Canada needs sustained economic growth, not income redistribution

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Appeared in the Financial Post, July 12, 2023
Canada needs sustained economic growth, not income redistribution

Anaemic economic growth has become so routine in Canada since 2014 that it’s worth recapitulating the benefits of sustained high growth.

Over the centuries, economic growth has accompanied vast improvements in measures of wellbeing such as life expectancy, health, housing quality, leisure time, food intake, energy security, political freedom and democracy. Today faster economic growth would help Canada meet the challenges of the huge debt incurred during the pandemic, a growing population and aging society. Even the Leader of Britain’s Labour Party, Keir Starmer, acknowledges that “economic growth is the absolute foundational stone for everything.”

Russia’s invasion of Ukraine is a reminder that money is needed to finance defence and survival in war. Napoleon famously said that three things were needed to fight a war: “The first is money. The second is money. And the third is money.” The history of central banking reflects the importance of finance to waging war. The Bank of England was founded to assist Britain’s government to finance war with Napoleon, while the first two attempts at creating a central bank in the United States were made to help deal with the country’s war debts.

Almost two and a half centuries after Adam Smith kicked things off, the question of what drives economic growth continues to preoccupy the best minds in economics. The benefits of sustained economic growth are so enormous that, in the words macroeconomist Robert Lucas (who died recently), “the consequences for human welfare involved in questions like these are simply staggering. Once one starts to think about them, it is hard to think of anything else.” It has become the norm for winners of the Nobel prize for economics (as Lucas was) to then write a book about the sources of long-term economic growth, with most emphasizing the role of innovation in a competitive marketplace.

The importance of economic growth is underscored by what happens in its absence. In the words of the British economist Paul Collier, “growth is not a cure-all, but lack of growth is a kill-all.” The Great Depression of the 1930s helped spawn the dictators who provoked the Second World War. As former Bank of England governor Mervyn King concluded, “put simply, our societies are not geared for a world of very low growth.”

Even so, it’s easy to forget that sustained economic growth is a new phenomenon. The libertarian economist Steven Landsburg concisely summarized the long arc of economic development: “Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened… Then—just a couple of hundred years ago—people started getting richer. And richer and richer still.”

Because it is so new to the human experience, economists at first struggled to adapt to the emergence of sustained economic growth. As recently as the early 19th century, they focused, as Smith had, on explaining the different levels of national wealth rather than income growth, because they assumed the level would not change much. Until recently, there was not even a word for productivity growth; the Concise Oxford Dictionary did not have an entry for productivity until 1951.

Economic growth must be sustained over decades, not just a few years. Growth over long periods means relatively small changes in growth rates compound to produce radically different results, which is why Albert Einstein correctly called compound growth “the eighth wonder of the world.” It follows that a country’s growth is best examined over long periods, not the quarters or even years that dominate economic commentary and political debate.

Some concrete examples demonstrate the importance of even seemingly small changes in growth over long periods. If U.S. growth had been one percentage point less per year after 1870, today U.S. GDP would be lower than Mexico’s. Even over shorter periods, different growth rates result in much different outcomes. If U.S. growth between 1952 and 2000 had been two per cent instead of the 3.5 per cent it was, per capita U.S. income in 2000 would have been $23,000 at the turn of the millennium instead of $50,000.

Canada’s recent growth slump has accompanied a shift in policy focus to relentless short-term stimulus and an emphasis on the distribution, not creation, of income. The reality is that redistribution is not an effective way to help low-income people. It subtracts from the growth that benefits poorer people most. As Robert Lucas put it: “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is the focus on questions of distribution… The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.”

Policies aimed at redistributing incomes or stabilizing economies in the short term do not sustain growth, they lower it. What we desperately need is a cultural environment where entrepreneurship and innovation thrive. Unfortunately, our culture has deteriorated to the point where, as commentator Paul Wells recently noted, “in Canada, if you run a successful business, you are made to feel you have done something wrong.” Sustained economic growth will not resume in this country so long as such sentiments prevail.