Why Does Economic Growth Matter So Much?! Hint: Its Not Just Wealth.
Economic growth matters. A lot.
This doesn't get stated enough let alone championed. In fact, we seem to inhabit a world where economic growth isn't just under-appreciated but also and incredibly, frequently an afterthought.
It has become almost hilariously fashionable to de-prioritize economic growth as a goal for developed democracies. In the ultimate of ironies, this is particularly the case for those who reap the greatest benefit from it, past and present.
Commentators, academics, politicians, "coastal elites” of all stripes, indeed an entire economic sector has grown up to loudly preach that, actually, economic growth isn't really that important after all.
Rather, the proponents of this new religion insist we should be aiming for something like:
Higher Happiness GDP is a thing.
Or perhaps "holistic" growth which is a euphemism for not prioritizing growth.
Or, shudder, "wellness"
We have successfully created an entire worldview (and, crucially, also an industry to sell it) based around the idea of either downplaying or straight up refuting the central and critical role that economic growth has played in building the entire rich, inclusive and liberal world around us.
That is privilege.
It is also precisely wrong.
The reality is that no one who has ever been deeply poor or close to it forgets that economic growth matters. They are often intensely, even maniacally focused on it, in fact. Is it any wonder that the only recent threat to the Chinese Communist Party's near total control over the world's most populous country was Dynamic Zero Covid, a policy that intentionally put the Chinese economy into deep freeze?
As you may recall, the idea behind Dynamic Zero Covid was that it would be a temporary and localized state to control any disease outbreaks. When new variants of Covid-19 became too virulent and China was behind on vaccination then suddenly it became both widespread and semi-permanent. This rapidly became untenable.
If even a figure as ruthless and single-minded as Xi Jinping pays attention to economic growth then we should likely not lose track of it either.
As a society we focus a lot on the negative externalities of economic growth. That is useful. Something like pollution is a costly by-product of economic activity and needs to be accounted for and dealt with, ideally by the state or some sort of central body that can weigh the costs and benefits. But we don't spend nearly enough time talking about the positive externalities of economic growth.
There are many.
Happiness is one. Democracy is another.
The direct link between the relative amount of economic growth and the health of democracy often gets lost in our modern political discourse. But actually, the connection between democracy and economic growth has been well studied and economic progress was central to the development of the democratic states we inhabit today.
This link isn't a new discovery either. Here is Adam Smith all the way back in the 18th century:
[I}n the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the great body of the people seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state.....
What Smith understood and we are busy forgetting (there is that word again) is that it is less about the level of wealth and more about the rate of change that correlates with happiness.
It is more than "people have to eat" however but rather "people need to believe that progress in their material well being is possible"
Why does economic growth matter?
There are many reasons but to narrow it to just one let us choose: political stability.
The low or stagnant growth that the Western world has struggled with since the Great Financial Crisis has caused problems to fester, not just within our economies but also within our democracies. This is a fact that should be repeated daily to just about every single member of a sitting government in the Western world.
If you don't like populism or certain political figures or events (Brexit being the most famous) of the last decade, then you should strongly cheer for greater economic growth. Yes, that growth must be stable to be useful but it also must exist in the first place.
Another way to put this is, if you like your politics boring, then you should prioritize economic growth. If you enjoy heading towards being a Banana Republic or aspire to the types of political fireworks that give Italy a new government every 14 months but also a stagnant or a shrinking economy, then please prioritize other things.
On the margin, other things do matter. Having a happy and healthy society is about more than most citizens having gainful employment. If everyone works in a dangerous occupation or is deeply unhealthy, then that isn't ideal. The US "deaths of despair" are both real and an important social issue though, they might be less of a tragedy if we had paid more attention to the employment prospects of the de-industrialized, undereducated working classes. But as a first principle, making sure that the vast majority of people have gainful employment and believe that their material well being can and will improve is hard to beat. More importantly than that, having people believe that progress is possible, both for themselves and their children is a critical ingredient of a stable and happy society.
So, economic growth is not the only thing but it is close. This leads to some questions.
Fine, economic growth matters but where can it be found? It isn't just sitting around waiting to be found, after all.
Actually, it is.
Growth can be found in free trade agreements, especially at the multilateral or regional level. It has been decades since the US was this uninterested in increasing global flows of free trade. What began under the Trump Presidency has only accelerated under the Biden administration. We have made being anti-trade a rare area of bipartisan agreement.
Alongside cementing more trade deals we could also be leading the way on new, communal standards, including critical areas such as digital currencies, artificial intelligence, biotechnology and space. This would make it easier for industries to grow and standardize around the world which would increase global GDP commensurately.
The US is doing precisely none of this at present. That is not just a shame, it is a huge missed opportunity and one that is leaving us vulnerable in a way we do not yet appreciate. We may win some or even many of the races to the bottom but overall we are turning economic growth into a zero sum game with a far lower ceiling. As we have written before, there are very few absolute truths in economics but the zero sum approach to growth is one of them.
Instead of trying to encourage more international commerce and creating more opportunities to trade we are actively doing the very opposite. As we have written before, we are engaged in a race to the bottom of subsidies for favored industries and products which are both expensive and inefficient. Our state is not just incentivizing business to invest, they are begging our neighbors, including our free trade partners and strategic allies. This is very unwise since we likely gained a slim but real advantage under the old system and because we need their help and goodwill on other matters such as Russia, China and Iran, to name just three.
Our allies have noticed. Canada's minister of natural resources, Jonathan Wilkinson in an interview with the Financial Times argued that the Biden's administration's Inflation Reduction Act provided "very significant subsidies had created an unlevel playing field for the Europeans and for Canada”
He continued: “We don’t want to get into a subsidy war with the Americans and neither do the Europeans and Japanese."
Quite.
We have devoted considerable time to the new passion for industrial policy, protectionism and zero sum economic policy. You can read our work here and here.
The US may narrowly gain from its current trajectory. Because it is a large economy with tremendous scale and control over the global reserve currency the US can outspend its rivals, even among rich nations.
We may be able to successfully reshape the global economy in this image but have we stopped to ask ourselves if it is a good idea? Economic nationalism and a large check book can achieve a lot but we may not like the new world we create because overall it will grow less and be less interested in our viewpoint, our standards and believing that we want the global GDP pie to grow.
The global economy needs US leadership in the way that brought tremendous prosperity to both the US and the rest of the globe. It also needs growth. The two can still be linked! There is a way to encourage growth without falling back on zero sum thinking and outdated policies and there is a way to have US leadership, economic and otherwise, that can be positive sum, including for regular Americans.
We don't have long to stop these policies before they become a negative and self perpetuating cycle around the globe.
We will turn our attention to some possible alternate solutions next week.
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