Does the Economy Really Need to Keep Growing Quite So Much?

Questioning a basic orthodoxy

Robert Galbraith / Reuters

Most things don’t grow forever. If a person grew at the same rate for his whole life, he’d become gigantic and perhaps perish (or else rule the world). Yet most economists are united around the idea that the economy needs to grow, always. And at a high rate, for the good of the country and its people.

As the thinking goes, growth of gross domestic product (GDP), which measures the goods and services produced in an economy every year is essential to a country’s stability and prosperity. It is growth that is responsible for each generation being better off than its parents’ generation, economists say. “More growth is better, period,” Robert Gordon, a Northwestern economist, told me.

But some economists are now challenging that view, arguing that it makes more sense to focus on measures of well-being other than growth.  After all, despite a growth rate that has averaged three percent over the last 60 years (which is quite robust), there are still 43 million Americans living in poverty, and most people’s wages are essentially unchanged from the end of the Reagan administration. In fact, the median income of households in 2014 was 4 percent lower than it was in 2000, despite positive economic growth in all but two of the years during that time period. For half a century, developed nations have focused on how to make their economies grow faster, hoping that strong growth would improve life for all their populations. But what if growth isn’t the key to raising the standard of living across a society?

“Many of us think we would benefit from a multi-dimensional approach that captures things people care about,” Michael Spence, a Nobel Prize laureate who is also an emeritus professor at Stanford, told me. “Missing from growth are many things: health, distributional aspects of growth patterns, sense of security, freedoms of various kinds, leisure broadly defined, and more.”

Spence and others who agree with him aren’t saying that the economy should stop growing or even shrink (though there is a group of people who do believe that). What they are arguing is instead that it may be more healthy economically to accept a slower growth rate, but still a positive one, while prioritizing policies that address things like inequality and access to services. This idea is, admittedly, somewhat utopian, but giving it serious consideration can illuminate the shortcomings of the current growth-first approach.

It’s not just that maximizing growth doesn’t necessarily help people, but also that rapid growth can itself come at a cost, such as when the pursuit of growth is used to push through policies that are expected increase the GDP but may have negative consequences for millions. For example, companies often say they could grow more quickly and produce more with fewer regulations, but loosening those regulations might also lead to more pollution and accidents in factories. Other times, policies that might be necessary for the country’s long-term survival are avoided because of fears they might harm GDP. For example, conservatives criticize climate accords because they say that cutting greenhouse gases will reduce GDP by trillions of dollars. “The pursuit of growth can be quite dangerous,” Peter Victor, an economist and environmental scientist at York University in Toronto, told me.

Victor, Spence, and other economists have begun to think about what a society that doesn’t prioritize growth would look like. It’s possible, they say, for a nation to thrive even when growth is slow. A country could instead work on making its residents safe and content, and pursue policies that would achieve those goals. That may mean helping people to work fewer hours, or consume fewer resources, or spend more time with their families. Such a nation, they say, would be a better place for everyone.

* * *

It was in the sluggish days of the Great Depression that the idea of measuring total output came about. After a group of experts were called into a congressional hearing and couldn’t answer basic questions about the state of the economy, the Commerce Department commissioned the economist Simon Kuznets to create a system that accounted for what was happening in the nation’s economy. The system he designed, which measured what people were producing in the economy, is now what we call the gross domestic product (GDP). It helped determine economic policy during World War II and in its aftermath, when policymakers were convinced that a country that kept making things and then buying more goods was one where all residents prospered. Yet Kuznets was skeptical about using his system to gauge the success of a country. “The welfare of a nation can scarcely be inferred from a measurement of national income,” he wrote in 1934.

Indeed, GDP measures activity in the economy, but there’s no way to know whether that activity is actually good for society. Merely sitting in traffic can cause GDP to go up, since people need to buy all that gas, but it has no societal benefit whatsoever, and additionally has negative consequences, such as pollution and frustration, that don’t show up in GDP at all. The BP oil-rig explosion, which killed 11, and the subsequent spill, which leaked 3 million barrels of oil into the Gulf, actually lifted GDP, analysts said, because of the amount of money spent cleaning it up.

Over the past half-century, policymakers may have focused on economic growth above all else, but the next century could be a time when people obsess less about their jobs and the profits of companies, Victor hopes. Instead, a country could focus on measuring the health or happiness of its residents, rather than what they are producing. This is a tack Britain’s David Cameron took in 2010 when he said that it was time to focus on more than just GDP; he wanted the U.K. to consider the country’s general well-being as well. The U.K. now releases a national well-being survey that measures factors such as people’s self-reported happiness and anxiety levels, their life satisfaction on a scale from 1 to 10, and the rate at which they feel that what they do with their lives is worthwhile.

An economy not focused on growth may be a place where people don’t need to work as many hours, according to Victor. Workers have gotten more productive over the past few decades, after all, so if GDP growth were to be less of a priority, a society could use the benefits of technological production to reduce working hours, all while producing the same amount. This would allow people to spend more time with their families, or to partake in more leisure activities, which Americans say they increasingly don’t have time for.

A new economy could also focus more on the health of the environment. While the government has put in place polices that express other values, such as environmental protection—those policies are often said to be directly at odds with economic growth, instead of seen as being in concert with a suite of goals that involve trade-offs. After all, growth depends on countries producing more and more goods, often using natural resources to do so. An economy more focused on environmental health than GDP growth could measure the resources it is consuming—like timber, for instance—and make sure it doesn’t extract them at a faster rate than they can be regenerated. “We’ve had this system that has relied on consumption growth to keep people employed over the last 50 years,” said O’Neill, who is also the chief economist at the Center for the Advancement of the Steady State Economy, which advocates for an economy that consumes materials at the same level that they can be replaced.

Economists often say that without growth it will be impossible to address income inequality. The more economic activity being created, they say, the more room people have to move up the economic ladder and perform to their full potential. “Growth is conducive to meritocracy,” Marshall Steinbaum, a senior economist at the Roosevelt Institute, told me. “In a world of high growth, the future is wealthier than the past.”

But even with growth, there’s no guarantee that inequality will decrease—in fact, the economy’s current trajectory is of increasing inequality. And proposals for addressing inequality, such as raising taxes on the rich, are often nixed because some economists say such prescriptions might reduce economic growth. If growth were less of an imperative, policymakers could prioritize distributional policies more than the current economy does, O’Neill said. That might mean raising taxes on the rich, or increasing tax credits for the working poor or middle class. Redistribution could be achieved by providing better educational or job opportunities for the disadvantaged, without worrying about the downsides of such government spending. It could also mean providing a basic income for the poor, something the Dutch city of Utrecht is about to test. “Current growth patterns do not produce acceptable distributions of incomes, wealth, quality of work,” Spence, the Stanford professor, wrote in an email. “If these issues were addressed effectively (it is hard to do) we would probably be reasonably happy with relatively lower growth.”

Mainstream economists also say that a nation’s economy needs to grow in order to provide more public services to its population, such as universal pre-K. Without growth, said Gordon, the Northwestern economist, if the country wanted to add those programs within its existing budget, it would have to cut something else or raise taxes. “There’s always a demand for more services, whether there’s growth or not. Growth gives you the funding to pay for it,” Gordon said. This goes for paying Social Security and Medicare, too, which are funded through taxes. As the population ages and more people receive Social Security, the economy needs to grow so their benefits can be paid for, he said. Of course, this assumes that the country has a political system that can adequately tax people.

Yet as long as the economy grows at the same rate the population does, it could continue to pay for programs like pre-K. (In 2015, the U.S. population grew 0.8 percent.) Doing so just might mean shifting dollars around from other areas, or raising taxes. Countries could also redesign the way they fund pension programs so they’re not as dependent on a constantly expanding economy. The future of programs such as Social Security, in which benefits for the older generation are funded by the payments of a larger younger generation, is already tenuous. Redesigning such programs for an economy that doesn’t grow quickly is possible, Victor said. After economic growth slowed from four percent to two percent, Sweden redesigned its state-based pension provision in 1998, for example, requiring workers to make certain contributions, rather than just promising them benefits. With Social Security, “it’s not a lack of growth that’s led to a lack of funding; it’s a lack of priority,” Victor said.

* * *

For most economists, the idea of focusing on something other than GDP growth is heresy. But developed nations may have to start thinking more seriously about the idea. That’s because of the simple fact that economic growth has been anemic since the recession, and no one is quite sure what to do about it. Though the Bureau of Economic Analysis said in October that the GDP increased 2.9 percent in the third quarter, it had grown at a rate of roughly 1 percent for the previous three quarters. Economists aren’t exactly sure why growth has slowed so much. Steinbaum, of the Roosevelt Institute, told me that economists aren’t even really sure what exactly causes growth, or a slowdown. “Economists decided a long time ago that they can’t explain growth,” he told me. “Lots of people thought they knew what causes growth, but nobody actually does.”

That may mean the country may have to reckon with an economy that doesn’t grow quickly, or at all, whether economists want to or not.

To be sure, this isn’t a realistic proposal for the developing world, where more growth is needed to get people out of poverty and improve living standards. But in the developed world, where the economies are already quite large, there are values besides growth to consider.

This isn’t the first time this idea has been advocated in The Atlantic. In a 1995 article, “If the GDP is Up, Why Is America Down?” Clifford Cobb, Ted Halstead, and Jonathan Rowe argued that it was time for new indicators of progress. GDP takes the breakdown of the natural habitat and portrays it as economic gain, the authors wrote. It hides important work­—like that of mothers raising children at home—and marks it as unimportant, because no money changes hands. “We may be witnessing the opening battles in a new kind of politics that will raise basic questions about growth,” they wrote. Such battles did not emerge following the article, in the heady days of the late 1990s, when the economy was booming and few people wanted to question a GDP that was growing at a rate of more than four percent a year. Now that such growth has waned, those battles may be on the horizon once again.