What Do You Do with Riches?
By James K. Glassman
Imagine you’re a hard-working mid-level executive in a stress-packed job, and you suddenly inherit a few million bucks. What do you do?
Economists have discovered that recipients of windfalls (bequests or lottery winnings) use their new wealth to purchase a delightful commodity: leisure.
“What we found,” says Harvey Rosen of Princeton, former chairman of
President Bush’s Council of Economic Advisors, “was that the more money you get thrown at you, the more likely you are to get out of the workforce. And, if you stay in the workforce, you work less.”
Economists can be masters of the obvious, but let’s take the finding a step further: In 1930, John Maynard Keynes wrote an essay, “Economic Possibilities for Our Grandchildren.” He pointed out that in the entire scope of human history before 1700,
the standard of living of the average person had hardly budged. Over the next 230 years, the increase was about half a percentage point annually. For the century ahead, Keynes predicted, living standards would at least quadruple and, as he put it, “the economic problem may be solved.”
Samuel Brittain calculated a few years ago in the Financial Times that GDP per capita in the U.K. had increased 3.8 times in the 70 years since Keynes’s forecast. Similar growth occurred in the rest of Europe, the U.S., and Japan, and there’s no doubt that Keynes will exceed his target in another 25 years.
In developed nations, individuals are far, far richer than they used to be and have all the comforts they need. It’s as if they received big inheritances. It stands to reason, then, that the people of prosperous nations will work less hard and that the annual growth of GDP will decline.
It appears that just this sort of complacency has taken hold in what Defense Secretary Donald Rumsfeld deemed Old Europe: France, Germany, Belgium, Italy, and a few others. Japan, as well, may be classified as economically complacent.
In opposition to these are aspiring Asian nations like China, Korea, and Thailand, as well as peripheral European countries like Poland and Ireland. And, of course, the United States.
Since 1990, Gross Domestic Product in the U.S. has grown at an average of 3.1 percent annually; in Europe the rate has been 2.1 percent; in Japan, 1.3 percent. Those European figures, anemic as they are, mask the poor performance of individual nations, specifically France and Germany, where growth has been significantly less than 2 percent in recent years.
As a result, GDP per capita in the U.S., $38,000 in 2003, has soared past that of other developed nations: $28,000 for Japan, Italy, the U.K., and Germany.
Better economic policy is a major reason for faster growth in the U.S. America’s tax and regulatory regimes are less onerous and intrusive than those of Europe and Japan. Economists worldwide now accept that less-burdened economies produce faster growth. Policymakers in complacent nations are aware that they choose a slower path when they lean toward the welfare state, but they’d rather adopt policies intended to redistribute income and avoid the bruises (real and imagined) of competition. Complacent nations have also institutionalized long vacations, early retirement, and generous unemployment and disability payments.
Quite simply, Europeans and Japanese have decided to spend their new wealth on leisure and stress-reduction. Why haven’t Americans? The only answer I can think of is culture. Americans tend to be far more satisfied with their working lives than Europeans, and while it is common for Americans to receive only two weeks of paid vacation a year, a Gallup survey found 53 percent completely satisfied with their vacation time and only 17 percent somewhat or completely dissatisfied. In the U.S., industrious new immigrants balance out citizens with enough prosperity to opt for more leisure.
Even in the United States, however, we should recognize that what Adam Smith called the “natural progress of opulence” won’t continue forever. Smith himself toyed with the idea that a nation, having “acquired its full complement of riches…could, therefore, advance no further.”
Certainly, people with wealth are free to choose more leisure (that’s a big reason we strive for riches, after all). But rich slothful societies would be a disaster—for poor people in Africa, Latin America, and Asia. If U.S. growth dropped to German levels, more than Texans and Minnesotans, those to suffer would be the Mexicans and Chinese—who reap the benefits of America’s hard work, inventiveness, and prosperity.
