Since then, governments have tried to revitalize productivity growth to return economies to the faster growth rates seen after the war.
The Role of Innovation
These policies really haven’t worked anywhere, Levinson noted, whether in the form of French socialism, or the Reagan/Thatcher era of lower tax rates.
For a time, academic thought was centered on the idea that innovation, and not productivity, was the main driver behind economic growth. While innovation is important, Levinson stated, it isn’t the main cause of growth.
“The problem here is that we don’t really know how to get from innovation to economic growth,” he said. “There are some things government can do to encourage innovation. … All of these things might lead to innovations. But the evidence is very strong that innovation by itself doesn’t matter to the economy.”
What really matters is how businesses put these innovations to use. For whatever reason, the innovations in recent years have in general had a smaller effect on business than some of the innovations in earlier years.
The Problem for Governments Is the Assumption of Control
People have a tendency to ascribe causality to factors controlled by the national government, such as taxes, tariffs, and welfare.
However, because economic growth comes from productivity growth, Levinson stated, politicians are stuck making promises they can’t keep.
“There’s no button on the desk you can push to give you faster productivity growth,” he said. “Most of the factors behind productivity growth come from the decisions of private businesses … (these) can’t just be ordered up.”
With the growth of the welfare state after WWII, we entered an era where social programs morphed into entitlements.
“Those programs were possible financially because very rapid economic growth meant very rapid growth in tax revenue, so governments could afford to do those sorts of things,” Levinson said.
But the cost of these benefits has grown more rapidly than the base economies and they consume a larger share of the tax revenues as a result, Levinson stated.
Is It Possible to Restore High Growth?
There are a variety of ideas proposed to return us to earlier growth levels, but Levinson doesn’t think it will be so easy.
“My view is nothing is likely to restore economic growth and productivity growth to the earlier levels, and the people who promise us otherwise are selling soap,” he said.
Proposals to increase fiscal spending and grow the national debt aren’t directly concerning to Levinson, given the size of the U.S. economy and our ability to repay our debt.
“Where I am more concerned, frankly, is what we do with the money,” he said. “A lot of this money really goes into benefits for older people. … Older people are not the ones who are making the great contribution to productivity growth.”
The reality is, we may be facing a return to what was normal for most of economic history: relatively slow economic and productivity growth rates. Though new technologies could form the basis for a new boom, it’s impossible to predict.
“The economy is ordinary,” Levinson said. “It’s likely to stay ordinary. ... It’s a world-wide problem. And it’s going to be a problem in all democracies. People expect their living standards to rise faster than is likely to happen. Maybe we get a shot of growth at some future time … (but) we can’t really predict it.”
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