Amplifications

Outside opinion and commentary

Will we ever grow out of growth?

Kenneth Rogoff
Jan 3, 2012 17:02 UTC

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

COMMENT

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?

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Fragile and unbalanced in 2012

Nouriel Roubini
Dec 15, 2011 15:37 UTC

Nouriel Roubini
The opinions expressed are his own.

The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth.

At this point, a eurozone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn.

The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the eurozone crisis. It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock.

Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and eurozone exposure undermine growth. In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.

Meanwhile, flaws in China’s growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.

They are not alone. On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth.

Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. Only the high-grade corporate sector has improved. But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted.

Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners. Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance.

At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the eurozone between the core and the periphery – remain large. Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.

But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.

Finally, policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.

Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”

COMMENT

I look at the patched together global economy and would offer the following. I think that the global economy may never work. I think, that like a complicated machine or formula or whatever, that it has too many modes to failure. I say “Scrap the Global Economy”. Like a business with too many branches some branch will do poorly and drag down the remainder.

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