Is US Growth Immiserizing? Some Neoclassical Thoughts
The United States command a strong lead
over their peers in the group of advanced economies in terms of current and
projected GDP growth. The latest IMF WEO 2024 projects the US real GDP to grow
by 2.7 pc in 2024, compared to 0.2 pc in Germany and 0.8 pc in the Euro area. Four
years after the COVID peak at 15 pc, the US unemployment rate is down to
historic levels below 4 pc. For investors, the country is shining bright:
direct foreign investment and portfolio investment flow in massively.
Fast growth and full employment are the
main ingredients for a government to win re-election. Not so in the US. Trump
is ante portas (again) to become US President, while Biden risks to lose the
Presidential elections despite his economic record. There is a lot of guessing
why that is so; this blogpost adds to those guesses, not more nor less.
To be sure, US growth is highly unequal and
unbalanced in many ways - ethnical, regional, etc. The Human Development Index
(HDI), a summary measure of average achievement in key dimensions of human
development such as longevity, health and standards of living, notes that the US
score topped in 2019 ahead of the Covid pandemic. The country ranks only at #20
on latest count (March 2024); the HDI ranking is topped by Switzerland. Three
decades of GNP growth superior to other advanced countries have done fairly
little to lengthen life expectancy at birth and schooling scores. For a third
of the US population, US growth has been immiserizing.[1]
Deaton: “In the US, life expectancy fell for three years in a row before the
pandemic. For people without a four-year college degree, life expectancy had
been falling since 2010… I get quite upset when people say: Well, the American
economy is doing so much better than the German economy or the British economy.
If you look at GDP growth, that might be correct. But that’s not the complete
story, and life and death are more important than money.”
My hunch is different and much narrower:
the USA suffers from ´immiserizing growth´, a term first proposed by Jagdish Bhagwati in the 1950s.[2]
US
Terms of Trade (2000=100)
Source: US Bureau of Economic Analysis
Factor accumulation and the resulting
output growth can make a large country worse off, or ‘immiserize’ it. The
higher output potential leads to excess supply of exportables and to excess
demand for importables. This will tend to worsen the terms of trade if the
country is large enough – as is the US - to be able to influence its terms of
trade. In extremis, the worsened terms of trade can weigh so much as to
outweigh the rise in output and leave the country worse off than before.
´Immiserizing growth´ does not necessarily
the large-country assumption. It cannot be ruled out when the simultaneous
expansion of subsidized supply, such as of semiconductors or solar panels, is
considered. If industrial policy in many small countries raises the output of
´fancy´ exportables simultaneously, it can likewise affect terms of trade and
cause ´immiserizing´ growth.
Technical progress increases potential
output per head, but it also shifts resources towards the industry in which
progress occurs. Silicon Valley comes to mind, where internet platforms are
created and make billionnaires. The social value of such hi-tech output is
mainly privatized, while the export industries from which resources are withdrawn
can cluster in rust belts, with social costs socialized.
Brecher and Diaz-Alejandro [3] have shown that ´immiserization´ is almost inevitable (when the profits of
foreign investors are not taxed) when foreign capital is attracted into
protected industries. Foreign investors capture the rents created by
protection, growth induced by foreign capital is, once again, immiserizing.
[1] A. Deaton, "Life and Death Are More Important than Money", DIE ZEIT 14/2024 (Interview M. Schieritz)