Allison Schrager: Populism is bad for economic growth

The degrowth movement, which had a moment a few years ago, is over — and not a moment too soon. As nations in Europe and North America face mounting debt and aging populations, politicians are again talking about how to increase economic growth. It is their only hope.

There’s only one problem: No one is advocating policies that will actually work. Doing that would require embracing change, which is the last thing any politician beholden to populism wants to do.

The best recent illustration is former President Donald Trump’s interview last week with Bloomberg News Editor-in-Chief John Micklethwait. Trump argued that there was no need to worry about the debt created by his spending and tax-cutting plans because economic growth would bring in more government revenue. At the center of his plan are very large tariffs, which he argued would increase growth by encouraging more companies to produce goods in the U.S.

Most economists are skeptical. In general, tariffs cost consumers money and have a poor track record of boosting growth. Trump’s tariffs would be no different.

Even if his tariffs managed to bring manufacturing back to the Midwest — a big if — they would not increase growth, which comes from three sources: capital, labor and productivity. It is tempting to look at China’s growth of the last few decades, buoyed by its manufacturing industry, and conclude that America could get Chinese growth rates if the U.S. made more things. But the Chinese economy grew so fast because it was so poor to begin with. Only a few decades ago, it was a barely industrialized economy with a mostly unskilled labor force. Simply adding capital to its economy created many manufacturing jobs that were more productive than the ones its population previously had — agricultural work in rural areas.

As the Chinese government is now seeing, this strategy works for only so long. After a while, the benefit of adding more capital diminishes, workers stop becoming more productive, and growth slows.

The U.S. economy reached this stage of development decades ago. What manufacturing remains in the U.S. is done with fewer people and is highly productive. Low-skilled manufacturing jobs have long been replaced by technology or moved abroad, in part because these jobs don’t create enough economic value to pay well. (Just because service jobs don’t produce things, doesn’t mean they aren’t productive.)

It is unclear what kinds of manufacturing jobs Trump would like to see return to the U.S. Vice presidential nominee JD Vance has suggested the U.S. could use more toaster factories, which would mean more low-skilled, labor-intensive manufacturing jobs. And that could boost growth, but only under certain circumstances — say, if most workers were currently doing something less productive, such as 19th-century agricultural work.

Meanwhile, U.S. unemployment is already low, so there is no glut of labor looking for low-skilled manufacturing jobs. If a lot of workers left their current jobs to make toasters, many would be less productive than they are now, and that would lower U.S. economic growth.

Vance would probably argue that unemployment does not tell the whole story, because the male prime-age labor force participation rate is down, and getting more men to work would help growth (though not nearly enough to pay for Trump’s proposed debts). He is right that men dropping out of the labor force is a serious economic and social problem. But it is not clear that this is happening because there are no jobs. And reviving the economy of the 1960s would only bring the U.S. back to 1960s GDP.

So what will make an economy grow? When a country is as developed as the U.S. or many European nations, there are only two things: more people and better productivity.

The first is unlikely in this political climate. On the second, the challenge is how to create conditions to allow innovation to flourish, since innovations — making new things, or making existing things using fewer resources — result in a more productive economy. The U.S. has historically grown faster than other rich nations for several reasons: deep capital markets, more spending on R&D, a more fluid labor market — and an exceptional ability to innovate and adapt.

There is some debate about how directly involved in innovation the government should be. Some argue it should be the primary innovator; DARPA, which is a Pentagon agency, famously helped invent the internet. And President Joe Biden has attempted to steer innovations into specific sectors, through subsidies and tariffs that promote green technology. But the role of the private sector, which relies on market prices and the rewards from taking risks, is critical to developing innovations, bringing them to market and spreading them through the economy. The government can facilitate market innovations by offering tax credits, say, or just getting out of the way by reducing regulations.

This year’s Nobel Prize was awarded to economists for their work on why some countries grow faster than others. Their work was mostly about developing countries, but it is also instructive for developed countries.

In both cases, institutions can encourage growth in the private sector and facilitate an economy that can better adapt to change — by promoting more flexible labor markets, for example, and bankruptcy laws that don’t punish failure too harshly. European bureaucrats are scratching their heads at how to boost growth, but you only need to look to their efforts to stall the progress of AI to understand why growth is not thriving there. Another factor is culture, namely an openness to change and risk. Canada has institutions as good as America’s, but it grows at a slower rate because it tends to be more risk-averse.

The populist surge in America, with its desire to either return to the past or slow down the change of the present, is what threatens America’s future growth. Trump’s tariff plan rejects what has made the U.S. economy successful. Economic growth comes from embracing the future.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”