The intimate connection between growth and national prosperity is one of the most cherished tenets of economics. But these days, what with climate change, other environmental pressures, and evidence that huge sectors of the population aren’t getting the touted benefits of a seemingly robust economy, many are questioning this connection.
Frankly, much of this criticism of growth – and calls for “degrowth” – defies economic common sense. It’s based on a simplistic view: because we consume far too much, the planet is running out of stuff. But an important new book titled “Fully Grown: Why a Stagnant Economy Is a Sign of Success” does rethink the high priority politicians and economists place on rapid growth. The author Dietrich Vollrath, an economist at the University of Houston, argues that the slow growth in the US is, in fact, nothing to worry about – it is a sign of prosperity and is good, overall.
Ever since the 1930s, growth of GDP – the value of goods and services produced in an economy – has been the conventional measure of growth. For the last two decades, GDP per capita in the US has risen at around 1% a year, sharply down from the average of 2% for much of the 20th century. The slowdown has worried economists, prompting one, Robert Gordon, to write some 700 pages lamenting the “The Rise and Fall of American Growth.” Innovation, argued Gordon, just ain’t what it used to be!
Vollrath’s optimism is rooted in what he sees as the two main causes of the slowdown. The first is an aging population, mostly a result of people having fewer children; a shrinking workforce means less GDP growth. Second, much of the economy is shifting from manufacturing to services such as healthcare, and productivity advances in services are notoriously slow; it’s easy to make stuff more cheaply, but hard to get a doctor to cure more patients.
Both megatrends, Vollrath argues, are a direct result of our success. Fertility rates fell as women became more educated, and affluent and gained greater access to contraception. And spending on services went up as people owned all the necessary material goods (who needs another refrigerator? But you can always keep going out to dinner).
What makes Vollrath’s analysis particularly interesting is that he rules out what some people blame for the growth slowdown: lack of innovation. Lots of factors affect productivity, he points out; and while innovation is indeed becoming harder and more expensive, he argues that research efforts are being intensified to keep pace. Thus, he concludes, a slowdown in innovation doesn’t appear “to be a plausible explanation for the growth slowdown.”
The flipside to this is: we can’t rely on a surge of brilliant new technologies to return us to robust economic growth. Breakthroughs in AI, 3D printing, quantum computing, and “on and on and on” are impressive, he writes, but just don’t expect “profound effects on the growth rate of the economy.” And he concludes, that’s just fine. Growth rate should not be “used to judge progress or well-being of our economy and society.”
Some, maybe even many, economists might counter some of these conclusions, particularly the claim that innovation in AI and other advanced technologies won’t give future growth a big boost. It’s true that they haven’t done it so far, but that doesn’t mean they won’t in the future.
Still, Vollrath’s larger point remains intact: we need to rethink the idea of rapid economic growth as the ultimate goal. And if GDP is not capturing all the benefits we value – in better health, with less harm to the environment, indeed even greater happiness – we need additional or alternative ways to quantify progress.