“It would not be foolish to contemplate the possibility of a far greater progress still.”
—John Maynard Keynes
In 1930, after the Roaring Twenties, John Maynard Keynes wrote an optimistic essay titled “Economic Possibilities for our Grandchildren.” After lambasting his disciples who predicted never-ending depression and permanent stagnation, Keynes foresaw a bright future. Through technological improvements and capital accumulation, mankind could virtually solve its economic problem within the next hundred years, he said. Goods and services would become so abundant and cheap that leisure would be the biggest challenge. According to Keynes, capital could become so inexpensive that interest rates might fall to zero.
Interest rates have not fallen to zero, but our standard of living has advanced remarkably since the Great Depression. In fact, we have probably already fulfilled Keynes’s prediction that “the standard of living in progressive countries one hundred years hence will be between four and eight times as high as to-day.”
Can We Grow Faster?
Today’s economists don’t appear to be as optimistic as Keynes, even as we enter another year of a dynamic, full-employment economy. I asked several well-known economists for recommendations that would give us sustained (long-term, not short-term) economic growth rates of 6, 7, or maybe even 10 percent a year, eventually fulfilling Keynes’s economic nirvana.
“Not possible!” most of them exclaimed. “I think it’s impossible to double the long-term growth rate in the U.S.,” answered Harvard economist Robert Barro. David Colander of Middlebury College agreed. “The idea of doubling economic growth in ten years sounds very much like a central planning goal of the former Soviet system.” He quoted Herbert Stein: “Economic policy is random with respect to the performance of the American economy, but thank God there isn’t much of it.”
Recently a whole book of essays was devoted to charting a course toward higher growth rates. In the foreword to The Rising Tide, Dana Mead, CEO of Tenneco and former chairman of the National Association of Manufacturers, rejects the notion that the U.S. economy can’t exceed its secular long-term growth pattern of around 3 percent a year. He argues that faster economic growth is achievable without creating shortages, rising labor costs, and higher interest rates. As Jack Kemp states, “We can raise the ceiling on growth by judicious changes in policy.”
Of course, not all the economists in the book agree with Mead and Kemp. James Tobin, Yale professor and Nobel laureate, declares, “Although politicians freely promise faster growth, governments have no handy set of tools for effecting it.” Apparently he hasn’t found the formula to fulfill his mentor Keynes’s dream of universal opulence.
Despite their skepticism of substantially higher growth rates, major economists do offer several ways to improve long-term prospects. Rudi Dornbusch of MIT recommends privatizing Social Security and education. Robert Barro urges a flat-rate consumption tax, exemption of savings from taxation, deregulation of labor and business, and a 10 percent cut in the size of government. Robert Mundell warns against inflating the money supply as a growth tool and instead favors slashing capital gains and income tax rates to encourage entrepreneurship and investing. “A lower level of government spending would make more of the surplus of society available for capital formation and growth. A shift in government priorities from consumption and redistribution to social overhead capital, improved education, and investment in scientific and medical research would go far in raising the productivity of capital with a permanent effect on growth.”
The Future Is Boundless
My own view is that we are selling our country short by thinking that super-growth cannot be sustained over the long run. Imagine how much advanced our standards of living could become if we
- slashed government spending to its legitimate functions, which undoubtedly means less than 10 percent of GDP;
- replaced the current tax code with a simplified 10 percent flat tax;
- privatized Social Security, or better yet, let Americans make their own plans for retirement;
- established a sound money standard that discouraged malinvestment and the boom-bust business cycle;
- established a fair system of justice that freed 90 percent of the lawyers in this country to become productive citizens; and
- stopped interfering in foreign military affairs.
Imagine the breakthroughs in medicine, transportation, housing, telecommunications, and science that could take place by adopting this laissez-faire program. It boggles the mind to think that we could double or triple our living standards in a short time. To quote Keynes: “Thus for the first time since his creation man will be faced with . . . how to use his freedom from pressing economic cares, how to occupy his leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”
- John Maynard Keynes, “Economic Possibilities for Our Grandchildren,” Essays in Persuasion (New York: Norton, 1963), p. 365.
- Quoted in Jerry J. Jasinowski, ed., The Rising Tide (New York: John Wiley & Sons, 1998), p. xxi.
- James Tobin, “Can We Grow Faster?,” in ibid., p. 44.
- Robert A. Mundell, “A Progrowth Fiscal System,” in ibid., pp. 203–04.
- Essays in Persuasion, p. 367.