• Andrew O'Brien

Book Review: Fully Grown – Why a Stagnant Economy Is a Sign of Success by Dietrich Vollrath

Updated: 3 days ago

If this is the best of all possible worlds, what are the others like?” Candide, Voltaire, 1759

There have been numerous responses to the slowdown in growth and productivity in the West. Some have tried to ignore it by claiming it to be an error of calculation, that we don’t have the tools to calculate the impact of new technologies. Let’s call that denial. Some have cried out for more radical forms of deregulation, tax cuts and ‘unleashing’ capitalism in a way that we haven’t seen since the Victorians. Anger and bargaining. Vollrath’s book is the latest stage. In this book, we are not slowing down because of anything that we have done wrong, but rather because what has gone right. Acceptance.

Vollrath’s book is full of interesting insights and observations on the nature of the growth slowdown in the US (although similar insights can be read for the UK). In summary, a combination of an aging population (which temporarily boosted productivity/growth when the baby boomers were growing up but is now slowing us down as they retire) and a shift from manufacturing into services (which are lower productivity by their very nature) has led to a reduction in productivity and growth. The good news is that these are things that we want. We have chosen to have smaller families and spend more on services that we want, rather than goods.

The evidence that these have contributed significantly to the slowdown is compelling. According to Vollrath, around 60% of the slowdown has been caused by the effect of smaller family sizes and aging and another 16% can be attributed to the relocation of activity from producing goods to services – around two-thirds of all the slowdown. The rest is the classic concerns about ‘geographical mobility’ and a lack of ‘creative destruction’ in the US economy.

The most useful bit of Vollrath’s book is his takedown of those that say that all we need to do is cut taxes and deregulate. Looking at the American Legislative Executive Council (ALEC)-Laffer rank for the ‘competitiveness’ of states. He compared this with the economic output of those US states. “What you can see…” says Vollrath “not much”. New York is one of the least competitive states according to ALEC-Laffer, yet has one of the highest levels of GDP per worker in the US. California, home to Silicon Valley, is similarly not ‘competitive’ according to ALEC-Laffer but yet has a high level of GDP per worker.

Would faster credit checks really improve growth?

The case of New Zealand is slightly more interesting. As Vollrath notes, New Zealand is ranked first overall in the World Bank’s ‘Doing Business’ indicators. It has enjoyed impressive levels of growth during the last decade. But the US is only 2.8 “Doing Business Points” (DBPs) behind New Zealand in 6th place. The UK is slightly further behind, trailing by 3.3 points in 8th place. The strength of NZ’s position is based on the fact that it is quick to set up a business, a good place to construct buildings and easy to get credit. The difference between the UK and NZ in setting up a business? Apparently, NZ scores 100 out of 100 because you can do it within a day. The UK is in the slow lane, apparently it takes 4.5 days on average to set up a business with a few more procedures. How much is that holding back growth? The UK loses out on ease of credit because it the ‘strength of legal rights’ is better in New Zealand, but if you asked most business people where they would prefer to set up or invest in a business, they would likely say the UK. So, what does the WB ranking mean in practice? As Vollrath would say “not much”.

That being said, Vollrath does ignore some important issues in the book that can frustrate a reader who has spent time reading around this subject. Vollrath makes clear that low taxes have not led to higher levels of growth, he uses Kansas in the US as an example, but he doesn’t consider enough whether tax cuts have slowed growth. For example, any look back at growth statistics will note that levels of growth were higher in the 1960s than they were in the 1980s, the latter period a time when there was a significant reduction in taxation in the US and UK which in turn led to a global trend towards cutting corporate and personal taxation. A consistent theme for this blog is that corporate decision making is critical to economic outcomes. Taking the pressure of firms to innovate and giving them the ‘easier’ way out to profit through reducing the tax burden has changed the nature of Western business and this in turn has impacted the economy. He does say that lower taxes have led to higher dividends and returns to shareholders, which have come at the same time as lower levels of physical capital investment, but in Vollrath’s view, lower capital investment is not responsible for the slowdown. A lack of investment has knock-on impacts across the board, in terms of human capital and innovation which Vollrath downplays. To some extent he is obliged to because the data from a lack of investment is there for all to see, no one can quote data the other way around.

The nagging feeling from this Panglossian analysis is that Vollrath has not given other possible futures enough attention. The drag of demography was inevitable, but the US (and UK) have responded to this by investing less in physical capital, running down infrastructure, investing less in R&D and skills for workers. If all the opposite approach had been taken, would we really have seen such a significant fall in growth?

Vollrath’s response will be to shrug and say yes, we would. The author’s data is compelling in describing what happened in the past but doesn’t convince that there were no alternatives. He takes down a neoliberal critique that lower taxes and regulation are the root to growth, The effect of compounding is significant, a slightly higher level of productivity growth in the years since 2000 would make a big difference to us now in 2021. Although Vollrath is clear that demography and a move towards services would have slowed things down a bit, like Candide, the reader is left to wonder whether this is truly the best that we have to offer.

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