Monday, May 07, 2007

All we Need is Growth?

"The planet has - or rather had - a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn't the small green pieces of paper that were unhappy." Douglas Adams, The Hitch Hiker's Guide to the Galaxy.

There's plenty of reasons why I find most media discussions around the state of the New Zealand economy vexing: trade offs are rarely discussed honestly, etc.

One particular source of irritation is the almost invariable tendency in discussions on the economy to portray economic growth either as an ends in itself and/or as some sort of magic elixir that will vanquish our problems, and which needs to be pursued at all costs.

Missing in all this is one important question: will increased economic growth actually make New Zealand a 'better' place to live? will it make us feel happier or more secure? will it improve our well being?

I'm not claiming that the answer to these questions is invariably no. But I just don't think that it's not inevitably yes either. Indeed, there seems to me room for an interesting national discussion about economic priorities and direction, associated with economic growth that basically never happens. Which is something we're all poorer for.

Accordingly - being a helpful young man* - here's my stab at the case 'for' and 'against' growth.

When people talk about economic growth what they mean is an increase in real (inflation adjusted) Gross Domestic Product. Usually, growth measurements also take into account population growth (i.e. it will be measured as GDP per capita growth).

Very approximately, one can think of growth as the rate of increase of our total domestic income.

Following from this, comes the standard defense of growth: if our economy grows, we all get wealthier. And increased wealth enables us to do more of what we want to in life.

Being a wealthier country also provides us with greater potential tax revenue, which in turn means that we can spend more on health care and education or, at least, spend the same amount while taking a smaller percentage of GDP as tax.

Being wealthier also means that we ought to be able to pay higher wages theoretically reversing things like brain drain.

Finally, low growth always seems to be accompanied by other issues that are bad in their own right such as high unemployment. I'm not an economist and don't know why this is the case or if it even has to be the case (and perhaps it's cause and effect that are getting mixed up here: high unemployment leads to low growth not vice versa) but the relationship does seem to be there.

On the other hand:

There is no guarantee that increased wealth will make us happier. Indeed, the evidence available on this suggests that happiness exhibits diminishing marginal returns to overall wealth. An that other contributing factors such as social ties and inequality are more important in how content we feel.

On top of this, standard measures of economic growth fail to take into account depletion of 'environmental capital'. Meaning that we could, and almost certainly are, growing at the expense of the environment and future generations. To be fair not all growth needs to be environmentally destructive, but until simple measures are replaced by something better growth stats do not allow us to distinguish between environmentally friendly development and environmentally unfriendly development.

Of the arguments for growth I don't, as you can see, buy into the first one - that it really makes us better off, of it's own accord, in a meaningful sense of the term**.

And I'm skeptical, at least in the short to mid term about the brain drain argument. I think as many people are motivated by quality of life as by GDP per capita.

I do think that the 'more money for health care' and the 'economic stagnation bad' are sensible though.

Which is why I think that some importance has to be placed on generating (or, more accurately, facilitating, economic growth).

At the same time though, discussions around the phenomena sorely need to be set in the right context.

Here's three thought experiments to show what I mean. Please note that these are only thought experiments and the trade offs outlined may not exist in the real world:

1. In order to preserve of areas of natural beauty we establish national parks and a resource management act to 'protect nature'. These restrictions means that growth, while still existing, is marginally slower than it would be otherwise. A growth only framework would see this as a bad thing. A growth amongst other priorities would not. At New Zealand's level of wealth, a healthy environment may well lead to a happy populous.

2. A strongly progressive tax regime is used to tackle rising inequality. This leads to slightly slower growth. Once again, 'growth-only' sees this as bad. But a true utilitarian, going by current evidence, would support this policy as it appears that, in wealthier countries, issues such as inequality are more important to happiness and health than absolute wealth is.

3. Instead of being rewarded for increasing productivity by an annual pay rise, New Zealand workers are offered an annual 'hours cut', they become no wealthier, but they do become happier, as they now have more leisure time. But your growth stats won't pick this up.

* This is, of course, an utter lie: I'm not young, nor particularly helpful.
** My answer would be completely different if we were talking about a developing country though.


Anonymous said...

GDP growth means more money on health and education and makes our lives longer and easier. Studies have also shown we are happier when things are equal. It will not take too many more years before the fact that NZ i slipping down the OECD rankings and grossly outspending its earnings will lead to economic crisis.

Growth is required to avoid falling relatively behind and as part of the human condition to keep wanting to improve.

Genuine question for you on a slightly different subject. Why is the price of money not subject to the normal laws of supply and demand by reserve bank economists.

When the price goes up supply increases. And demand reduces.

Yes idiot thinks Terence

So why not put the price of money down for the foriegn suppliers of money. Ie substantially reduce interest rates. That will mean they will make less available and cause the currency to fall. suppliers of money will become more choosy about the creditworthiness of borrowers.

So my question is why do the laws of suply and demand only apply to consumer borrowers. Never to foreign buyers of NZ debt?

Terence said...

hi Sage, Thanks for your comment.

"GDP growth means more money on health and education"
I agree - if we choose to spend it on that of course.
"and makes our lives longer"
It does do this but, as per the Preston Curve, the real gains are at low levels of GDP and once you get to NZ's level of wealth diminishing returns have long since set in. And other factors such as inequality (and health care affordibility etc) become important.

"and easier."
Once again, up to a point, would you really say that life for the average New Zealander was significantly easier than it was in the year 2000? Or even in the year 1970? Once again other factors come into play too.

"Studies have also shown we are happier when things are equal."
The studies I read show diminishing returns but perhaps I'm wrong. Even so, all things are not equal.

"It will not take too many more years before the fact that NZ i slipping down the OECD rankings and grossly outspending its earnings will lead to economic crisis."
Out-spending our earnings is not something that growth will necessarily solve (we didn't outspend our earnings in the 1960s for example when we were much poorer). At present consumer behaviour is the culprit. And to be honest I doubt that our position in OECD rankings itself will cause some sort of economic meltdown.

With regards to your other question. Lunch is over for me know, and I need time to mull it over. I'll try and reply tonight or tomorrow.

thanks for your comment.

Anonymous said...

Hi there Terence

I'm mighty impressed that you whipped that off in your lunchtime... slow bites I guess is the key.

You can come up with dozens of examples of growth and reduced happiness both being generated by a common cause. I think you know the type..the arms expenditure, etc, etc arguments. There are dozens of books with dozens of examples (a score of examples?)

Anyway I meant to contribute just one more example to illustrate the fallacies often thrown around about growth:

The NZ economy "grew" last year, as it always does. But the residents of New Zealand received less income than the previous year - we got poorer. So even if you are a true believer in the income-happiness link, and you believe that all other factors are irrelevant in determining happiness, you would have to agree that the "growth" of last year was not actually growth in the thing that (supposedly) makes us happy: income. It was growth without average happiness going up, even if the average person actually was the rational economic man of the models.

Heres the breakdown:
Nominal GDP grew 4%
Real GDP grew 1.5%
Real GDP per capita grew 0.5%
Real GNP per capita shrank 0.4%

So the economy grew, but the people living in it each got a little poorer. The big reason was the capital surplus - much more investment by foreigners took place in NZ than by NZers overseas, so a lot of the extra stuff produced in NZ is under the control of foreigners.

And unless you want a gloomy evening, don't ask how much of that capital surplus was actually put into 'productive' capital (as opposed to into existing assets in the hope of a capital gain).

Those numbers are from

So its not all happy days.

However I'm pleased to report that this because the particular rational economic man writing this comment lives in Australia, he got happier (presumably). An ongoing war, and other miltaristic pacific meddling, a corrupt, fearmongering, racist, sexist, government, environmental destruction everywhere and human rights abuses were but a small price for (everyone else) to pay. Apparently

Terence said...

Tim, Tim, Tim,

once you become a true Australian you will realise that good old militaristic chest beating will actually make you happier ;)

More seriously, thanks for your comment - interesting to hear that real GNP per capita declined while real GDP per capita increased last year. While we're on this topic, one thing I always wonder about is the fact that repatriation of money earnt in NZ by foreign firms makes up such a large proportion of the trade deficit (sometimes I think the economists who call this capital flow 'the invisibles' are merely reflecting the fact that they wish it was invisible). Presumably one could make the case against (some types of) foreign investment because of this? It seems to me that there's a vicious circle here (the trade deficit has to be funded by more overseas investment which leads to a greater deficit) too?

One other thing I forgot about growth stats is that they tell us nothing about the distribution of wealth in a country. So it is possible to have good growth and the median income going nowhere.



Terence said...


So why not put the price of money down for the foriegn suppliers of money. Ie substantially reduce interest rates. That will mean they will make less available and cause the currency to fall. suppliers of money will become more choosy about the creditworthiness of borrowers.

So my question is why do the laws of suply and demand only apply to consumer borrowers. Never to foreign buyers of NZ debt?

Ok so I'm not an economist, and I am near comatosed at the the end of the day, so think I'm struggling to understand your question.

If we were to lower interest rates our currency ought to decrease. But this wouldn't stifle inflation. Instead imports, including oil, would get more expensive - which would be inflationary. Also, NZ assets would become cheaper for foreign firms to purchase. Supply over demand - therefore inflationary. Also NZ money would be cheaper so overseas lenders would find it easier to lend more rather than less.

But maybe I've misunderstood your question or maybe I'm misunderstanding the economics here.

One thing I do know is that financial globalisation has made monetary policy a messy messy business. It's harder for the Reserve Bank to influence interest rates because banks can borrow overseas. And restrictive Monetary policy leads to speculators driving the currency up. Which screws our exporters. Personally, I think one of the few options that remains is fiscal policy - but you know me and taxes :)

Anonymous said...

Some seemingly intelligent people state that without growth our system cannot survive,it is like a cancer. The system can last abit longer,if easy credit becomes easier,and more people enslaved to debt to keep the system running.

This seems to be true,in my opinion.

Our politicians chose open markets over a closed more controllable economy.Treasury was keen on this in the late 70s.

Did muldoon over do it thus justifying the new right(labour) in 84?

The question is not often asked.
- that is,infinite growth.

Perhaps it was on campell live or similar for 5minutes.

But then a million people wouldve been watching shortcrap street and reading gossip mags/playing xbox360 etc.

The question of un ending growth can not be asked since then the neocon temple of truth come crashing down.

It seems like you can have one or the other. An uncontrollable open market or a closed regulated somewhat controllable one.

Im really not sure that centralised planning(slow) is any better than a multitude of selfish people(fast) buying and selling....

/end rambling.

Anonymous said...

The reason we need all this growth is rarely addressed. It is partly of course because of population growth, however that is all changing in much of the world. In Italy especially the reproductive rate has been well below the replacement rate for some time. Here in the UK too, though not as bad. In the short term what you get is a top heavy ageing population, in Italy villages of only old people.

Immigration is touted as a solution and there are lots of people from less fortunate places who risk their lives to get to places like Italy.

However if you look longer term, if a shrinking society bore the pain until the baby boomers had finally died out then the reason for growth disappears. As human fecundity world wide falls (apart from the US) this is a plausible scenario, we just have to get over the projected peak. Mechanise and automate agriculture, factories etc and you effectively have a slave economy with no one suffering. Rome without the cruelty.

The trick is maintaining security without making the Roman mistake of relying too much on mercenaries. Something the Americans seem keen to rediscover...

Anyway the assumption that we must grow only really applies in a Malthusian world where human population growth necessarily impacts on resources. We can see that this need not always be, therefore growth need not always be. I think we need to figure out how to live like that, meaningfully and happily.