It might seem like asking why the sun rises in the east, but: Is economic growth good?
The knee-jerk response is: Of course it is. And that's almost certainly correct broadly speaking.
But it's worth exploring why it's true, and when it's not. The assumption that economic growth is both good and essential drives much of our policy at the local, state, and national level. The news last week that the national economy shrank in the third quarter - confirming for many people that we're in a recession - underscores the importance we place on economic growth.
"People in general need to ask these fundamental questions more often," said Daniel Conway, associate professor of business administration at Augustana College. "People make the assumption that something is good, and then they go from there and pursue an agenda ... ."
To be clear, this inquiry should not be taken as an argument that economic growth is bad, or unnecessary. Rather, given the economic turmoil we've seen in recent months, and the resulting reality that local and state governments will need to cut and reallocate to make ends meet, it would be wise to understand the true importance of economic growth so it can be given the proper priority in our civic efforts.
Economic growth is obviously different at the national and local levels, and while this article deals with the topic broadly, we asked civic leaders from city government and chambers of commerce to help us understand their perspectives on economic growth as it relates to the local economy. We asked six questions, and the responses can be found here.
Some Definitions
In the Concise Encyclopedia of Economics, Stanford economist Paul M. Romer notes that "economic growth occurs whenever people take resources and rearrange them in ways that are more valuable." He likens economic growth to a recipe in which inexpensive ingredients are combined into something that has a greater value than the cost of production.
A certain level of economic growth is necessary to maintain the status quo. An economy that doesn't keep up with population growth, inflation, and the cost of borrowing money - real interest - is effectively shrinking. When we refer to economic growth in this article, we mean real (as opposed to nominal) economic growth - that beyond what's necessary to maintain what we have.
The Value of Economic Growth
The basic argument for economic growth is that it makes for healthier, happier people. Economic growth creates a wealthier population, and higher income is associated with certain benefits.
Using a variety of measures (such as those collected at http://www.uofaweb.ualberta.ca/economics2/pdfs/Econ213A1-F08-Dahlby-LN-2-1.pdf), it's evident that higher per-capita incomes are correlated with higher levels of happiness, better nutrition, and higher life expectancy.
In an October 2006 article in Prospect Magazine (Prospect-Magazine.co.uk/article_details.php?id=7795), Will Wilkinson makes the case that "if you really profess to care about happiness, you must care about economic freedom and economic growth, too. Our happiness depends on them more than almost anything else."
He summarizes the research: " A recent study of the self-reported happiness of almost 400,000 subjects in the OECD [Organisation for Economic Co-operation & Development] countries by Harvard's Rafael di Tella and Imperial College's Robert MacCulloch shows that while no single variable has a whoppingly large positive impact on average happiness over time, none, other than life expectancy, has a larger effect than GDP [gross domestic product] per head. If becoming richer does not boost happiness, then, according to the statistics, neither does reducing unemployment, increasing welfare benefits, or ... anything.
"An even more comprehensive 2006 study, published in the Journal of Socio-Economics by the University of Regina's Tomi Ovaska and the University of West Virginia's Ryo Takashima, indicates that GDP per capita has a relatively modest positive effect on happiness, while GDP per capita growth is a somewhat larger boon."
The point here is that maintaining a high level of per-capita income is not enough, Wilkinson argues: "A steady rate of growth may be necessary to keep happiness and other good things at a high stable level."
Harvard economist Benjamin Friedman, author of the 2005 book The Moral Consequences of Economic Growth, argued that there's also a social value to economic growth: "Economic growth - meaning a rising standard of living for the clear majority of citizens - more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy."
He argues: "By continually giving most people a sense of living better than they or their families have in the not very distant past, sustained economic growth reduces the intensity of their desire to live better than one another. Economic growth satisfies the form of people's aspiration for 'more' that is possible for everyone to fulfill."
Like Wilkinson, he further argues that growth must be a continuing process, not a means to an end.
Yet growth must be sustainable, Augustana's Conway said. He noted the General Motors' business model was to continuously gain market share. "One might argue that they sort of exceeded what was healthy for them as an organization," he said. "They exceeded market share at which they could do well."
The Rich Getting Richer
The key phrase in Friedman's definition of economic growth is "the clear majority of citizens." As Conway emphasized, economic growth is provably good, but "'For whom is it good?' is probably the more important question."
Economic growth that benefits a few is not the same as an equivalent amount spread among many people. As Conway said, "Economic growth from a macro point of view ... could just mean that the king is getting richer."
More broadly, he said, "growth is not going to benefit everybody in the same way."
As J. Bradfold Delong wrote in reference to Friedman's book in Harvard Magazine (http://harvardmagazine.com/2006/01/growth-is-good.html): "For a generation now, the benefits of economic growth have been concentrated in those slots in American society that are at or near the top. To the extent that any of America's working class is richer today in inflation-adjusted terms than the nation's workers were in the early 1970s, it is because today's households have fewer children and a greater proportion of their members out earning money. America's middle class today does live better than the middle class lived in 1970 (and a bunch of the children of the 1970s working class are in today's middle class). But today the gap between America's middle class and its upper class yawns extremely wide, at levels not seen since before the stock market crash of 1929."
The goal, then, is economic growth to the benefit of as many people as possible.
