The ‘Growth’ Game

March 2, 1959

A few weeks ago Nikita Khrushchev, in the course of a seven-hour speech, called for an 8.6 percent annual increase in Soviet production. He said that the United States’s annual increase was only 2 percent. This set off a fresh alarm among the 5-percent-or-bust addicts over here.

Edwin L. Dale, Jr., in The New York Times, went Khrushchev one better. In allowing us a growth of 2 percent a year, he wrote, Khrushchev “was being unnecessarily kind because “after correcting for higher prices” our own growth rate since the end of the Korean war “has averaged less than 1.5 percent.” Barbara Ward, also in The New York Times, demanded an “Atlantic world” growth of 5 percent a year, to be achieved by an “increase in government activity.” Walter P. Reuther, head of the United Automobile Workers, told Congress that the nation could solve most of its problems by achieving a 5 percent annual growth in the economy—by (as one might guess) more spending and “higher wages.”

WHY 5 PERCENT?

It is difficult to know where to begin in analyzing all the confusions and false assumptions involved in these rates-of-growth comparisons. I discussed five of them in an article last summer (Newsweek, Aug. 25, 1958). There is space here only to mention two: (1) There is no reason for assuming any Russian statistic to be honest. (2) It is more than doubtful whether overall “economic growth” is accurately measureable even by “objective” statisticians. All such measurements rest on arbitrary assumptions.

But suppose we ignore these fundamental difficulties. Why the mania for a growth rate of 5 percent? Of course once the magic figure of 5 percent is suggested as a “goal,” no one dares to say that he would be smugly content with a growth rate of a miserable 3 or 4 percent. But why don’t our starry-eyed “liberals” really set their sights high? Why don’t they at least try to better the Khrushchev goal of 8.6 percent per year? What’s wrong with a growth rate of 10, or 20, or 50 percent a year?

If we are trying to talk about realities rather than dreams, it becomes pertinent to ask just how realistic the 5 percent growth figure is. One of the few hardheaded comments I have seen on this is that of Jules Backman of New York University, who points out that an annual rate of growth of 5 percent in gross national product, compounded, would result in a gross national product sixteen times that of the present figure within slightly more than half a century.

PERCENTAGE TRICKS

In my article last August, I pointed out that our “unfavorable” growth rate compared with Soviet Russia depends in part on a trick of percentage figures. The smaller the base from which you start, the easier it is to attain a high percentage growth rate; the bigger the base, the harder.

Take the history of a specific economic product—television. Output in 1946 was 7,000 sets. In 1947 it was 200,000—growth rate, 2,757 percent. In 1948, it was 975,000 sets—growth rate, only 387 percent. In 1949 output rose to 3,029,000 sets—but growth rate was only 211 percent. In 1950 production jumped to 7,464,000 sets; but growth rate was only 146 percent. Though output was accelerating enormously in absolute amounts, percentage rate of growth was constantly falling. And since 1950 the rate of growth has stopped entirely. Yet we have continued to turn out from 5 million to 7 million sets a year.

This brings us to steel. Grave concern has been expressed because United States steel output fell to 78 million metric tons in 1958 from 102.5 million in 1957, whereas Russian steel production increased to 54.9 million tons from 51 million in 1957. But the U.S. increased steel capacity 6 million tons last year, compared with an apparent Russian increase of 4 million. Our percentage rate of increase was less than Russia’s. But our real increase was more. This means that, in real terms, we are even farther ahead of Russia in steel capacity than we were a year ago! As long as we can maintain such an absolute annual lead, Russia can never catch up.

Our rates-of-growth alarmists are scared stiff by their own false assumptions and statistical fallacies.