Liz Truss’s growth delusion

27th October, 2022

There is a fashionable line of attack against Liz Truss’s single-minded focus on growth: what about the poor? What about the planet? In chasing GDP growth, this critique runs, Truss shows herself to be a politician who knows the price of everything and the value of nothing.

This criticism is misguided. The UK’s new prime minister is absolutely right to believe that economic growth should be her top priority. The problem is that she seems to have no idea how to go about it.

Let’s start with the case for economic growth. Gross domestic product is not, and never has been, an attempt to measure the wellbeing of a society. It is easy to list activities which promote wellbeing but not growth, and plenty more which promote growth but not wellbeing. Nevertheless, it is striking how countries with a high GDP also have flourishing citizens. Pick your issue, from life expectancy to child mortality, from opportunities for women to the protection of basic human rights, cleaner streets, lower crime, even better-quality art, from TV to opera. Somehow, people who live in richer countries are likely to be enjoying more of the good stuff.

Of course, causation probably runs both ways in many of these cases. Healthy people, safe cities and empowered women are all both causes and consequences of economic growth. When one looks through the lens of complex, sophisticated, multidimensional efforts to measure wellbeing, there is plenty to suggest that growth is good.

For example, the Social Progress Index combines “60 social and environmental outcome indicators” to produce “a nuanced picture of what a successful society looks like”. This valuable effort throws up few surprises. The 25 most “successful societies” are the Nordics, western Europe, the US, Canada, Australia and New Zealand, and Japan and South Korea. Aside from a few petrostates, the list of the countries with the highest GDP per capita contains much the same names.

Focus on less fortunate places and you’ll see that Burundi, South Sudan, the Central African Republic, the Democratic Republic of Congo, Somalia and Chad are in the bottom ten. The bottom ten by GDP per capita, or according to the Social Progress Index? Both, of course.

GDP per capita is not a measure of social progress. It just happens to be extraordinarily closely correlated with social progress.

Nor should we forget Benjamin Friedman’s prescient argument, in The Moral Consequences of Economic Growth (2005), that “economic growth — meaning a rising standard of living for the clear majority of citizens — more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.” Stagnant growth — which many rich countries, particularly the UK, have seen since 2008 — clearly risks the reverse. If you doubt that, look around.

Economic growth promotes all these good things, and it has one further benefit: it tends to last. The best predictor of which economies will be complex, sophisticated, productive and rich next year is the list of economies which were complex, sophisticated, productive and rich last year. Grow faster now, and there is reason to expect you’ll be richer indefinitely.

That, then, is the case for prioritising economic growth — not to the exclusion of all else, but as a central goal of policy. Truss and her chancellor Kwasi Kwarteng deserve credit for recognising this. Prioritising growth in the recent past would have avoided some obvious policy blunders, such as Theresa May’s insistence on leaving the EU’s customs union and single market, or George Osborne’s disastrous obsession with balancing the budget in the teeth of a deep recession.

But while recent governments have demonstrated how to depress growth, we know far less about how to increase it. And Truss’s statements so far do not inspire confidence. Her rant about the “disgrace” of cheese imports suggests someone who hasn’t appreciated the importance of free trade in goods to a prosperous modern economy.

Her sorrow at seeing solar panels on agricultural land speaks of a soul who values bucolic tradition over a vital technology that is growing more productive at an astonishing rate — not to mention a strange taste for heavy-handed intervention.

Her vast and open-ended energy price cap is a kick in the teeth for market forces. By some measures the largest fiscal event in living memory, it feels closer to Mao than Thatcher. And it is unnecessary: a truly pro-growth government would have achieved the same social goal by letting prices rise, but giving an offsetting cash grant to each household. That would let the price system encourage the efficient use of old technology and the embrace of the new.

It may be that her tax cuts and enterprise zones will boost growth, but the currency and debt markets appear to disagree. Most policy wonks suspect that fundamental reforms of housebuilding, infrastructure and education are likely to be required. Better access to large markets on our doorstep might also help, but that ship seems to have sailed.

It is good to have a prime minister focused on the goal of growth, but what we really need is for her to show signs of being able to stick the ball in the back of the net.

Written for and first published in the Financial Times on 30 September 2022.

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