By Karl Smith
Ken Rogoff has a much commented on piece up at Project Syndicate. I can’t help but feel something must have been lost in publication.
There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations. Consider a simple thought experiment. Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1% per year over the next couple of centuries. This is roughly the trend per capita growth rate in the advanced world in recent years. With annual income growth of 1%, a generation born 70 years from now will enjoy roughly double today’s average income. Over two centuries, income will grow eight-fold.
Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2% annually. In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century.
Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold. Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth? Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more?
So, presumably a “catastrophe that derails society for centuries or more” would lower the “long-term average income growth rate.”
But, if not then not.
Let’s use a numerical example. Suppose that we invented the flux capacitor tomorrow. The flux capacitor alone produced output equal to $100 Million per capita per year – thus greatly increasing the long-term average growth rate.
Unfortunately the flux capacitor was self-consuming. So, its output was set to fall 2% every year from the moment of its creation. Thus, implying that output would fall and that generation after generation would get poorer for probably two centuries or more.
The flux capacitor is by design unsustainable. Its creation will usher in an era of decline for as far as the eye can see. There will be absolutely no economic progress for dozens of generations.
Is the flux capacitor bad?
It seems to me to be greatest invention man would have ever produced. Not to use it would be a moral crime on par with worst atrocities in human history.
Yet, it is unenduring, unsustainable and will derail society for centuries or more.
Is any of that important?
Or is what is important the lives that actual people live? In the world with the flux capacitor people will have vastly more opportunity to build the life that they want and to live their dreams.
That seems like a better world.