Crisis may be good chance to rethink growth strategies

Kenneth Rogoff wants to know: does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?

Economists such as Joseph Stiglitz, above, have argued for broader measures of national welfare. Shannon Stapleton / Reuters

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 and literacy. Such appraisals include the UN Human Development Report and, more recently, the French-sponsored International 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 running deeper than statistical narrowness: the failure of modern growth theory to emphasise 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 afterthe Second World War, despite significant trend income growth. Needless to say, Mr 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 behaviour is almost surely an important factor in how people assess their own well-being. If so, generalised 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 their welfare. And, on a related note, benchmarking behaviour may well imply a different calculus of the trade-offs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest.

To be fair, a small but significant number of models recognise 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 specialised 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 maximising long-term average income growth in perpetuity, to the neglect of other risks and considerations.

Even if one thinks narrowly about one's own descendants, presumably one hopes 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. 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 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.

Today 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 a chief economist at the IMF

* Project Syndicate

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