Friday, January 27, 2012

The Great Expansion

From 1980 to 2007 the entire world economy expanded at an average 3.4% per year, which is an increase of 145%! The US grew a little slower, but even with the Great Recession the US averaged 3.0% growth. We are all much richer than we were in 1980. [wording clarified]

Did the middle class shrink? (I hate calling an income grouping a "class.") The broad grouping of $35k to $105k inflation adjusted to current dollars did shrink. But the lower income group didn't grow; the higher group grew! And around the world the lower income groups increased their income. [wording clarified]

What we can learn from the "Great Expansion" of 1980 to 2007?

Henry R. Nau is a fellow at Hoover Institution. Quoting:

… Even more importantly, the global surge in growth spread wealth from the rich to the poor countries, creating greater equality in global markets than ever before. Throughout this period, developing countries grew two and even three times faster than developed countries. As a result, the share of world GDP held by emerging markets increased to 22% from 13%, while the U.S. share remained steady at approximately 26%. The "Great Expansion" created a global middle class of some 600 million-800 million people in China, India, Brazil and other developing countries.
What were the policy trends that produced this Great Expansion? 

Precisely the free-market policies of deregulation and lower marginal income-tax rates that Mr. Obama decries.

President Ronald Reagan's decision to reverse the high-tax, loose-money, and interventionist government policies of the 1970s brought an end to the painful "stagflation" of that decade. Privatization world-wide reversed the growth of government, and new trade rounds were launched to open global markets and roll back protectionism. The Uruguay Round and later the North American Free Trade Agreement liberalized trade in agriculture and services and brought fast-growing emerging markets into the global system. This was combined with the liberalization of private financial markets, creating the global banking system that mobilized massive savings in emerging markets to fuel the industrial engines of the Great Expansion.

Global financial markets could have been better regulated, but President Obama's policies go far beyond any reforms that would bring an end to "too big to fail." His policies shift the emphasis back to public-sector growth while squeezing private-sector initiatives. He raises federal spending to 25% of GDP, favors higher taxes to keep it there, and touts government investment in clean energy and infrastructure to spur economic growth.

Meanwhile, he imposes health-care, regulatory and other costs on the private sector, restricts credit by trashing "fat cat" bankers, and discourages imports by pandering to labor's fears of globalization. Sadly, his policies resemble those that brought on the stagflation of the '70s, not those that ignited the Great Expansion.

This also appeared in the Wall Street Journal Thursday.