Crash Diets, Debt, and National Economic Growth

Last week I argued that the priority for economic growth had slipped and pointed out why this is a prescription for continued labor and economic problems. For a government that claims it wants to help the average guy, its opportunistic approach to labor market (and other) problems does nothing but slow the healing process. Today I want to take this discussion a little further and possibly irritate even more of my friends and relatives. I associate the government’s current shotgun approach with the popularity and (lack of) effectiveness of diet crazes.  

Some of you responded last week by admitting that economic growth is crucial for developing countries. When the average person in a country makes $1000 per year it seems pretty obvious that economic growth is the only sustainable way to lift people out of poverty and into lives that more closely approximate modern living. There is no serious debate about the negative side-effects of growth in such cases. The first priority is to improve the lives of very poor people. Of course there is always some debate. I have been lambasted more than once by questioners attending my speeches who pointed out how the serene and wonderful lives of people living in jungle huts were destroyed by the encroachment of economic development. I also remember the NAFTA debates that pointed out the deplorable conditions faced by inhabitants of northern Mexico as they traded rural lives for wealth aspirations associated with factory work in the Maquiladoras.

But while many growth critics will agree that economic growth is okay for poor countries, the party ends when we start talking about richer nations. Apparently it is okay for poor people to get richer but at some point self-appointed representatives of proper behavior draw a red line that means enough is enough. Earning one more dollar above that line is apparently not worth whatever side-effects might accompany the increase in income. This idea is not without economic foundation. Economists often cite “diminishing marginal utility of income (DMIU).” That fancy term means that as your income rises the satisfaction you get from each additional dollar gets smaller and smaller. So when a poor guy earns another $100, he is happy as a lark. But when a rich guy earns an extra $100 it means very little to him and he leaves it sitting on a park bench with his half-eaten croque-monsieur.

While DMUI sounds pretty intuitive a critical question asks when any of this actually kicks in enough to make a difference. Judging from park benches in the USA today, I see very few $100 bills sitting around. Does someone who makes $50,000 a year not value what another $100 will buy? Does someone who makes $250,000 not value the extra Benjamin? Where is the line? I will agree there is a line but I have never observed it in my family. If DMUI kicks in at a low income level then it follows that the negative side-effects of growth might dominate the good things generated by it. But if high income people value extra income sufficiently then it is not so clear that DMUI favors less emphasis on strong growth.

Another relevant economic concept comes from a psychologist named Abraham Maslow, “hierarchy of needs”. Wikipedia has a lengthy technical discussion (http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs ) but the simple and popular version is that human beings (that means you too Charlie) first must meet their biological needs for food, water, etc. Once they have enough income to meet those needs, then they move up the ladder to such things as JD, security, friendship, self-esteem, and morality.  This is important for a couple of reasons. First, it gives a foundation for valuing all human wants and needs. Who is to say that the “higher order” needs are not important? Surely you must eat and drink to survive, but some people could barely “survive” if they missed the latest showing of Survival. Clearly people are willing to die to protect freedoms to associate, speak, protest, etc. If higher incomes allow a country to reap some of these higher order benefits, I am not sure where we are supposed to draw the line and stop the income parade.

But a more important aspect of Maslow is how it affects our political aspirations. Once a country gets richer and once basic needs are met for most of the people, then Maslow’s hierarchy might suggest a political recognition of higher needs.  More equal incomes, cleaner environment, and more humane immigration policies surely seem more important once you are easily meeting basic needs for survival. But again, the argument is not about the theory. The debate centers on the values of the tradeoffs. What if economic growth is negatively impacted by a stronger focus on equal incomes, a cleaner environment, and more humane treatment of immigrants? What if weaker economic growth then makes these higher order objectives less attainable? Or put another way, an "obvious or direct" approach doesn't always succeed. How many crash diets ultimately succeed?  Just because you think a diet will make you look like Popeye’s girlfriend Olive Oyl or Dan Marino, we have plenty of evidence from millions of people who try extreme stupid diets that do nothing but create more income for shady businesses.

When smiling politicians tell you that they have wonderful ways to redistribute incomes or improve the quality of the environment ask them how they are going to accomplish those goals when the policies of the last 50 years have done little to create lasting remedies. More important, however, is to ask them what happens if such policies create more debt and/or rob the country of its higher economic growth.  If such direct approaches to a myriad of higher order needs have dubious chances of succeeding and very strong chances of creating more debt and less income, then one has to wonder if there is a better approach.

That better approach is twofold. First you reduce debt. The more we sustain historically high levels of debt, the less wiggle room we have. Look at this latest issue with Russia. A country with no debt can easily devote more resources to an urgent military conflict. The same goes for natural disasters. But if you have a large debt, the only way for the government to spend more on the emergency without having even more debt is to spend less on other government priorities. We hate that. So we need to have less debt now to give us more room to spend tomorrow on our highest national priorities. But reducing debt isn’t enough.  What we spend is limited by our incomes. When a nation grows it generates more tax revenues that support government spending. If you want to afford expensive policies for anything – environment, income distribution, defense, security, etc – then having a higher income and more tax revenue is the surest way.

Crash diets don’t work. Healthful living does. Every diet that takes you away from a sustained healthful life plan simply makes you worse off. Shotgun approaches to numerous national problems that threaten economic growth and/or create more debt are doomed as well.