Amplifications

Outside opinion and commentary

Will we ever grow out of growth?

By Kenneth Rogoff
January 3, 2012

By Kenneth Rogoff

The views expressed are his own.

Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. That message is echoed in political debates, central-bank boardrooms, and front-page headlines. But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?

Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi.

But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasize adequately that people are fundamentally social creatures. They evaluate their welfare based on what they see around them, not just on some absolute standard.

The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth. Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being.

In advanced economies, however, benchmarking behavior is almost surely an important factor in how people assess their own well-being. If so, generalized income growth might well raise such assessments at a much slower pace than one might expect from looking at how a rise in an individual’s income relative to others affects her welfare. And, on a related note, benchmarking behavior may well imply a different calculus of the tradeoffs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest.

To be fair, a small but significant literature recognizes that individuals draw heavily on historical or social benchmarks in their economic choices and thinking. Unfortunately, these models tend to be difficult to manipulate, estimate, or interpret. As a result, they tend to be employed mainly in very specialized contexts, such as efforts to explain the so-called “equity premium puzzle” (the empirical observation that over long periods, equities yield a higher return than bonds).

There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations. Consider a simple thought experiment. Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1 percent per year over the next couple of centuries. This is roughly the trend per capita growth rate in the advanced world in recent years. With annual income growth of 1 percent, a generation born 70 years from now will enjoy roughly double today’s average income. Over two centuries, income will grow eight-fold.

Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2 percent annually. In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century.

Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold. Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth? Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more?

Even if one thinks narrowly about one’s own descendants, presumably one hopes that they will be thriving in, and making a positive contribution to, their future society. Assuming that they are significantly better off than one’s own generation, how important is their absolute level of income?

Perhaps a deeper rationale underlying the growth imperative in many countries stems from concerns about national prestige and national security. In his influential 1989 book The Rise and Fall of the Great Powers, the historian Paul Kennedy concluded that, over the long run, a country’s wealth and productive power, relative to that of its contemporaries, is the essential determinant of its global status.

Kennedy focused particularly on military power, but, in today’s world, successful economies enjoy status along many dimensions, and policymakers everywhere are legitimately concerned about national economic ranking. An economic race for global power is certainly an understandable rationale for focusing on long-term growth, but if such competition is really a central justification for this focus, then we need to re-examine standard macroeconomic models, which ignore this issue entirely.

Of course, in the real world, countries rightly consider long-term growth to be integral to their national security and global status. Highly indebted countries, a group that nowadays includes most of the advanced economies, need growth to help them to dig themselves out. But, as a long-term proposition, the case for focusing on trend growth is not as encompassing as many policymakers and economic theorists would have one believe.

In a period of great economic uncertainty, it may seem inappropriate to question the growth imperative. But, then again, perhaps a crisis is exactly the occasion to rethink the longer-term goals of global economic policy.

Copyright: Project Syndicate, 2012.
www.project-syndicate.org

Comments

In America, the frontier was where the less affluent or civilized could go (or be banished) as the remainder of the country gradually became more settled, safe and genteel. The rules of life were significantly different and the challenges of frontier life made it both rougher and shorter.

In a world of SEVEN BILLION people (and growing), the economic “engine of ever-increasing productivity and consumption” is already operating at a speed and load far in excess of this planet’s available resources to sustain. But we do not have a single such “engine”. Each essentially independent economy is such an engine.

In each, as with any ungoverned engine, at some point floating valves or fuel flow will limit RPM and power if the engine does not self-destruct first. For the first time, large economies must face the reality that their historical dependency on more and more people to create more and more demand is no longer possible.

In more and more of the world, the fasting growing part of the population is the least capable, least educated, least motivated, least intelligent, most demanding and most disruptive. Instead of increasing production, such people actually decrease production and create a downward spiral in the quality of life as a fixed or shrinking Gross National Product must then be divided among a steadily increasing number of people.

This historical shift, and awareness of same, must and will change life as we know it. If societies do not provide SOMETHING for these people to do to at least avoid starvation, they will predictable rip the fabric of society apart. If we DO, and they continue to breed as they tend to do, the increasingly unsustainable demands of economically supporting their offspring will predictable rip the fabric of society apart.

Engineers have learned that in building an earthen or gravel or rock bank, there is a certain angle (called the angle of repose) that varies with each material. Once that angle is reached, any extra material just falls back down as fast as you attempt to place it. Similarly, our planetary natural resources are finite. We can use them rapidly and then die, or we can adapt to a rate of use that is indefinitely sustainable. The latter is already not possible for SEVEN BILLION PEOPLE!

No one can stand before all humans now existing and tell them “if you are not today a member of advanced western society or the elite in other societies, the present productivity of humans has reached it’s maximum possible. Henceforth any improvement to your way of life must be at the expense of someone else’s way of life.” That is because such truth, once known, understood and weighed can only result in chaos.

The question civil society can not answer in any acceptable manner is: How much is “human dignity” worth? How much of available resources can or will civil society grant to sustain those not needed and with no “economic function”?

There are two possibilities from which to choose. Man can turn to religion and the idea that the multitudes can be fed from too little food multiplied indefinitely by God. Or man can give priority to space, as Gene Roddenberry described as the “Final Frontier”.

It will be the worst of times if we fail to adapt, and the best of times lie ahead if we succeed. Our choice; but it must be made without undue delay.

Posted by OneOfTheSheep | Report as abusive
 

To say that it is difficult to model human behavior would, it seem, to be a tremendous understatement. When you factor in “happiness” as a correlation statistical relationships seem to go askew. A recent study reported that the “happiest” of people, were, in fact, lower income earners and often deeply religious. This is often perceived as counter-intuitive to most researchers. Your point about humans being “social” hits the proverbial nail on the head. When incomes rise slowly, we are used to the issues and problems that come along with them. No significant change in “happiness” or well-being should be expected. When incomes increase tremendously beyond a normal growth rate, we would expect additional “happiness”, but it is lost. The newly invigorated person now has additional fears, worries and desires associated with the new status. This will actually make him less well off in the long run, from an overall “well-being” stand point. Those free from the issues, fears and desires of the improved status may not have as much “stuff”, but they have more through the replaced social interaction.

And in continuing to do my best to keep religion out of the discussion, the age old addage, money doesn’t buy happiness, really is a truism.

Posted by bluewater23000 | Report as abusive
 

As a casual observer of nearly 50 years, I’ve come to be believe that economic stability is largely a dimension of wealth and human welfare maintenance. Don’t mistake the comment as in anyway as a political agenda. Simply stated, historically when disproportionate inequities arise within the socio-economic distribution of either wealth or “well-being” as perceived by a majority then change and often radical change occurs.

There is no avoiding the need for action yet those actions are rarely appreciated in their complexity and then by only a small segment. Sound bite politics is certainly not the answer nor is one economic-political view over another. Both are roads to perdition. Certain political leaders have suggested a banding of interests for a balanced well-being, yet they are branded as ineffectual, socialist and/or weak. Those who criticize want to dominate and reap the benefit of power. I would suggest that the road less traveled is the road taken by the truly courageous.

The “Tale of Two Cities” – Dickens saw it over 100 years ago – are we that blind not to see it today?

Posted by OFA7 | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/