“The Case for Economic Growth” Speech for the NZ Initiative Panel Discussion

Tuesday, April 14, 2015


Thanks to the New Zealand Initiative for organising this event, and to everyone for coming along.  There’s not enough of these sort of events in public life, and there aren’t enough organisations like the NZ Initiative.

I only have ten minutes. In that time I want to argue forcefully that economic growth is a good thing, and has demonstrably made us as people better off, and continues do to so. Then I want to deal with three specific objections commonly raised about economic growth. Finally, I want to talk specifically about New Zealand.

Economic growth is good

I hope this will basically be uncontested this evening. Even the modern-day Green Party has come around to the view that economic growth is a good thing. Back in 1972 the manifesto of the Values Party (the precursor to the Green Party) talked earnestly of a zero population growth policy in order to reduce economic growth. Rod Donald used to talk, negatively, about the “fixation” with economic growth. In her valedictory speech in 2010 Jeanette Fitzsimons quoted Tim Jackson’s “Prosperity without growth”, which she said systematically examined the proposal that growth makes us better off and finds it wanting. James Shaw I think is made of sterner stuff and I don’t think he agrees – or at least I hope he doesn’t.

“The Case for Growth” by the NZ Initiative makes the case for economic growth cogently. I think the basic point is that economic growth gives us choices. For thousands of years, humans basically lived lives that were nasty, brutish, and short. The Industrial Revolution changed all that, along with modern capitalism. Economic growth has made us wealthier and healthier. As we’ve got richer, child mortality has dropped. We’re living longer. We can spend more on healthcare. We invest more in education. As Julian Simon has said:

“It is hard for us to imagine, for example, that in 1900 less than one in five homes had running water, flush toilets, a vacuum cleaner, or gas or electric heat. As of 1950 fewer than 20 percent of homes had air conditioning, a dishwasher, or a microwave oven. Today between 80 and 100 percent of American homes have all of these modern conveniences.”

The world is almost unimaginably better off now than it was in 1800, or any date in the past you care to name. By almost every objective measure, 2014 was the safest, healthiest, happiest year in human history. Child mortality has fallen by half since 1990, as has maternal mortality. Global life expectancy is 70 years and climbing.

Economic growth has helped drag billions of people out of poverty. In September 2000, fifteen years ago, the heads of 147 governments pledged that they would halve the proportion of people on earth living in the direst poverty by 2015, using the poverty rate in 1990 as a baseline. People scoffed. But the goal has been achieved. Extreme poverty was halved in just ten years.

Between 1981 and 2010 China lifted 680 million people alone out of poverty – more than the entire population of Latin America.  Chinese per capita real income has risen by a factor of 20. Not 20 percent. A factor of 20. In other words, almost 2,000%. That’s economic growth.

So let’s deal with some of the common objections to economic growth

First there is the claim that economic growth is necessarily limited because we will “run out” of natural resources. This has been at the heart of green objections to growth since the time of Thomas Malthus in 1798. Malthus thought an ever increasing population would overwhelm the world’s capacity to use scarce agricultural land to provide food for everyone. Famine and war would result.

He was wrong. While resources may be scarce, human ingenuity is limitless. Agricultural production, driven by innovation and technology, has grown exponentially faster than population growth. Market economies find more efficient ways to harvest existing resources, or find substitutes.

In the 1970s everyone started worrying about global food supply again. Paul Ehrlich wrote a book called the Population Bomb. It starts by saying this:

“The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate.”

He was utterly and spectacularly wrong. Hilariously, Erhlich claims he’s been proven correct – and he was saying in 2014 that soon we will need to think about eating each other because of overpopulation. It’s hard to know why anyone takes him seriously.

Neo-malthusianism manifests itself these days in the wild claims about peak oil and other resources. The idea of peak oil first got raised in 1909. People reckoned there was about 25-30 years of supply left. Currently, global oil production is about 100 million barrels per day and reserves have never been higher. Of course oil is a finite resource, as are all non-renewable resources. As those resources get more scarce, the price will rise. The price mechanism encourages people to be more efficient, and also to look for alternatives that are cheaper – that’s essentially while shale gas was investigated in the first place.

The Environment

I made the point earlier that economic growth fundamentally gives us choices. And one of those choices is to care about the environment. The evidence shows that economic growth tends to improve environmental quality. Growth brings improvements in technology. Consumer demand grows for cleaner and greener products.

The environmental records of the poorest nations in the world are generally shocking. The reason is they prioritise economic development – and the alleviation of poverty and hunger – over the environment. Economists have even figured out a GDP per capita level where the trade-off starts to go the other way – where the environment starts to matter more – it’s about $10,000 USD. People were astonished last year when China struck a historic deal with the US over climate change. But it is utterly consistent with what I’ve just said.

Often the best way of dealing with environmental problems is through markets. New Zealand’s been a world leader here. Take fishing quotas for example. Absent a system of enforceable property rights in fish, the tragedy of the commons would result and fishing stocks in New Zealand would be highly likely to be exhausted.

Poverty and inequality

The third objection commonly made to economic growth is that it is exacerbates or causes inequality. Let me make three points.

First, inequality between countries is declining. This is a function of the extraordinary increase in growth and consequent reduction in poverty across almost all of the developing world in past decades.

Second, we should be careful not to conflate poverty and inequality. These days “poverty” and “inequality” tend to be thrown around interchangeably. They are different. We should be most concerned with absolute levels of poverty, and material living standards, particularly amongst the poorest in society. And the evidence shows that economic growth does improving living standards for all. In New Zealand for example,  average real incomes rose from about $23,000 in 1953 to over $41,000 in 2011. Average earnings for the bottom 90 per cent of income earners rose from $16,500 to $31,800, almost doubling, in real terms, from 1953 to 2011.

Third, as I said before, growth fundamentally gives us choices. It allows us to redistribute resources to help those who need it – the sick, the poor, the vulnerable; those who can’t look after themselves. New Zealand has chosen a highly redistributive welfare system. The Treasury recently estimated that households earning over $150,000 a year – the top 15 per cent of households by income – pay 74 per cent of the net income tax when the redistribution of income support (excluding NZ Super) is taken into account. By contrast, households earning under $60,000 a year – which is half of all households – actually pay no net income tax because the $2.5 billion of income tax they pay is more than offset by the $7.3 billion they receive in income support.

Social justice is impossible without a growing economy.

New Zealand

In closing let me make a few remarks about New Zealand. The history of economic growth in New Zealand since 1950 is not a great one. In 1950 we were one of the richest countries in the world, then we squandered our position. Per capita income grew just 1.4 per cent per year from 1950 to 1985. The OECD average was 2.87.

Between 1973 and 1985 a series of utterly disastrous policies saw growth stagnate, inflation skyrocket, and imbalances build up in the New Zealand economy which required painful correction after 1984. Those reforms were tough but necessary. They brought New Zealand into the modern world. Our economic reformers don’t get enough credit. In Australia, Keating and Hawke are heroes. In New Zealand, Roger Douglas would probably be spat at if he turned up to a Labour Party conference.

In 2005 after six okay years as Finance Minister Michael Cullen unleashed a fusillade of spending. Government spending jumped 50 per cent in five years. Most of it was wasteful. The Salvation Army lamented just that in 2008, commenting that “it seem[ed] to have contributed very little to our social progress.”  By the time National took office in late 2008 the economy had been in recession for a year. The tradable sector had been there for five years. Inflation was high, as were mortgage interest rates. The Treasury forecast never-ending budget deficits. As a government we have spent five years unpicking the economic disaster left to us by the Labour Party.

So where are we now? Well, our growth rate is one of the fastest in the OECD. It looks like we will grow at or about 3% for a while. That is above our historic average of 2 per cent. But as the Prime Minister says, we don’t need just one or two years of good growth as a country. We need solid, sustained high economic growth for a period of many years– that’s the only way we will climb the OECD ladder, and more importantly, improve the lives of all New Zealanders. We are heading in the right direction as a country but there is a huge amount of work left to do.

I’m out of time, so will leave it there – but I look forward to discussing in the Q and A session just what we need to do to “go for growth” in New Zealand.