Friday, August 19, 2011

Today's Fallacy of Composition

Joy Resmovitz:

The report concluded the U.S. could increase GDP growth per capita by enhancing its students' math skills. According to the report, over an 80-year period, gains from increasing the percentage of proficient students to Canadian or Korean levels could yield $75 trillion:

Increasing the percentage of proficient students to the levels attained in Canada and Korea would increase the annual U.S. growth rate by 0.9 percentage points and 1.3 percentage points, respectively. Since long-term average annual growth rates hover between 2 and 3 percentage points, that increment would lift growth rates by between 30 and 50 percent.

Aside from the issue I quoted from Dean Baker yesterday, annual growth rates don't just "hover" around 2 to 3 percent, they are effectively capped there by policy. You might remember this from the Bush administration. Probably not. Anyway, in many cases the additional growth the study predicts would simply result in the Fed raising interest rates to "cool down" the economy. Otherwise, you start having to pay people more to work. Which would be bad.

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