Saturday, October 4, 2008

The Fundamentals

There's a good bit over at the Center for Global Development on taking the long view with respect to the economic consequences of the financial crisis.  At the end of this post are a bunch of graphs illustrating that point, containing actual and extrapolated GDP per capita for the U.S., Western Europe, China, and India on a logarithmic scale:

Looking at the actual data, it's interesting the extent to which the American real economy basically grows at a steady rate, without reference to bubbles, panics, wars, or economic and financial crises.  So despite this talk from Naomi Klein and others that we're facing a monumental crisis of faith in our economic organization, as far as the economy as a whole is concerned, we will probably just revert back to the hist
orical average.  That's not to say that there won't be distributional issues.  

Another interesting point from the historical data: Recent growth rates are higher for America 
than Europe.  Of course at least some of European growth after WWII reflects capital replacement, but it's still interesting to see that growth rate pivot somewhere in the '70s, while American growth rates continued to rise.  It's not shown here, but England shows no pivot while Ireland pivots up.  There's an argument out there that under conservative governance (but also going back to Kennedy's supply-side tax cuts and Carter's deregulation), England and America made the necessary but painful transition into a more free-market system and so enjoyed hig
her growth rates than their Continental peers.  It's certainly true that while there are many people out there calling for the demise of American economic hegemony, as the graph shows, America has kept its share of world GDP relatively constant over the last few decades while Europe and Japan have plunged and non-island Asia risen.  The American model of relatively free immigration and relatively free markets may lead to a financial crisis every ten years or so, but in the long run it's very good at generating wealth.

Looking at India and China, you really see the growth takeoff in recent years.  While China's pivot is located at the Deng political reforms, India's growth actually took off a bit before the 1991 liberalization.  This is well-known among Indian economists but tends to be overlooked by people elsewhere who prefer the reform narrative.  The growth that did happen in the '80s was unsustainable, related to hesitant reform, and fueled by currency depreciation and excessive government debt.  In fact India did face a balance of payment crisis in 1991, leading to the "shock capitalist" systemic reforms that did, of cour
se, lift millions out of poverty.  

As Easterly notes, the biggest consequences of economic shocks tend not to be in the economy itself--which recovers eventually--but on the world of ideas informing regulatory and economic structures.  So the worst economic consequences of the Great Depression are not actually felt in America--where the country is about as rich as it would be were there no Depression--but in the developing world, where the Depression served as a cautionary tale of the free markets previously dominant and encouraged cataclysmic failures in government planning worldwide.  Due to historical influence, these institutions persist till today and continue to impoverish.  I guess what I'm trying to say is that some sort of Sarkozian arrogant claim of necessity for changing the structure of the economy could end up very very badly.  

As far as the predictions go, I estimated a model and fudged the numbers from there.  In constant 1990 dollars, in the year 2030, I see Europe with a GDP of $29,000 per capita, America with about $45,000, China with $14,000 and India with $6,700.  The Europe/America gap is of course large.  Given the wealth of talent over there, I have to imagine 
that some degree of convergence will bring the two areas closer to each other as they have been historically; but maybe this will only happen for those parts of Europe that improve their institutions and maintain fertility? 

No comments: