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How Europe Can Return to Growth | Podcast Highlights

Blog Post | Economic Growth

How Europe Can Return to Growth | Podcast Highlights

Marian Tupy interviews Jon Moynihan about why economic growth matters and how the UK and other social democracies can avoid economic stagnation.

Jon Moynihan —

Listen to the podcast or read the full transcript here.

What does growth mean, and why is it important?

Great question. There are practical reasons why growth is crucial, but there are also moral reasons. The practical ones are that the world stagnates if you don’t have growth. And there are a couple of billion people for whom a great deal of economic growth is needed to bring them out of poverty.

Now, the moral reasons are, for example, that if there’s no growth, and you, for whatever reason, want to earn more money next year, then somebody else has got to earn less. So, the desire to better yourself, which is very natural, will always be at somebody else’s expense in a no-growth world.

These numbers are rough, so I don’t want anybody writing to me saying that I got the decimal place wrong or whatever. But 112 billion human beings have lived since the beginning of human existence. 104 billion have died. 80 billion or so died of infection. And those 80 billion had an average lifespan of about 30 years. Then Alexander Fleming discovered how to cultivate penicillin, and capitalism figured out how to manufacture it in bulk, leading to an enormous transformation of human existence. Now, you or I can expect to live till we’re about 93.

That’s economic growth. People think of economic growth as some dry set of numbers. Well, it’s not. It’s Alexander Fleming discovering how to cultivate penicillin and the capitalist process spreading that knowledge around the world. So I say to people, “Well, you say you don’t want economic growth. Well, how would you like to only live to 30 instead of 93?”

And in addition to having all those additional years of life, there’s the fact that you no longer have to bury your child before the age of one.

Absolutely.

Tell me more about the institutional underpinnings of growth.

Well, I’ve written this book in two volumes. The first volume talks about three big things that you’ve got to have for growth. The three big things are small government, a low level of taxes, and a low level of regulation. I went into this asking, “What creates growth?” I didn’t have a particular point of view. Then I looked through all these academic studies, and they’re absolutely dispositive. There’s no doubt that’s what you need.

The problem is that you’ve got a nasty little thing called Wagner’s Law. This Wagner was Adolf Wagner, who in 1865 said, “In a democracy, the size of government inexorably increases.” And what he meant was that in order to get elected, politicians promise the world to the electorate, and they sometimes even deliver it. And delivering it is expensive. Then they have to tax more, and that leads to big state, big tax, social democracy.

This is what the European Union is testing the limits of right now. In France, the government spends about 55 percent of GDP and taxes about 50 percent of GDP, which creates a significant deficit. Germany’s the same. And they’re not growing at all. They don’t have any economic growth. 20 years ago, our government was about one-third of GDP, and now it’s at 45 percent. So, you can come up with theoretical but very valid reasons as to why that will cut growth into ribbons. But in any event, real wages in our country are about 5 percent lower than they were 17 years ago.

That’s shocking.

It’s like that story about how you get poor slowly for a long time and then suddenly. The European Union is getting poor rather suddenly at the moment, but around the turn of the century, GDP per capita was about the same as the US. Now it’s what, 25 percent lower? Because America has kept on growing, and the European Union has kept on not growing.

The battle in the UK has been whether we manage to become more like America, which would lead to more economic growth, or more like the EU, which would lead to much less economic growth. And so far, even though we’ve left the EU, we’re still becoming more like them. This latest government has massively increased the size of government and is also attempting to increase the size of taxes.

My book says that won’t happen. Arthur Laffer’s been very nice about this book. I admire him tremendously, and in a rather cheeky way, I’ve gone beyond the Laffer curve to something I have egocentrically called the Moyni curve. I say that the amount of tax that a country can take from its people is invariant. However much it tries, it can’t go up from a certain flat level. And that level in the UK is about 36 percent.

Labor has published an economic plan that says we’re going to raise tax rates, and that will increase tax revenues to 38 percent of GDP. And I’ve been writing about this for the last dozen years, and every year, I say, “No, it’s 36 percent. If GDP isn’t growing, then tax revenues won’t grow.” And I said this last year when the Conservatives raised taxes, I said, “You can raise tax rates, but you won’t raise more tax revenues; it’ll stay at 36 percent.” And it did. And of course, they spent more because of Wagner’s law, but they didn’t raise more. So, the deficit in the UK now is 4.5 percent.

Now let me explain why the Moyni Curve works, and of course, I owe all this to Arthur Laffer, who’s a genius. I just lift off him. But you look at all the different countries. Interestingly, the Scandinavian countries have quite a high level. They can raise around 50 percent of GDP in taxes from their people. So can France. Singapore can only raise around 18 percent.

Why would they be different? Well, you may have heard about this psychologist called Hofstadter, who spent all his life trying to distinguish national characteristics. One thing he measures is how risk-loving nations are. And the French are very risk averse. Interestingly, the Brits are very risk loving. So, are the Irish, by the way, and very independent. They’re not collectivists. Scandinavian countries are much more collectivist. The French are enormous collectivists. Anyway, if you take Hofstadter’s measures of each country, you get a brilliant correlation with the level of their Moyni curve.

I surmised from what you said that Wagner’s law continues to demand that governments spend more, but they can only raise so much in taxes. So, the result is more borrowing.

Yes. The US has gone absolutely mad both under Trump and Biden in terms of the wasteful and squanderous way they are borrowing and spending. If you remember, the US was chided for having the “exorbitant privilege” of the world’s reserve currency, which allows them to borrow as much as they like. But that won’t last forever.

Sooner or later, your debt to GDP gets to such a level that investors are not very keen on buying any more of your debt or even holding it because they worry about you going bust. Let’s take Argentina as an example. In 1910, it was the 10th richest nation in the world. It’s an extraordinarily blessed country with wonderful beef and agriculture and so forth. And then they discovered Peronism, which is the Acme of Wagner’s law. By the turn of this century, they were regularly defaulting on their debts and constantly having to go to the IMF for debt restructuring and the like. So, there are a couple of examples of rich, prosperous, well-run countries that went to hell, and Britain could easily go to hell. France could easily go to hell. At some point, you can’t go on borrowing.

I want our listeners to walk away understanding how government spending impacts economic growth. Let’s talk about this chart from your book.

The graph shows an inverse correlation between a country's level of government spending as a share of GDP and it's average real GDP growth.

The vertical axis is the growth rate, and the bars are different categories of government. On the left, you’ve got governments that spend less than 25 percent of GDP. And over on the right, you’ve got governments that spend 50 and 60 percent of GDP. So, you can see on the right that those high-spending governments have very low growth. And it’s absolutely dispositive. I first produced that chart in 2012. I stole it from somebody else. Nothing that I say in the book is original. And I’ve been redoing that calculation year after year with new data and all sorts of different data, and you always get the same result.

Why does this happen? I appeal to common sense. Let’s say you’ve got three governments: one is spending 20 percent of GDP, another is spending 33 percent of GDP, and the third is spending 50 percent of GDP. Now, if the size of government is 20 percent of GDP, then for every one government worker or beneficiary, there are four private sector people paying for them. Now, increase the size of government to 33 percent. For every one government employee or beneficiary, there are two private sector people. Now go to the government that spends 50 percent of GDP. Every one employee or beneficiary now has to be carried on the back of just one private sector worker, and it becomes a crushing burden.

Let’s go back to the Moyni curve. The UK can’t raise more than 36 percent of GDP in taxes. Well, why not?

30 percent of all income tax in the UK is paid by the top 1 percent of taxpayers, and 60 percent of all income tax is paid by the top 10 percent. Those 10 percent are the entrepreneurial types. They’re not necessarily rich people, but they’re people who will bust a gut to build a business. They’re young, high achievers. They are millionaires, billionaires, and rich people who want to have an environment where they can invest their money and not have it confiscated. And it’s the risk-taking behavior of that top 10 percent that determines what the level of your Moyni curve is. It’s not the risk-taking behavior of the entire population. And right now, we have an absolute flood of millionaires leaving the country. We have an absolute flood of young high achievers in their 20s and high earners leaving the country. And we are the only country in Europe with a net outflow of millionaires.

And it’s not just a few of them. It is an awful lot of them. And it’s the richer ones. I know plenty; I can tell you a couple of funny anecdotes. Well, one anecdote is from a friend who runs a very high-end club, and he’s lost 700 members this year. Now, those members are all very rich; it’s just a matter of going off and living in their house in Italy or Dubai or wherever else.

A lot of our millionaires and young high achievers are moving to America. I moved to America when I was 26 and lived there for 20 years because I was fed up with the British economy. But the point is that we are the only country in Europe that’s losing millionaires. In every other one, they’re going up each year. And that’s how raising taxes, having a larger state that requires you to raise taxes, results in people leaving, which means you don’t raise the tax anyway.

Presumably, you left when Britain was doing very poorly in the 1970s. And now we are going back in that direction. What happened? Is it that people forgot about the 1970s?

It does look like you have to teach every generation the perils of socialism. We had a debate last night on a new law they’re bringing in to have a regulator for football. Now, by football, I mean soccer, not American football. It is the most absurd thing. By the way, this regulator will require that all football clubs have an EDI strategy that’s equality, diversity, and inclusion. And by equality, they mean equality of outcome.

I pointed out that soccer is a game. It’s a competition. There’s a thing in that game called a winner and another one called a loser. That is not equality of outcome. And I asked if this regulator would require that every game end in a draw. The whole idea is lunacy. We’ve got so many regulators. Now we’re going to have a regulator for soccer.

Another example is when I was moving some money from one bank account to another a couple of weeks ago, and I was told, “Well, you can’t transfer the money. You’ve got to write a check.” “Okay, fine, here’s a check.” “No, no, you can’t send it by mail. You’ve got to walk it down to the bank, prove who you are, and pay it in.” That’s only 45 minutes of my time. What could possibly be wrong about just taking a little 45 minutes of my time to walk a check down to the bank?

But consider that regulators are doing this sort of thing all over. They’ve been trying to build a new railroad in the UK, and there was a regulator who was worried about a colony of bats somewhere near this railroad. And they required that the builder build a roof over 10 kilometers of this railroad, known as the bat tunnel, to keep the bats out from flying in front of a speeding train. That cost 100 million pounds. Everybody in the House of Lords has been going, “This is dreadful, 100 million pounds to build this bat tunnel. How bat shit crazy is that?” And I said to them last night, “You’ve all been complaining about this bat tunnel, but you are putting in more and more regulators. Who do you think made you build that bat tunnel? It was a regulator you put in.”

More and more of life is regulated and just congealing, and I believe the whole economy is just going to congeal into inactivity. I may be exaggerating slightly.

So, you talked about three things that underpin economic growth: one is the rule of law, another is low taxes, and the third is small government. But small government doesn’t just mean that you spend less money. It also means that you regulate less.

Yes.

Now, let’s finish on this. I was struck by something that you said about how we are always one generation away from socialism. Do you conjecture that the default setting of a human being is more or less socialist?

Fortunately, I don’t think that is the case. And I’ll explain that assertion in this way.

Mother Nature or God or whoever you wish to believe ordered the way human beings are, so ordained it that half of human beings would be feelers and half would be thinkers. And it was Carl Gustav Jung who defined thinkers from feelers. Feelers act from the heart. It’s how they feel about something that informs their principles and how they behave and judge. Thinkers use their heads and use logic to get to their answers.

Now, the feelers’ primary thing is to be kind, and the thinkers’ is to be logical. Now, here’s the problem. Feeler-thinker is gender-differentiated. 40 percent of women are thinkers, and 60 percent are feelers. 60 percent of men are thinkers, and 40 percent are feelers.

The primary schools, which teach children up to the age of 11, are almost exclusively staffed with women right now. As a result, the “be-kind” philosophy is more inculcated into children than it was 30 years ago. Young people are told over and again that they must be kinder, that boys are toxic, and so forth. And so, everybody now believes that the default thing is to be kind, be nice, and that means be socialist. And I think that’s why we’ve got the problem that you just enunciated.

And I think that a reaction is starting now. We might see a bit of the opposite in the next few generations. But it is a problem because right now, young people do not vote for capitalism. They think capitalism is a horrible thing. They enjoy the fruits of capitalism every second of their ever-loving lives, but they don’t understand that, and, in general, they think that socialism is the way to go.

Get Jon Moynihan’s book, Return to Growth: How to Fix the Economy, here.

Buenos Aires Times | Economic Growth

Argentina May See Three Straight Years of Growth

“The World Bank on Tuesday reduced its growth forecast slightly for Latin America and the Caribbean, while predicting Argentina’s GDP will increase 2.1 percent this year.

In its biannual Regional Economic Update, World Bank experts highlighted Argentina's economic recovery, noting that the economy expected to post growth for three successive years to 2027 – the first time it will have done so in nearly 20 years.

The improvement, the report said, is driven by 'fiscal consolidation, tax reforms and a more open economy.'

Argentina’s economy grew by 4.5 percent last year and will grow by an estimated three percent in 2027, said the report.”

From Buenos Aires Times.

World Bank | Economic Growth

Global Economy So Far Weathers Major Oil Shock

“The Middle East conflict delivered one of the biggest disruptions to global oil supplies in decades. The disruption of oil shipments through the Strait of Hormuz earlier this year briefly drove Brent crude prices to nearly $120 a barrel—roughly two-thirds higher than the price on the eve of the conflict. Yet the global economy has so far escaped the steep downturn that used to accompany similar oil shocks.

Consensus forecasts now put global growth at about 2.6 percent in 2026, close to what was expected in January and above the more pessimistic projections made in the spring.”

From World Bank.

Bloomberg | Economic Growth

Pharmaceutical Exports Lift Denmark’s Growth Forecast

“Denmark’s central bank more than doubled its growth forecast for this year as surging US sales and production at Novo Nordisk A/S fuel strong exports in the Nordic country’s pharmaceutical industry.

Gross domestic product is now expected to grow 4% in 2026, up from a 1.8% forecast in March, Danmarks Nationalbank said Wednesday. The upgrade largely reflects stronger-than-expected growth in the first half, led by the drug industry, as well as better performance elsewhere in the economy, which has remained resilient despite geopolitical and trade turmoil, the central bank said.”

From Bloomberg.

Blog Post | Economic Growth

Growth vs. Redistribution in the Fight Against Poverty | Podcast Highlights

Chelsea Follett interviews Kevin Corinth about the causes of America’s long-term progress against poverty.

Kevin Corinth —

Listen to the podcast or read the full transcript here.

Joining me on the podcast today is Kevin Corinth, a senior fellow at the American Enterprise Institute, where he researches economic mobility, poverty, safety net programs, homelessness, social capital, and other issues. He is a co-author, along with Richard Burkhauser, of a recent paper titled “Poverty and Dependency in the United States, 1939 to 2023.”

What motivated you to revisit nearly a century of American poverty trends?

We have a lot of evidence about the extent of economic progress over the past 50 years or so. My co-author, Richard Burkhauser, and I did a paper a few years ago showing that, since President Johnson declared his war on poverty, we’ve seen a dramatic decline in poverty in the US from a 20 percent baseline to less than 2 percent today. In this paper, we wanted to ask, “What happened before that? Were we seeing declines in poverty before we had a large and expanding safety net?”

I also think that the idea that living standards have not improved over time is motivating a lot of today’s political turn toward socialism. And if we lose our understanding of what we’ve gained through our imperfect capitalist system, that could have very deleterious effects on policy today.

Before we get into the findings, why should people care about how we measure poverty?

A lot of people would agree that you should judge a society based on how it treats its most vulnerable members. I subscribe to that. So measuring poverty matters a lot for people’s views about how society is doing, which matters a lot for determining which policies to adopt.

You measure poverty almost the same way that you measure incomes. The only difference is that you have to pick a poverty line because poverty is the number of people with an income below some threshold. A lot of the debate on poverty comes down to where to draw that line. Where you draw the poverty line is a value judgment. It’s scientifically arbitrary, but it’s not arbitrary in terms of our values. As an economist and social scientist, I don’t get to decide that. You tell me where you want me to draw that poverty line, and then I’ll update it with inflation each year to measure our progress.

The official poverty measure is not measuring poverty well. It tries to be an absolute measure in that it increases the poverty line with inflation, but it uses an inflation measure that overstates how much prices go up each year. It also doesn’t include in-kind transfers like the SNAP program, which is our largest non-medical transfer today. It doesn’t include Medicaid or refundable tax credits. It doesn’t adjust for taxes at all.

Based on the official poverty measure, we’ve seen essentially no decline in poverty over the past 50 years because of these problems. When Rich Burkhauser and I looked at it, we found 90 percent reductions. So how you adjust the threshold and which resources you include matters a lot. Fortunately, almost everyone recognizes that the official poverty measure doesn’t make sense.

Among those who do recognize that poverty has come down in the United States, many assume that it has fallen because of government redistribution. Your central finding is that poverty fell dramatically before the War on Poverty even began. Could you tell me more about that result?

We’re not looking at the causal effect of the War on Poverty. I think we’d argue that it’s not possible for someone to estimate the causal effect of such a massive change in society. However, a lot of people want to say, “Poverty has fallen a lot since 1963 or 1964. That must have been caused by the great expansion of the safety net.” We strongly push back against that assertion, because we found that poverty was actually falling in the 24-year period before the War on Poverty began.

In the paper, you distinguish between poverty reduction through government transfers and poverty reduction through rising earnings. Why should policymakers pay attention to dependency as well as poverty?

That’s the exact way that President Lyndon Johnson thought about it when he declared the War on Poverty in 1964. He wanted to reduce poverty, but he cared a lot about the way in which we did it.

You can reduce poverty by more redistribution, providing more resources to people at the bottom. But that comes with some adverse behavioral effects; maybe they work less, and there could be reductions in marriage, and that could counteract some of the benefits. The other way, which is the one that President Johnson wanted, was to reduce poverty by increasing people’s earnings. People are usually better off, materially and psychologically, when they are able to overcome poverty through their own efforts.

Today, with our spiraling federal debt, there’s also some point at which we cannot continue to expand these programs. If we want to see people flourish and rise up the economic ladder, it’s going to require more than just government transfers. Whenever you redistribute resources to people with lower incomes, these programs are all means-tested. That creates an implicit tax on increasing your own earnings, because if you increase your own earnings, you’re going to reduce the amount of transfers that you receive. Those penalties can stop people from moving up the economic ladder. So those are all reasons why it’s typically better, if possible, to reduce poverty through increases in market income as opposed to more redistribution.

In your view, how much of the post-1960s slowdown in market income growth among lower-income households may be connected to some of those changing incentives from welfare policy itself?

I don’t think it’s the whole story, but it is probably one reason that we’ve seen diminished growth.

There are a few ways that redistribution can slow growth. One of them is by reducing the incentives for people to work, invest in themselves, and get married. It also requires a lot of taxes, which is possibly even a bigger factor. We have high effective marginal tax rates that disincentivize working and investing, which can slow growth. We also borrow money to fund these programs, and the more we borrow, the more taxes we pay in the future. It also means higher interest payments on our existing debt, which slows growth by driving up interest rates and reducing investment.

Many people today are arguing that unconditional cash transfers are the future of social policy in the age of AI.

I worry a lot about the universal basic income debate. My former colleague at AEI, Charles Murray, has talked about it, although for him universal basic income was a replacement for the large safety net that we already have. His idea was to spend the same amount of money, but do it in a way that doesn’t have some of these perverse incentives. The debate has moved on from that idea. Now people are saying,


“Let’s keep the existing means-tested programs and also add a universal basic income for everybody, even middle-class people.”

In the short term, that’s completely unrealistic. We don’t have the budget for it. The cost would be astronomical, and you certainly could not do it just by taxing the rich. You would need vast expansions in taxes for middle-class people too.

However, I worry a lot about universal basic income in the longer term. I don’t know what’s going to happen with AI, but I think in the back of people’s minds there’s this belief, and maybe they’re right, that with AI and all of the benefits it brings, we could see much stronger economic growth in the future. I think that people see that as an opportunity for a universal basic income, and think that once we can afford it, we should implement it. But universal basic income payments could discourage people from working, and especially from entering the labor market. Younger workers may decide, “I may not need to enter into the labor market.” And if you have less labor, you also have less of the augmentation effect of AI, which is where most of the value from AI might be created. So we could see a much smaller economic boom if the labor supply shrinks as a result of universal basic income.

Even if we don’t need human workers and we could actually get by with the machines doing everything, I still think universal basic income would be a terrible idea. People don’t just need work to fuel their own material well-being, but also for the sense of purpose that comes with contributing to society. And there will be ways to contribute to society, no matter what happens with AI.

What policies can we pursue to increase earnings opportunities for Americans without expanding dependency?

We can’t wave a magic wand and get the economic growth rate that we had during the 1940s and 1950s. And we already have a large social safety net. But we can want to design it in a way that reduces poverty and reduces dependence.

Starting in the 1960s, if you measure poverty based only on people’s market income, you see a flatlining of the poverty rate, maybe even a small increase. And at the same time, you see a greater dependence on government transfers. That pattern breaks starting in the early 1990s. Between 1990 and 2000, you see a continued reduction in poverty based on market income and a reduction in dependency.

What happened was welfare reform.

In the late ’80s, there was a lot of frustration about our cash welfare program. It was called AFDC, Aid to Families with Dependent Children. There was concern that it was breeding dependency and reducing marriage rates. In the late ’80s and early ’90s, states started experimenting with other ways of providing assistance, like having time limits on cash welfare, work requirements, and more investment into training programs and education. Then, in 1996, or early 1997, we passed welfare reform legislation that rolled those kinds of policies out nationally: time limits on assistance, work requirements, and, at the same time, expanded refundable tax credits that target families with children, including the child tax credit, which didn’t exist before 1997, and the earned income tax credit, which did exist but was much smaller until the 1990s.

In short, didn’t get any of the benefits unless you worked. And then benefits phased in as you worked more. Eventually there is a phase-out, and that has major problems, but these programs all encouraged people to enter the labor force and work. And after these reforms went into effect, we saw a growth in work efforts. Single moms had something like a 10 percentage point increase in their labor force participation. We saw many measures of child outcomes improving, including test scores and long-term outcomes. And even though we were still seeing a reduction in poverty, we were also seeing a reduction in dependency.

The 1990s example shows that, even with a large social safety net, if we design it correctly and address some of these perverse incentives, we can see reductions in poverty and reductions in dependency at the same time.