Saturday, December 31, 2005

Best Economic News of 2005

Arnold Kling at Tech Central Station claims that the best indicator of economic health is a nation's productivity, and by that measure we're doing pretty well. He concludes with these observations:

In a recent TCS interview, Robert Fogel suggested that productivity growth of 2 percent per year would be sufficient to ensure the soundness of Social Security. With three percent productivity growth, even Medicare may be sound.

In The Great Race, I argued that our economic future boils down to two trends. Moore's Law is raising productivity, helping to increase the size of the economy relative to government spending. On the other hand, Medicare is growing, which tends to increase government spending relative to the size of the economy.

In the 2-1/2 years since I wrote that essay, nothing has been done to slow the growth of Medicare. However, if the economy can sustain or increase its rate of productivity growth, the long-term outlook may be reasonably good. We are headed for the scenario that I called "affordable welfare state," meaning that the lavish benefits that we have promised ourselves when we get older will require relatively modest increases in tax rates. Tax revenues will be high because incomes and payrolls will be high.

The politicians have done nothing to slow the growth of entitlements. The mainstream media have totally missed the most important economic news of the early 21st century, which is the strong productivity growth. The state of the economy in 2005 is that it is performing well in spite of both the pols and the pundits.

Almost makes one think that the millenium is right around the corner.