Rethinking The Growth Imperative

Kenneth Rogoff Project Syndicate January 3, 2012

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Rethinking the Growth Imperative

CAMBRIDGE "“ 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% 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%, 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% 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.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

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Username Password New registration Forgotten password Zsolt 10:02 02 Jan 12

Thank you very much for this very important, thought provoking article.

As the article states in its consclusions the time of crisis is a good opportunity to ask questions, to examine ourselves, our previous methods instead of stubbornly escaping, running ahead, banging our heads against the wall again and again.

Only an honest examination, understanding ourselves and the conditions we live can give us the platform necessary for finding solutions and building a future.

The problem of course is that we view everything subjectively, according to all the data imprinted into our minds through our upbringing, education and mostly by the society we exist in.

Thus the necessity of constant growth is completely engraved in us. The constant growth is purely a method of accumulating material wealth, increasing profits way about normal human necessities, and today this machinery is served by a very sophisticated marketing industry and also by the subservent political system, that is supported by those who benefit from the system the most.

This all creates a very powerful "Matrix" we all find very difficult to escape from. The crisis started to cause cracks on the powerful walls around us.

Moreover this article, and several similar articles, and scientific studies start to break this hypnosis providing factual data about how much this expansive, constant growth model is actually harmful, destroying human relationships down to the family level, harmful for our health and our environment, and that today humanity is unhappier than ever before, which is obvious from depression, suicide and drug use statistics, especially in developed countries.

Also just as this articles itself, many others point out that constant growth is not even sustainable due to the closed, finite system we live in, the way the increasing loan bubbles necessary for driving increasing consumption drove us into unmanagable debts, how ruthless and constant economic or military competition is obsolete and self destructive in the integral, global network we evolved into, where we are increasingly dependant on each other. We are in such an intermingled system today that by tricking, attacking, harming an other party we evoke multiple trouble on ourselves as it comes back to us augmented.

Thus articles like this are very important to start a gradual process, a process which is not easy as we have to correct lots of misconceptions, prejudice and beliefs about our present lifestyle and our human objectives.

Most importantly as the writer states humans are first of all social creatures, and sustainable future and true well being can only be achieved if we correct the human relationships in between us, shifting priority from economic well being to social well being, using economics as means not as the most important, stand alone goal.

The crisis although negative in nature, gives us the opportunity to consciously realign our human evolution towards the right human goal, adjusting to the reality of the global integral conditions of the 21st century.

Tony 02:48 03 Jan 12

Hi Prof. Kenneth Rogoff, thanks also your article for encouraging people to reflect.

If nation states keep compete for narrow self-interest, failed states will grow and eventually nation states system will collapse. It is because over-competition, overlooking cooperation is part of the nature. Nature will balance back, but may not in pleasant way. Don't be excessive. This is conventional wisdom.

Share vision, get committed, improve ourselves.

http://think4sustain.wordpress.com

AUTHOR INFO Kenneth Rogoff Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF. MOST READ MOST RECOMMENDED MOST COMMENTED Is Modern Capitalism Sustainable? Kenneth Rogoff What Can Save the Euro? Joseph E. Stiglitz Fragile and Unbalanced in 2012 Nouriel Roubini A Summit to the Death Kevin O'Rourke Occupy the Classroom? Dani Rodrik A New World Architecture George Soros Did the Poor Cause the Crisis? Simon Johnson America's Political Class Struggle Jeffrey D. Sachs The Second Great Contraction Kenneth Rogoff To Cure the Economy Joseph E. Stiglitz When China Rules Ivan Krastev The Exchange-Rate Delusion Michael Spence Who Will Fix the US Economy? Henry Mintzberg Two Models for Europe Hans-Werner Sinn The Worst and the Best of Austerity Jean Pisani-Ferry ADVERTISEMENT PROJECT SYNDICATE

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Thank you very much for this very important, thought provoking article.

Only an honest examination, understanding ourselves and the conditions we live can give us the platform necessary for finding solutions and building a future.

The problem of course is that we view everything subjectively, according to all the data imprinted into our minds through our upbringing, education and mostly by the society we exist in.

This all creates a very powerful "Matrix" we all find very difficult to escape from. The crisis started to cause cracks on the powerful walls around us.

Hi Prof. Kenneth Rogoff, thanks also your article for encouraging people to reflect.

Rethinking The Growth Imperative

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