Rich Country, Poor Country

Very small increments in economic growth make major differences in quality of life

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To paraphrase Robert Lucas in On the Mechanics of Economic Development:

Once one starts to think about economic growth, it is hard to think about anything else.

There’s a proposal going around to tax unrealized capital gains for individuals whose net worth is in excess of $100m. This doesn’t apply to startup founders unless your company is listed on a public exchange, but that means it does apply to certain visionary founders like Elon Musk and Mark Zuckerberg, effectively making it a means of divesting them of their very important companies. This would almost-certainly negatively impact American growth by a considerable degree. If you believe in something akin to the Olley-Pakes model of competition—where the most efficient firms capture large market shares—then you might be thinking this tax would push our best founders out of their companies all the time, and in many important cases, you’re probably right. But how much might that matter? Look here:

This chart depicts what American GDP per capita would be if America had a 0.25 to 1 percentage point lower growth rate per quarter since 1947. So if America actually grew 3% in a year, in this model, you might see it growing at about 2% per annum (-0.25 percentage points, pp, per quarter).¹ That compounding effect would be to make America incredibly poor compared to where it is now. Having 1 percentage point knocked out of growth each quarter, America becomes as poor as Tunisia by the modern day.²

To put America-as-Tunisia into perspective, consider that almost 10% of Tunisian children suffer from growth stunting and that about 10% of the rural population lacks safe drinking water, or that the World Bank listed America as having almost 21-times higher GDP per capita in 2023 than Tunisia did (current US$). Even accounting for PPP, with the same comparative level of GDP per capita, our counterfactual U.S. would still be 6-times poorer than the current U.S.

1 percentage point can have an unimaginably large influence on your quality of life. But let’s make the timeframe shorter so we can really see that. I’m going to show you comparisons from 1980 now.

Do you see who’s in the -1pp position? It’s Mexico. Most Americans do not want to live in Mexico: it’s a place where gangs rival the state and it’s stereotypically poor. But that’s the difference 1pp since 1980 could have made. America could be as poor as its southern neighbor, it could be truly impoverished if it lost just 1pp.

Now, unless you are just the worst type of pessimist, you believe America can grow faster. You think America can eke out just a bit more growth, even if the amount that’s on the table is small. You might support permitting reform, or you want a destination-based cash-flow tax, deductible payroll, and full expensing of capital equipment; you might support gutting NEPA and letting American build again, setting up land value taxation, and greatly expanding the level of skilled immigration while fixing up unemployment insurance; you might want a progressive consumption tax; or you might want any combination thereof and more. If you’re reading this, I assume, like me, you want serious land use reform. If America got that and it delivered the +0.7pp to annual aggregate output (let’s just call it GDP per capita) growth Duranton and Puga suggested it would, then we would see an America like the green line here starting from 1980; if it got the opposite and, let’s say, America became more onerously overregulated and it lost 0.7pp of growth, it would be like the red line today:³

If we extend this back in time to the 1947 starting date and we add a few more growth rate boosts for fun, we see something even more dramatic:

If you still don’t see why growth is so important, then I don’t know how to help you.

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1. Technically

(1+((1+0.03)^(1/4)-1)-0.0025)^4-1  

And thus 1.97%.

2. With annual rate reductions of the same magnitude, the comparison countries for -0.25, -0.50, -0.75, and -1pp would be Denmark, Greenland, New Zealand, and Guam. From 1980, they would be Iceland, Denmark, the Netherlands, and San Marino.

Since a few people messaged me for clarification on what I’m saying here, I am referring to each quarter’s figure being adjusted down by -1pp, or

first(GDP) * cumprod(1 + GrowthRate - 0.01)

3. You may reasonably ask: “Though you might net 70 basis points from land use reforms with current margins, shouldn’t we expect that to decline as land use becomes a less binding constraint on growth?” Perhaps, but there are suggestive reasons to think that electrification also permanently increased the TFP growth rate, and electricity isn’t very binding for modern people. What I suspect electrification did is less that it created some immediate jump in growth, and more that it enabled activity consistent with a higher rate of growth even if that activity is independent of electrification’s direct impacts because it, say, allows better communication, faster travel, reduces rates of mortality, and so on, and I suspect the deregulation of land use would do something similar. At the very least, more mobile labor means greater resiliency to shocks, and the growth rate might earn a permanent dividend of considerable size through that alone.