The other Smith on Growth

In a recent Bloomberg piece, "Growth Fantasy of Tax Cuts and Small Government" Noah Smith took on my recent blog posts on 4% growth. In the first, I outlined the historical evidence that yes, the US has grown at 4% quite often. In the second, I outlined the standard smorgasbord of free-market policies which I suggested would increase our growth, at lest by inducing a substantial level shift.

Noah's main point is that in my blog posts I did not make any substantive quantitative claims that moving our country from the Republic of Paperwork to Adamsmithia would return the US to the kind of growth we saw in the 60s, late 80s and 90s. True enough.

My surprise in reading Noah is that he provided no alternative numbers and no alternative policies.  Well, if you don't think Free Market Nirvana will have 4% growth, at least for a decade as we remove all the level inefficiencies, how much do you think it will produce, and how solid is that evidence? He rambled a bit about the predictive value of some state scoring efforts, but that's all quite beside the central point -- how much growth could the best imaginable economic policy, at a national level, produce?

More deeply, Noah suggests no alternative policies. He does not claim that more government wage controls,  unions, stricter labor laws (Uber drivers must be employees) heavier and more politicized regulation, cartelizing more industries beyond health and finance, raising taxes to confiscatory levels, larger welfare state, boondoggle public works and so on -- the alternative path in the current policy debate -- will get us back to 4% growth.

So, one must only conclude that Noah -- and others voicing the same it's-not-possible complaint -- believes 4% growth is not possible. 2% or less is the new normal. Sustained growth, of the sort that made us all healthier and wealthier, if not wiser, than our grandparents, is a thing of the past. So all we can do now is fight to carve up a shrinking pie, retreat from an increasingly chaotic world, and pretend that carving up the pie will not shrink it further.

I am surprised at this pessimism, both economic and political. If the absolute best economic policies anyone can imagine -- and, again, Noah offered no alternatives -- cannot return us to 4% growth and sustain that growth, why bother being economists? They do not call us the "dismal science" because we think the current world is close to the best of all possible ones, and all there is to do is haggle over technical amendments to rule 134.532 subparagraph a and hope to squeeze out 0.001% more growth. Usually, the role of economists is to see the great possibilities that every day experience does not reveal. ("Dismal" only refers to the fact that good economics respects budget constraints.)

Similarly, the next US presidential election looks to be an argument over growth vs. redistribution. I doubt that many Americans are so willing to abandon hope so soon.  Even Hilary Clinton's latest speech took the view that reducing inequality would raise growth -- a novel argument (relative to 250 years since Adam Smith) that invites similar theoretical and quantitative evaluation, but at least one that does not give up on growth.

Noah's tired pot-shot has been going on a long time. In 1980 Ronald Reagan announced some pretty radical growth-oriented policies, at least by the standards of the time. (Not much new since Adam Smith, of course.) The standard liberal commentators made the standard objections: voodoo economics, numbers don't add up, it will take generations of unemployment to lower inflation, the debt will explode, and so forth. (Plus, the Soviet Union will be there forever, we might as well get along.)  Reagan offered optimism; won, malaise ended, we won the cold war, and there was an economic boom. One would think the tired argument would have less force by now, or that the pessimists would have found a better one.