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How to Vote Progressive in Australia: Labor or Green?

Chapter 10

Why Progressives Should be Pro-Growth1

Andrew Leigh

One of the dividing lines between Labor and the Greens is our attitude to economic growth. Labor’s policy platform is unequivocal:

Labor is a party of economic growth. We reject the arguments of those who do not believe in economic growth.2

By contrast, the Greens platform reads:

The pursuit of continuous material-based economic growth is incompatible with the planets finite resources. In order to provide for the needs of present and future generations, economic management should prioritise improving the quality of life rather than the production and consumption of material output.3

This sceptical attitude to economic growth can also be seen in the speeches of Greens representatives. Richard Di Natale claims that there is a belief that GDP and the stock market are all that matter.4 Lee Rhiannon argues that economic growth is not the solution to women’s empowerment.5 Scott Ludlam has compared continuous economic growth with cancer.6

Attitudes to economic growth are as good an issue as any to define the policy difference between Labor and the Greens. In part, this reflects the difference between a party of government and a party of protest. But it runs deeper. A party that compares economic growth to cancer is one that deliberately places itself outside the important economic debates that Australia faces.

True progressives should never shy away from making the case that economic growth matters.

Why Growth Matters

As Australians, we’re used to economic growth. Yet it is easy to forget how unusual growth is in human history.

Go back a few centuries to the Victorian era and the average person was no better of off than the average caveman.7 There were a lucky few who enjoyed tea in china cups, but the true living standards of 1800 were better captured by Charles Dickens than Jane Austen.

Indeed, economic historian Greg Clark makes the point that on some measures, the vast mass of the world’s population were worse off in 1800 than their ancestors of 100,000 BC. Victorians were shorter – reflecting their poor diet and exposure to disease in childhood.

In 1800, life expectancy was around 30–35 years, pretty much what it had been on the savannah. And citizens of 1800 probably worked longer hours than cavemen. From the Stone Age to the Renaissance, most people ate around 2000 calories a day, compared with the 3000 calories a day that we consume. In fact, most of us would find it difficult to get by on 2000 calories a day, because our bodies are significantly bigger than those of our ancestors.

There’s something slightly shocking about the thought that our ancestors – just seven generations ago – experienced stone-age living conditions. For them, it was normal to go to bed hungry. Everyone knew someone who had lost a baby in childbirth – sometimes with the loss of the mother too. Illness was normal and uncontrollable. Life for most was, as Thomas Hobbes famously put it, ‘nasty, brutish and short’.

There was simplicity in a world without economic growth. An artisan would engrave his prices on the stone wall of his workshop, knowing that his son would be charging the same. Living standards for most people were low, and there was no expectation that your children would enjoy anything better.

Then – beginning in a little island off the coast of Europe – something changed. With the Industrial Revolution, people began to experience rising living standards. Average income tripled from 70 cents per person per day in 1800 to $2.30 by 1900. In the twentieth century, average incomes rose tenfold to $22 per person per day.8

That transformation had immediate effects on people’s health. A person born in 1900 could expect to live to 40. By 2000, babies born in a developed nation could expect to live into their 70s. Today, Australian life expectancy is 80 for men and 84 for women. Economic growth is the central reason why Australian life expectancy is twice as long as at the time of Federation.

People don’t just live longer – we live healthier. A survey of elderly veterans in the United States found that in 1910, nearly all were suffering from digestive disorders.9 By the end of the twentieth century, just one-fifth suffered from the same health problems. Another study looks at direct measures of health, such as the ability to perform light housework, or the number of days each year that illness confines a person to bed. The authors conclude that the self-reported health of men aged in their early-70s today is similar to the levels recorded for men aged in their early-60s three decades ago.10

Underpinning economic growth has been a massive rise in productivity. Workers today create more value in an hour than their great-grandparents did in a day. A century ago, it took 1700 hours of work to buy a year’s food supply for a family. Working a typical week, that’s 10 months’ labour. Today, a family’s food supply takes a month and a half of work.

That’s true of other products too. Since the late-nineteenth century, the number of working hours to buy various products has dropped dramatically. It used to take 260 hours of work to buy a bicycle – now it takes 7 hours. It used to take 2 hours of work to buy a dozen oranges – now it takes 6 minutes. Not surprisingly, that’s meant an increase in the number of leisure hours: from 2 hours a day in the late-nineteenth century to 6 hours a day now.

The Easterlin Paradox Debunked

If you had to name one central fact to characterise the past two centuries, it would be income growth. It has made us healthier and allowed us to enjoy more leisure. It has lengthened our lives and allowed us to be more generous.

Yet some now argue that economic growth has gone too far. In Growth Fetish, Clive Hamilton argued that once a society has developed to the point at which the majority of people live reasonably comfortably, the pursuit of growth is pointless and should be curtailed. Internationally, books like Tim Jackson’s Prosperity Without Growth have become bestsellers.

At the core of many of the anti-growth arguments was the contention that once incomes reach a certain threshold, more money doesn’t buy more happiness. The person most closely associated with this idea is Richard Easterlin, who wrote a famous article in 1974 that looked at the relationship between GDP and happiness across nine countries. Easterlin found that there was no statistically significant relationship, and concluded that across countries, money didn’t buy happiness. The relationship became known as the ‘Easterlin Paradox’. His article has since been cited nearly 2000 times, and has become one of the most famous ideas in the social sciences.

In 2008, a pair of economists at the University of Pennsylvania – Betsey Stevenson and Justin Wolfers – decided to revisit the Easterlin Paradox.11 But rather than using data for just nine countries, they exploited the fact that we now have more happiness surveys. A lot more.

In 2006, Gallup surveyed people in 132 countries about their life satisfaction. As the chart below shows, the relationship between satisfaction and log GDP is almost perfectly linear. There is no evidence of satiation. If anything, money seems to buy more satisfaction as you get richer. When we move from nine countries to 132 countries, the Easterlin Paradox simply doesn’t hold up.

Figure 1: Life satisfaction and income (source: Betsey Stevenson and Justin Wolfers)

Figure 2: Emotions and income (source: Betsey Stevenson and Justin Wolfers)

Interestingly, money doesn’t just buy more happiness. In countries with higher levels of GDP per capita, people are more likely to say that they experienced enjoyment, and more likely to say that they were pleased at having accomplished something. People in affluent nations are less likely to have experienced physical pain, loneliness, depression and boredom. Indeed, people in richer countries are more likely to tell an interviewer that they experienced love in the previous day. That’s right, Paul McCartney, money can buy you love.

Environmental Concerns

A popular belief is that economic growth and environmental damage go hand in hand. This concern comes in two forms – some people argue that we will use too many inputs, while others argue that we will produce too many outputs. Let me address each in turn.

The view that our economy will eventually use up all the stuff in the world is based on a static view about where our GDP comes from. If it were the case that all workers produced goods requiring non-renewables and if we never became any more efficient at producing those goods, then rising incomes and population would eventually use up all the world’s resources.

But it turns out that neither of these things are true. Most workers don’t produce goods from non-renewables. In fact, three-quarters of Australians work in the service sector. For detectives and doctors, barristers and baristas, the product of their jobs doesn’t weigh much (leading some to dub the phenomenon ‘the weightless world’ of work). In fact, the entire output of the United States weighs only marginally more today than it did a century ago.12

Productivity too, is always increasing. Today’s cars use less fuel. Our computers use less electricity. And, thanks to recycling, our paper uses fewer trees.

Our economy is also shifting from one resource base to another, a phenomenon that economist Paul Collier characterises (not very reassuringly) as ‘running across ice floes’.13 In the nineteenth century, the British government worried that it was going to run out of tall trees for the masts of ships. We will probably look back at arguments about ‘peak oil’ in the same way.14

The other environmental concern about growth is that people say it inexorably leads to more pollution. Here, the best example is urban air pollution. In the 1950s and 1960s, people became concerned that growth would inexorably choke cities like London and New York. Yet through cleaner cars, cleaner factories, and shifting industrial pollution away from the largest urban areas, we have managed to reduce urban air pollution while still enjoying economic growth.15

Today, our major environmental challenge is climate change. Here again, I am optimistic that we can decouple growth from carbon pollution, in the same way as we successfully did with urban air pollution (and with the CFCs that were damaging the ozone layer). I do not believe that the best way to deal with climate change is by abandoning economic growth. Indeed, I think that growth will help us address dangerous climate change, since higher incomes will provide more resources to assist with the transition.

An Imperfect Measure

One of the curious things about economic growth is that while it closely tracks many of the things that we care about – such as health, longevity and love – it is far from being a perfect measure of wellbeing. Indeed, growth in Australia’s GDP (or our GNI or GNP, if you prefer) captures some things that we would think of as bad, and fails to capture other things that most of us would regard as good.

Robert Kennedy put this best in a speech at the University of Kansas, less than three months before he was tragically shot:16

Our Gross National Product… counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

More recently, Australian economist John Quiggin argues that there are three things wrong with GDP as a measure of a nation’s economic wellbeing: ‘it’s Gross (doesn’t net out depreciation of physical or natural capital), Domestic (doesn’t net out income paid overseas) and a Product (takes no account of labour input)’.17 A number of economists have argued that we should instead be tracking Net National Disposable Income per Capita.

But either of these measures has the problem that it’s just an average. Suppose you’re in a café with 25 people when a member of the BRW 200 Rich List drops by for a latte. If we just look at averages, the average wealth per person in the café is now at least $10 million – even although no-one has gotten wealthier.

The same problem occurs if economic growth goes only to the richest. In Australia, recent decades have seen an increase in inequality, but everyone’s incomes have gone up. According the OECD, the past quarter-century has seen incomes for the richest tenth grow by an average of 4.5 percent per year. For the poorest tenth of Australian households, incomes grew at 3.0 percent per year.

Australia’s experience contrasts with the United States, where incomes for the bottom tenth have barely budged in a generation. But it does highlight the importance of talking about both growth and inequality. Or perhaps we should focus more on median incomes, just as we do with median house prices. Just as median house prices are unaffected by the doubling of millionaires’ house values, so a measure of median incomes would be unaffected by the doubling of millionaires’ incomes.

Boosting Growth

By now, you’ve probably guessed my secret: I think growth is good. As Winston Churchill said of democracy, it’s not perfect – merely better than all the alternatives. The challenge now is to find the set of policies that are best for promoting economic growth.

In the long run, the key to boosting growth is raising productivity – producing more with the same set of inputs. During the 1980s and 1990s, tariff cuts, competition policy and enterprise bargaining were among the underpinnings of productivity growth, but what is the answer to the modern productivity puzzle?

In my view, the best productivity policy we can pursue today is to improve our education system. Raising the skill level of the workforce is essential if we are to adapt to changes in the labour market.

We need to raise quantity of education – boost the average number of years of schooling that each person receives. That means encouraging young people to complete high school, undertake vocational training and go to university.

We also need raise the quality of Australian education. Since the 1960s, the performance of Australian 14 and 15 year olds on literacy and numeracy tests has failed to rise, and may even have fallen somewhat.18 One possible reason for this is that the academic aptitude of new teachers has fallen.19 Policies to boost teacher effectiveness are vital to Australia’s future growth prospects.20

Getting education right isn’t just good for our economy – it’s also great social policy. A first-rate education is the best antipoverty vaccine we’ve yet devised.

Education is also good for civic activism.21 A bit more school, some vocational education or a few years at university are all factors that help make you more likely to join organisations, volunteer at the local sports club, or donate money to a worthy cause. Admittedly, the past few years have seen Australia become better educated but more disconnected – yet the decline in community engagement would probably have been worse still if educational attainment had stagnated.22

Another crucial element to the productivity puzzle is technology. As recently as the early-1900s, American jurist Oliver Wendell Holmes quipped that if all the medicines in the world were dumped into the ocean, it would be better for humanity and worse for the fish.23 A century on, medical advances have vanquished diseases like smallpox, polio and tuberculosis from the developed world. Our emergency departments are considerably better at saving critically injured patients. And in mental health, we are steadily doing better at diagnosing and treating mental illness as soon as it appears. Ensuring that Australia has the right technological infrastructure and incentives to innovate is vital to raising productivity.

Conclusion

There’s an old joke that goes:

Q: How many conservative economists does it take to change a light bulb?

A: None. The darkness will cause the light bulb to change by itself.

My main argument here has been that economic growth tends to benefit all Australians. But you should not mistake my belief in the benefits of growth with complacency about the need for government to help build a better Australia. Unlike the conservative economist in the joke, I do not believe that markets can solve all problems. Government has an important role to play in providing public investments and managing risks. But it should also promote pro-growth policies, since growth tends to raise wellbeing.

A central policy difference between my political party and the Greens is that Labor recognises the value of growth. Far from regarding growth as a cancer, we recognise that it has the potential to make us happier, and it need not leave us with a dirtier environment. Indeed, the example of the past shows that we can use the resources from growth to improve our natural surroundings. Sometimes the changes come in unexpected ways. In the early-twentieth century, some Londoners worried that there would soon be so many horses plying the streets that the manure would become unmanageable. With the advent of the motor car, worries about exhaust fumes quickly replaced concerns about horse manure.

Globally, Australia’s geographic position could hardly be better. At the start of the Asian Century, our proximity to fast-growing nations such as China, Malaysia, Vietnam and Korea will prove vital not only for goods trade, but also because it will allow us to plug in to global growth in other ways as well. Thousands of foreign-born students now study in our universities, while many Australian-born students take the chance to complete all or part of their education in an Asian university.

Great fundamentals place the onus on us to do something special. With the right policies and effective leadership, we can lay the foundations for continued productivity growth, ensuring that future generations enjoy steady improvements in living standards. We can make schools and hospitals work even better, providing the building blocks of a happy and healthy life. We can improve trust in politics, engaging with voters about the trade-offs that are at the heart of decision-making. We can continue to close the gaps between Indigenous and non-Indigenous Australians, applying hard-headed analysis to find out what works, and what does not. Through trade, aid and diplomacy, we can help improve the lives of many in our region. Unlike those in the Greens, I am confident that economic growth will be part of Australia’s continued success.

___________________

1    This is an edited version of a speech delivered at the Ginninderra Labor Club on 18 May 2011. My title borrows from Gene Sperling, The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity, Simon & Schuster, New York, 2006. Thanks to Jennifer Rayner for valuable comments on an earlier draft.

2    ALP National Platform, Chapter 2.

3    Greens Policy Platform, Economic Principle 2.

4    ‘Every generation has its fashion and we are cursed by the belief that narrow economic measures such as Australia’s GDP and the performance of the stock market are all that matters’, Richard Di Natale, first speech, Australian Senate, 16 August 2011.

5    ‘So the assumption that increased economic activity will help everyone is highly problematic. Put simply, the problems women face are not only economic, they are complex and require careful, participatory solutions that are more than simply an increase in economic activity.’ Lee Rhiannon, debate on International Aid (Promoting Gender Equality) Bill 2015, Australian Senate, 5 March 2015.

6    ‘When our economy fails to grow we call it a recession; but an entity that knows only blind growth we call a cancer.’ Scott Ludlam, first speech, Australian Senate, 16 September 2008.

7    Gregory Clark, A Farewell to Alms: A Brief Economic History of the World, Princeton University Press, Princeton, 2007.

8    Arnold Kling and Nick Schultz, From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity, Encounter Books, New York, 2009, 26.

9    Dora L. Costa, ‘Health, income, and retirement: Evidence from nineteenth-century America,’ The Journal of Economic History 55(2) (1995): 374–375.

10  David Cutler, Jeffrey Liebman and Seamus Smyth, ‘How fast should the social security retirement age rise?,’ NBER Retirement Research Center Working Paper NB04-05, National Bureau of Economic Research, Cambridge, MA, 2007.

11  Betsey Stevenson and Justin Wolfers, ‘Economic growth and happiness: Reassessing the Easterlin Paradox’, Brookings Papers on Economic Activity, 2008. See also work by Angus Deaton and Alan Krueger, which reaches the same conclusion.

12  Kling and Schultz, From Poverty to Prosperity.

13  Paul Collier, The Plundered Planet: Why We Must – and How We Can – Manage Nature for Global Prosperity, Oxford University Press, Oxford, 2010, 98. Our ethical obligation with natural resources, Collier argues, is to bequeath future generations assets of equal value to the natural resources we use. We are not obliged to preserve the world as a museum, but we are ‘custodians of their value’. In the mid-nineteenth century, a generation of prospectors who mined Victoria’s gold and left us with Melbourne’s wide streets and magnificent buildings. We look upon them more fondly than if they had sold the gold and left our generation nothing in return.

14  On peak oil, see Michael Lynch, ‘Peak oil is a waste of energy,’ New York Times, 24 August 2009.

15  Economists refer to this tendency of environmental outcomes to worsen and then improve as the ‘environmental Kuznets curve’.

16  Remarks of Robert F. Kennedy at the University of Kansas, March 18, 1968.

17  John Quiggin, ‘Is happiness gross?,’ 7 August 2006, www.johnquiggin.com.

18  Andrew Leigh and Chris Ryan, ‘Long-run trends in school productivity: Evidence from Australia, Education Finance and Policy, 6(1) (2011): 105–135.

19  Andrew Leigh and Chris Ryan, ‘How and why has teacher quality changed in Australia?,’ Australian Economic Review 41(2) (2008): 141–59.

20  For more discussion of this issue, see Andrew Leigh, ‘Robots, remuneration and restructuring: How do technology and inequality shape one another, and what we should do about it?,’ Melville Lecture, Australian National University, 16 November 2015, www.andrewleigh.com.

21  John F. Helliwell and Robert D. Putnam, ‘Education and social capital,’ Eastern Economic Journal, 33(1) (2007): 1–19

22  On the decline in community life, see Andrew Leigh, Disconnected, New South Books, Sydney, 2010.

23  Quoted in Robert Guest, The Shackled Continent: Power, Corruption, and African Lives, Smithsonian Books, Washington, 2004, 200.

How to Vote Progressive in Australia: Labor or Green?

   by Dennis Altman and Sean Scalmer