Monday, 25 October 2010

Why Economic Growth is Still the Big Question and How to See It

The spending cuts dialogue seems to have moved today away from the numerator (the deficit) to the denominator (GDP).  Hooray.  Let’s not forget that growth can really help us get out of the mess we are in.

But its often hard to put over the sheer power of economic growth in a way that persuades people, who have iPhones, cars, flatscreens etc, just how remarkable modern economic growth is.  One very good method is set out in John Nye’s short piece.

Here are some facts on the table.  He starts by observing
    1. the average American’s annual income in 2000 was five times higher than thatin 1890 and
    2. 12 times higher than in the 1850s.

How best to bring this to life?  Consider the following table.  To see how much more an American worker can buy today, compare the number of hours she would have had to work to obtain various items in 1895 versus 2000.  Have a look at the bicycle row.  Today the worker needs to work 7.2 hours to earn it.  Back then, they needed to work 260 hours.  No wonder bikes sit rusting in the back garden or sell for nothing on eBay.  And, going back further in time, I’ve always been struck how in the dramatisations of Jane Austin there are so few possessions in people’s houses.   The final column compares the prices charged in the Montgomery Ward catalog with prices today, both expressed as a multiple of the average hourly wage, to give an index of productivity of making the goods consumed back in 1895 has multiplied.

Multiplication of Productivity 1895–2000: Time Needed for an Average Worker to Earn the Purchase Price of Various Commodities

For even more fascinating stuff on this, see the great Brad de Long here.