Economic Growth; D. Russell

ECONOMIC GROWTH THE WORD "democracy" now has a rival for popularity; it is "economic growth." And like democracy, economic growth seems to mean whatever the user wants it to mean. Ordinarily, the growth of our economy is meas ured by the gross national product figures, and thus re fers to total national spending (government and pri vate) without regard to what the spending is for. By that popular measurement, however, we shall see that a de crease in our material level of living can occur during a period of high economic growth) as is often the case dur ing wartime. Obviously, that type of growth is not what one ordinarily has in mind when he thinks of a prosper ing economy. To avoid such confusion, I define economic growth as any increase in the production of goods and services that consumers want and will pay for voluntarily. If eco nomic growth (that is, a higher level of living) refers to anything else, the term becomes not only meaningless but actually misleading.

For example, as I have defined it, an increase in the production and sales of canning machinery, hula hoops, Dr. Russell is Director of the School of Political Economy of the Foundation for Economic Education. 125 126 DEAN RUSSELL and vacation tours represents real economic growth; we consumers want them, are willing to pay for them our selves, and are confident that they increase our level of living in one way· or another. Otherwise we wouldn't buy them. But the current inclusion of the cost of bigger armies and more bomb factories in our economic growth figures is surely a distortion of what we all visualize when we speak of a growing economy. For clearly, those proj ects mean that fewer (not more) goods and services are available for our daily· consumption. While I am highly in favor of giving up a part of my income to build nu clear submarines, surely it is misleading to add the cost of them to our economic growth figures, as is now done.

Gross National Product Millions of intelligent and responsible persons are ob viously in disagreement with my definition and concept of economic growth. Most economists and practically all officials of the United States, as well as those of the Soviet Union, define economic growth as any increase either in capital goods or in consumer goods and services, govern ment or private-that is, any increase in gross national product. By their measurement, it makes no difference at all whether the consumers want the goods and services and are willing to pay for them. Nor, apparently, does it make any difference to them whether our level of living is there by increased or decreased, so long as the figures themselves are rising. According to them, any increase in the capacity to ECONOMIC GROWTH 127 make tanks or hydrogen bombs should be included, along with houses and bread, as economic growth. The building of dams to water deserts to grow food to be stored in surplus ships are all included in our economic growth. As now measured, our gross national product (and thus our economic growth) could be increased dramatically if our government printed the money to pay unemployed workers to tear down one-half of all the houses in the United States, and then paid them again to build back the. houses. Our gross national product (and thus our rate of economic growth as now meas ured) would be increased by. the destruction as well as by the construction. Further, if the government today were to forbid the production of automobiles and re quire the manufacturers· to spend the same amount of money on the production of buggies, our economic growth figures would not necessarily thereby decrease. I am of the strong opinion, however, that my level of liv ing would fall sharply if I had to travel by horse and buggy instead of by automobile.

Since governmental decisions and activities now play such a prominent part in our economic growth, perhaps a comparison of how the American economy has per formed under different degrees of government control would be of interest at this point. You understand, of course, that it is impossible to find two periods in eco nomic history that are truly comparable. Further, meas urements such as gross national product are, at best, merely rough and often erroneous estimates of what hap pened in the economy as a whole in the past. So while 128 DEAN RUSSELL these statistical devices are of some value to economic his torians, the figures must be interpreted with extreme care. Variable Growth Rates Economic growth figures for the United States are rather sparse before 1900. Even so, economists consider them adequate for indicating general trends. For exam ple, from the founding of the United States as a nation in 1789, and continuing until 1830, the growth rate per capita, as measured by rough estimates of gross national product in dollars of the same general purchasing power, was poor indeed. In fact, it barely moved forward during that entire 41-year period. But for the next 100 years, from 1830.to 1930, the rate of growth by the same meas urement was truly phenomenal. While economic his torians are far from unanimous in their estimates, it seems reasonably certain that the per capita real level of living of the American people at least tripled during that 100-year period, and perhaps quadrupled. And if one chooses to count as growth the longer life expec tancy, the shorter work week, and the increased variety and quality of the goods and services produced, the Americans of 1929 might well have considered them selves six or eight times better off materially than were their great-grandparents of 1830.

That fantastic growth record accounts for the oft-heard statement that the level of living in the United States tends to double with each generation of 30 years or so. But from 1929 through 1962, our growth rate has been ECONOMIC GROWTH 129 well below the preceding 100-year average. And for the past five years, the rate has been much like that of 1789 1830; that is, it has been just barely moving forward. If one is interested in advocating and supporting policies to help our economy prosper again, he is obligated to search for probable reasons to explain the differing growth rates during those periods. So let us first briefly examine the early economic history of our nation. Mercantilism in Early America Most of us are unaware that the United States did not have a free market economy during its early history. Our forefathers generally endorsed and supported the mer cantile philosophy that existed throughout the Western world from around 1500 to around 1800. True enough, the sad results of that semicontrolled economy as prac ticed by Great Britain was one of the causes of the American Revolution. But the economic causes of the revolt were inspired more by the place assigned to the American colonies in the general scheme than by a re pudiation of the philosophy of government intervention as such.

Throughout the War for Independence, and continu ing for the first 40 years or so after the colonies became a nation, the leaders of the national and state govern ments of the United States generally continued to follow the old mercantile and semifeudal policies of the gov ernment-directed economy. On the national level, there were vast public works projects, irresponsible manipula130 DEAN RUSSELL tion of the money supply that resulted in ruinous infla tion, and heavy controls of various kinds on all foreign trade. Human slavery was a national policy. In itself, that sad and uneconomic practice necessarily meant that the economy was far from free. On the state level, the politicians generally continued their customary controls over wages, hours of work, working conditions, and apprentice regulations. They encouraged certain businesses and professions with tax concessions and subsidies. They discouraged, and some times prohibited, other professions and businesses.

The evidence is clear that the economy of the United States did not prosper during its early history of mercan tilism. We cannot prove that the various controls caused the stagnant economy; we can only say with certainty that the economy did not move forward under them. The philosophy of mercantilism (that is, a-type of con trolled economy) came under increasing attack during the last quarter of the eighteenth century. The free mar ket philosophy that was formalized by Adam Smith in his Wealth of Nations in 1776 found increasing accep tance in both Great Britain .and the United States. The free market did not come to Britain until 1846 and the repeal of the so-called Corn Laws. There is no compar able and specific date for the emergence of the free mar ket economy in the United States. But with the excep tion of the still-feudalistic and slave-owning South, it is reasonably safe to say that the economy of this nation was generally free from serious government restrictions by 1830.

ECONOMIC GROWTH A Century of Rapid Growth 131 The most fantastic material growth record the world has ever known then began in the United States and lasted for the next 100 years. Wages were left to find their own levels-and they soon became the highest in the world. The feudalistic guild policies and restrictive apprentice regulations were repudiated. Labor unions as we know them were nonexistent. While the federal gov ernment did continue to encourage and subsidize various projects it considered to be of national importance (rail roads, for example), at least it abandoned its former policy of direct ownership and control. With the excep tion of the Civil War period, those great increases in pro duction throughout that century of progress consisted almost entirely of goods and services that consumers wanted and paid for with their own money. Further, the increase here referred to was on a realistic per capita basis that included the millions and tens-of-millions of immigrants who clearly preferred our free market system to the still-feudalistic continental European system. It was during this period-probably around the end of the nineteenth century-that the United States became the most powerful nation, with the highest level of living, that the world had ever known.

Some persons claim that our rapid growth and high level of living were due primarily to our vast areas of land. But several other nations with vast areas of land continued to stagnate during the same 100 years. Others point to our vast mineral, forest, and water 132 DEAN RUSSELL resources. But that hardly explains why other nations with similar natural resources made little if any progress. Nor are Americans innately more intelligent than the people of other nations. Nor did they work longer hours here than elsewhere. Nor did they begin with a stock of machines and factories (capital) that was not available on equal terms to others. After considering all possibilities that might account for our rapid growth rate during those 100 years, I am forced to the conclusion that the primary reason was our essentially free market economy and the "hands of!" policy generally followed by our government.

Back Toward Intervention But just as the philosophy against government controls over the economy began to find increasing acceptance around the end of the eighteenth century, just so did the reactionary philosophy for a return to government controls begin to find increasing acceptance in the United States early in the twentieth century. The Re publican President, Theodore Roosevelt, discovered that political campaigns to restrict "big business" found ready acceptance among the voters. The Republican President, William Howard Taft, was in favor of the Federal Reserve Banking System of 1913 with its na tional control of our money and banking policies~ Those two Republican Presidents also favored the Sixteenth Amendment and the new tax system of penalizing the successful and subsidizing the unsuccessful. Campaign ECONOMIC GROWTH 133 pledges to "conserve our natural resources" proved to be the surest possible way to gain high political office. The American people even turned to the federal government for a constitutional amendment to control our drinking habits and to abolish an entire industry!

State· regulation of wages, hours, and general working conditions grew apace. The labor union movement gained millions of members and became a powerful force in the economy. Even so, our economy was still the freest in the world, and it continued to forge ahead for the next 30 years at about the same rate of growth and increasing level of living as those of the preceding 70 years. Then came the stock market crash in the fall of 1929. It was another of those setbacks that invariably follow an expansion of credit and "paper investment" that are based on inflation instead of real savings. In· previous similar occurrences (1907 and 1921, for example), the policy of our government had still generally been to do nothing during such periods of business failures and in creased unemployment. Thus, as usual, those two "money and credit" depressions quickly ran their courses -the unsound investments were liquidated, and the economy surged forward again. But by 1929, a new philosophy concerning the purpose and functions of government had been accepted by most of our political leaders and the American people in general.

A direct result of this new (actually, old and reac tionary) philosophy was a sharp increase in positive gov ernment action to get our economy rolling again. The 134 DEAN RUSSELL Republican President, Herbert Hoover, rushed in with his Reconstruction Finance Corporation to help busi ness, and thus to prevent unemployment. He also ad vanced and supported several agricultural programs to help the hard-pressed farmers. He encouraged the idea of shorter hours of work in order to decrease production and keep prices high. He also encouraged industrial leaders to keep wages above the competitive free market level. He clearly endorsed the concept of creating pros perity and economic growth by deficit financing and make-work projects. In short, contrary to what is generally believed, Mr. Hoover fully committed the powers of government to the positive task of ending the recession and, as he phrased it, to put two chickens in every pot. But under increased government controls and spending, the reces sion turned into a depression and became worse, year by year. By 1933, our level of living had dropped back to that of· 1906, as measured by gross national product on a per capita, constant dollar basis.

Then Mr. Roosevelt took office, with still greater con trols over the economy to make it move forward again. He increased sharply both deficit spending and make work projects. The depression continued. There was a partial recovery in 1936-37, followed by another crash in 1938. More than ten million persons were still look ing for jobs. In fact, mass unemployment-and a sharply reduced level of living for the American people-con tinued in an extreme form until we went to war in 1941. These facts and comparisons cannot correctly be used ECONOMIC GROWTH 135 to prove that the longest and most severe depression in our history was positively caused by government inter vention in the market place, even though one may log ically suspect that such is the case. But these figures do prove one thing beyond any shadow of a doubt: While there mayor may not have been other reasons for the continuation of the depression, our level of living posi tively declined during that 12-year period of increasing controls and deficit spending by government to get our economy rolling forward again.

World War II, and After It was not until 1942 and our all-out war effort that the actual gross national product reached a level that was in harmony with the long-time growth rate of 1830 1930. At that point, and for the next three years, the growth rate as measured by gross national product leaped forward to new levels. Much of the growth was real; that is, more products per capita were produced for consumption. But the products that caused most of the increase-tanks and battleships-contributed nothing to our level of living. If, as I recommend, the growth rate were measured only in real terms of voluntarily bought houses, cars, clothing, and similar products, our per capita level of living was still low in 1945-in fact, lower than the 1929 level per capita, even though the nation's total production that now counts as economic growth had increased markedly. Now let us see what happened to the growth rate and level of living under continuing government controls 136 DEAN RUSSELL and deficit financing from the end of World War II through 1962. During about half of that period, we made considerable progress. But throughout that 18-year peri od, our rate of growth has been well below the 1830 1930 average. Only during the Korean War was there any marked increase in it, as measured by gross national product. But once again, that temporary spurt was due primarily to the production of guns and bombs, which hardly add to one's level of living. For the past five years, the actual annual growth rate for the increasingly controlled American economy has been well below one per cent per capita-less than one-half what it was in the comparatively free economy that generally prevailed for the 100 years before 1930 and the initiation of positive government action to move our economy forward. Fur ther, that disturbing decrease in our long-time rate of growth has included a heavy and still increasing amount of government services that few people really want or are willing to pay for.

So even when we use the socialistic measurement for economic growth-that is, all production, government or private, wanted or not wanted-our economy has not performed at all well under government direction. A more realistic measurement of economic growth-one that is reasonably close to the measurement I recom mend-is the money you and I have left after taxes to spend for goods and services we want. So here is the comparison for disposable personal income in constant dollars per capita for two periods of the same length 1897 to 1930, and 1930 through 1962.

ECONOMIC GROWTH 137 That figure doubled itself between 1897 and 1930 in our essentially free economy. Even with the tremendous immigration that occurred during that 33-year period, real per capita take-home pay increased by at least 100 per cent. But since 1929-during the following 33-year period-disposable personal income has increased by only around 65 per cent. Our government is now engaged in an extensive pro gram to increase our faltering rate of economic growth and level of living. The actions already taken, and those proposed for the coming years, are markedly similar to the measures followed by the government from 1930 through 1945-that is, deficit spending, inflation, and make-work projects, plus a huge increase in armament production. Most definitely, those measures were a fail ure then, as measured by the production of consumer goods and services to increase our level of living. I can find no logical reason to' suppose these schemes will be any more successful now.

Statistically, however, the government has the power to increase our rate of growth considerably-if we count every product or service that the government buys or produces (wanted or not wanted), as is now the case. By the customary and popular means of deficit financ ing and inflation, our government can indulge in all sorts of grandiose "economic growth" projects-urban redevelopment to tear down large sections of our cities and build them back again, draining swamps and irrigat ing deserts in order to increase the amount of arable land we can pay people to keep out of production, trips to 138 DEAN RUSSELL the moon, increased production of all the items that are used to fulfill our foreign aid commitments, more price supports and subsidies that consumers won't willingly pay, and so on through 10,000 and more similar projects. All of these will probably increase our gross national product, and thus will also increase our economic growth rate as now measured.

rr New Frontier" Psychology Personally, I fail to see how any of these projects can truly increase our level of living by producing more goods and services that consumers want and are willing to pay for. But, worse still, and in spite of the sad record of government interventions in the economy in the past, most of us now look to the federal government as the mainspring of our economic well-being. If you doubt this, ask the next five persons you meet what they think would happen to our economy if the "cold war" sud denly ended and our military machine was dismantled within the next year, even with a corresponding de crease in taxes. Ask any economist what he thinks would happen to our gross national product and employment levels if the government immediately reduced its non military spending by one-half, even with a correspond ing across-the-board tax cut. Ask those who are protected against both foreign and domestic competition, and those who receive subsidies, what they think would hap pen to total production in our nation if their subsidies and protection and government guarantees were reECONOMIC GROWTH 139 moved. Put those same questions to the top management of the privately-owned corporations all across the nation.

N early all the answers will be the same. That is, whether or not it is true, they honestly believe that if our govern ment discontinued any or all of those things, our econ omy would be in serious trouble. Now stop and think I Our economy is in serious trou ble, and has been in trouble most of the time since the government began directing and controlling it so exten sively in 1930. More than one-third of our national income is now taxed away and spent by government on all levels, and we have serious economic difficulties. Suppose the gov ernment taxed and spent one-half of our incomes; would that solve any problem now before us? Surely the answer is no. Suppose the government were in total control of our economy, instead of merely in partial control; do you imagine that we consumers would thereby get more goods and services we want? Again, surely the answer is no. When you get right down to it, though, those are the only two positive actions that our government can take to "get our economy moving." That is, our officials can tax more and spend more-directly, or indirectly by means of planned inflation. And they can impose more controls. Those are the only positive "economic growth"

weapons in the government's arsenal. Yet, beyond any shadow of a doubt, our rate of economic growth has been comparatively low under increased government 140 DEAN RUSSELL spending and controls in the past. But in spite of that record, millions of sincere and good Americans are im ploring our government to take positive action to get us moving again-with more spending and more controls! Now it is logical to assume, of course, that the increase in some economic services that have been traditionally provided by government actually does represent real economic growth in much the same sense as similar pri vate services. For example, education is a service that all parents want for their children. And presumably, we are willing to pay for it-in whatever form the bill is pre sented to us. This applies also to highway construction, fire departments, and to perhaps one or two other prod ucts or services for which the government has assumed almost total responsibility. But even when government does provide consumers with services they want and are willing to pay for-services that actually do increase our material level of living-there is no positive way to meas ure their economic values. And even at best, I am con fident that we are paying more for them than would be the case in a market economy.

N ow I am well aware of the claims advanced by the disci pIes of John Maynard Keynes concerning the sec ondary (or multiplier) effects of government spending, even when the spending is for the production of goods that cannot be used in our daily living. That is, the per sons who are paid by government to produce the goods for our military and foreign aid programs will, in turn, use the money to buy consumer goods and services. That new or increased consumer purchasing power will thus ECONOMIC GROWTH 141 contribute to real economic growth in the sense I have defined it. That appears to be the reasoning behind the pres ent Administration's planned deficit of $12 billion or so for next year. But if we are to avoid continuing infla tion, the government must first tax the money away from the people. If that fiscal policy is followed, the tax pay ments will necessarily decrease the taxpayers' ability to purchase consumer goods and services themselves, or to invest in the growth of our factories and machines. Thus any new jobs and production created by government spending from taxes will merely replace the jobs and production destroyed by the taxes themselves.

An Illusion of Progress If the spending is by deficit financing and inflation in stead of taxation, it is true that the result is often a pseudo prosperity, for a short period of time. Then, since the increased industrial activi ty is based primarily on government spending and inflation, the stimulating effect is brought to a halt as soon as prices catch up with the increased money supply. Many formerly profitable investments then become unprofitable. Thus, in order to keep ·the illusion going, the economic pump must be primed again and again-as has clearly been the case in the United States since 1929. Sooner or later, that bank rupt policy must collapse here, as it has in scores of other nations that have adopted it. The inevitable result is then revolution or dictatorship-or both. That probable 142 DEAN RUSSELL result of a policy of continuous inflation should be given serious thought by all Americans who are, actively or passively, now deciding the type of economy we will have for ourselves and our children for the next 50 years.

To help us decide, this final fact from economic his tory should also be· considered: I cannot find even one historic example to show that a controlled economy has ever resulted in a higher level of living than a compar able free economy over a significant period of time. I can, however, find many examples to the contrary. The most dramatic one currently is, of course, the comparison of East and West Germany. Comparisons of currentver sus past economic policies in Japan, Italy, and various other nations also give the same answer. I am convinced that we American people are not now following a realistic path toward economic growth when we turn to government "to get us moving again." Wefor get that the only positive ways the government can use to attempt this are to tax, inflate, spend, and control~ that is, to leave you with less real money to spend, and to restrict the ways you can spend what you have left.

Thus we are clearly not choosing the means and policies that will increase the long-time production of goods and services that we consumers want and are willing to pay for. I am convinced that the only possible way to accom plish that goal is to reject totally the restrictive influence of government controls and ownership and deficit spend ing, and to return to the· free market economy that is the hallmark of a responsible and prosperous people.