Why Is Economic Growth So Hard To Plan?

Today’s Quote of the Day featured a discussion of economic growth, how the planner’s problem can lead to the growth of a predetermined variable but not necessarily economic growth.  History is rife with examples like this (heck, the book I linked to in the QoD is filled with examples).

So why is planned economic growth so hard to achieve?  The answer is as obvious as it is simple: there is no magic formula, no silver bullet, for achieving growth.  Even Robert Solow, the grandfather of economic growth modeling himself, said “[I]n real life it is very hard to move the permanent growth rate; and when it happens…the source can be a bit mysterious even after the fact.”  There have been many who have run tests trying to determine what the factors are (including Xavier Sala-i-Martin’s 1997 paper “I Just Ran Two Million Regressions“), but the results are just a jumbled mess; hard to interpret and even harder to build policy off of.  The results tend to be rife with omitted variable bias (for example, Sala-i-Martin finds that Islam tends to correlate with economic growth.  Well, is it Islam that is driving the growth or some omitted variable that is occurring along with Islam?).

Another issue that arises is: how to measure economic growth?  There are many ways to measure it, but none are perfect.  GDP (and its derivative, GDP per capita) are among the most common, but they suffer from the same “output vs economic growth” problem I discussed above.  GDP is a measure of the final output of all economic actors within a nation.  It makes no distinction between economically beneficial output and non-economically beneficial output.  For example, let’s say there are two countries: Country A produces $100 of goods its citizens consume (things like housing, food, automobiles, etc).  Country B produces $100 of goods no one uses (things like “a road to nowhere”).  Both countries have 10 people in them.  Mathematically, the two countries would have the same GDP ($100) and the same GDP per capita ($100/10 = $10 per capita).  However, it would be a gross mistake to claim the two are identical economically speaking.  Country A is filled with welfare-enhancing goods.  Country B has no welfare-producing goods, only welfare-detracting goods.  So we need to be careful with our measurement devices lest we fall back into the Planner’s Problem (as an aside, this is the exact issue the USSR and Maoist China ran into.  Both focused on increasing their GDP without any regard to producing economically useful goods.  This is why, despite similar (and sometimes higher) GDP growth rates, the USSR and Maoist China remained so poor compared to the US).

While GDP is just a single example, this is true regardless of what measure one wants to use.  They all have the same issues and all run the policy risk of simply increasing the predetermined variable vs actually generating economic growth.

Since the goal of all economic activity is to improve welfare, and welfare varies from individual to individual, region to region, and even country to country, there cannot be any any single, unified policy agenda to generate growth.  Even the institutions I heartily endorse (free trade, open borders, rule of law) can run into the same planner’s problem issues if treated as a policy goal instead of an organic institution.

There are many questions in this topic and people far smarter than I can ever hope to be have been struggling with them for over a century.  If there is any takeaway from this post, it is to beware anyone selling a “miracle cure for growth.”  They are most likely con men.

Quote of the Day

Today’s Quote of the Day comes from page 73 of my GMU professor Chris Coyne’s 2013 book Doing Bad By Doing Good: Why Humanitarian Action Fails:

Indeed, foreign assistance is often presented in terms of contributing to countrywide economic progress…but in reality the best it can accomplish, owning to the planner’s problem, is to increase predetermined outputs.

Dr Coyne’s point is not limited to just foreign aid.  Indeed, it applies to all top-down economic plans.  By focusing on a predetermined output, all one is guaranteeing is increasing that output, not addressing the underlying problem.  For example, Obamacare’s focus (the predetermined output) was increasing the number of people insured.  By using both a carrot (subsidies) and stick (uninsured fines), it was able to accomplish this goal.  However, Obamacare has not addressed the underlying issues in medical care.  Indeed, by some measures, health care has gotten worse in the US because of Obamacare.

I used Obamacare as an example, but there are many others: education (higher test scores but no change necessarily in the quality of graduates), trade (higher exports but no change necessarily in the quality of living), and so on.  Whenever any kind of growth plan (or “national industrial policy” to use the more modern jargon) is implemented, it is easy to achieve growth in the variable(s) measured.  Achieving true economic growth (as opposed to a series of bubbles) is another thing all together.

Restricted Immigration Will Not Protect Liberal Values

This comment fragment was left on this AEI blog post today:

Of course, many, if not most, commenters here are acolytes of diversity and scream RACISM at the top of their lungs with any suggestion that having large amounts of immigrants who have a culture the polar opposite of life, liberty, and the pursuit of happiness is a dumb idea.

The commentator’s point is that an influx of immigrants from what is deemed illiberal cultures will ultimately change America’s liberal* culture into a carbon copy of wherever they came from.

The arguments against this are legion.  I’ve written on them multiple times here on this blog.  But there is a larger, more fundamental error contained in the argument: illiberal values can coexist in a liberal society.  However, liberal values cannot coexist in an illiberal society.

Within a liberal society, many kinds of value systems can coexist.  Indeed, that is the emphasis of liberalism: individual freedom to live as he so chooses so long as he doesn’t involuntarily violate the rights of anyone else.  Mini dictatorships, communist societies, socialist, they all can (and, in fact, do exist) within relatively more liberal societies.  Corporate structures can be dictatorial.  Family structures tend to be communist.  Religious organizations can be socialist.  And yet, none of these illiberal institutions threaten the overall liberalism of a society.

However, in an illiberal society, liberalism cannot exist.  Illiberal societies require conformity and homogeneity.  They tend to ruthlessly squash dissent (and that ruthlessness need not be overtly violent.  For example, imagine a social-democratic society.  They vote to build a bridge.  One person dissents and refuses to pay.  The others throw him in jail for tax evasion.  This is an example of the kind of ruthlessness I mean).  Liberalism is not tolerated in this kind of a society, even as a sub-culture.

To bring this back to immigration, people who make the argument like I quoted above, under the guise of liberalism, advocate for very illiberal policies.  While an immigrant can come from an illiberal place and have an illiberal culture all his own, in a liberal society he cannot foist that upon anyone else. He can live as he so chooses, but cannot compel anyone else.  Liberal values are preserved.  However, in an illiberal society, such as the one advocated for by the commentator quoted above, by necessity destroys liberal values (in this particular case, the right to pursue property and liberty of both the domestic citizen and immigrant) and indeed promotes illiberal values (hegemony).

The restriction of immigration will not, indeed cannot, preserve liberal values.  It can only seek to undermine them.

*Please note I am using the word “liberal” in its classical sense.