"For the record, I think tax policy in a rich country is much more likely to affect the level of economic output than the sustainable growth rate of output but I cannot prove that with a chart"
Advocacy for some policy proposal or other, most often a tax cut or regulation roll-back, by appealing to economic growth is often muddled thinking and not at all clear whether the purported increase will happen to economic growth or economic activity (i.e. there is a danger of the common stocks-vs-flows fallacy here). Imprecise words here (will the policy ‘increase economic growth’, ‘grow the economy’? etc.) leave a lot of room for both intentional and unintentional misrepresentation of the case for a policy change, especially given that some level of growth is the normal status quo for most economies under consideration.
It makes a huge difference to whether or not a policy proposal survives a cost-benefit analysis whether it increases the level of economic activity or the rate of economic growth: if a policy change increases only the level of economic activity without increasing its rate of growth, then there is a cost to not adopting the policy, but that cost is constant over time so the society that rejects the policy change stays the same margin behind where they could have been had they made it. On the other hand, if a policy change increases the rate of growth of economic activity, then the cost to rejecting the policy is ever-growing, and the society that rejects the policy change is always getting further and further behind the levels of economic activity they could have had with the policy’s adoption.
Obviously then, there are a lot of possible policy changes that could survive a cost-benefit analysis if they increase the economic growth rate, but would fail if they increase only the level of economic activity. Thus it is crucial to be able to tell these apart.
However, there is a particular difficulty in telling them apart: even policy changes that increase only the level of economic activity (and leave the growth rate unaffected) will cause an increase in the rate of growth to show up in the data, if only temporarily as individuals and firms ramp up production to levels that are only newly-profitable thanks to the reduction in deadweight loss.
To see this, consider that the only prima facie alternative way (alternative from temporarily increasing the growth rate) that a policy change can increase the level of economic activity
is for that same level of growth, while remaining constant, to continue for a longer period of time than it otherwise would have without the change in policy. But this implies that the initiate rate of growth before any policy discussion otherwise (without the policy change) would have decreased or leveled out completely to zero; if not, then the policy change would not have been able to increase the level of activity, as was assumed, because the society that does not make the change would never have fallen behind the society that does. Thus, the ‘alternative way' of a policy change increasing the level of economic activity without increasing the rate temporarily is inconceivable: causing an initial rate of growth to stay constant when it otherwise would have decreased partially or entirely is changing the rate, and it must be so either temporarily (in which case the policy change increases the level of activity by temporarily increasing the rate of growth) or permanently (in which case the policy doesn’t just increase the level of activity, but does increase the rate).
To bring all these words back to practical earth, this means that advocates for policy changes on the grounds of economic growth need to be asked specifically whether the policy change will increase the level of activity or its rate of growth, and that evidence brought forth to demonstrate the latter needs to be examined carefully and over long enough periods of time.
On top of everyone’s priors about the desirability of tax cuts or regulations roll-backs, and their judgments of the evidence brought in to support specific policy proposals, it probably also makes a difference to people’s policy calculus whether they’re implicitly assuming infinite growth or its end: falling behind where a society could be in terms of increased economic activity, whether by a constant margin or a changing one, can definitely be more or less bad depending on whether or not there is an ending point, and if so, how far into the future it is.
You provide interesting discussion. If only we knew which policies did which.
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