What Does Slower Economic Growth Really Mean?
Respondents to this month's column by HBS professor Jim Heskett came close to general agreement on the proposition that economic growth is not measured properly by GDP, calling for new indicators. Jim sums up. (Online forum now closed. Next forum begins July 6.)
If not useful growth, what are we measuring? And why? This column does not thrive on general agreement. And this past month discussants came close to general agreement on the proposition that economic growth is not measured properly by GDP, gross domestic product. Further, in an age of concern about the environment, questions are raised about whether certain forms of growth—let alone incorrect measures—serve a very good purpose.
Paul Jackson caught the tone of many responses when he said, "Of course GDP is flawed, duh!" Jim Ruen added, "Is all growth equal? Of course it isn't. That is like saying that all apples are just that, apples."
A rich discussion centered around a proposition raised by Colin Moore that more "stable" or "sustainable" forms of growth, for example food production, should carry "higher multiples … versus opportunistic…." forms of growth (such as "financial securitization"). Milton Puryear added "truck-type SUV sales" to the list of activities deserving low multiples, commenting that, "How is it growth if it is only sustainable under conditions that are mostly in the past?" Other activities included in GDP, such as health care costs, do not reflect the fact that spending more on health care is, in John Caddell's opinion, "in general not good for the country."
How should growth be measured? Deepak Alse commented, "Slower growth is not necessarily good or bad…. Quantitative metrics serve as best indicators when they are based on qualitative platforms." Along this line, Ken Ackerman reminded us that "Growth is a product of confidence … we spend too little time measuring the mood of the public." Kenan Jarboe said, "GDP has always been an imperfect proxy for growth…. Rather than focus on GDP per se, we should look at … standard of living, productivity, innovation." Noting that "GDP is a point-in-time measure," Gerald Nanninga asked. "How much of the economic activity today… will improve tomorrow's (or) … is really borrowing or taking away from the future?"
Questions were raised about the necessity of growth itself. Tom Dolembo commented that "This is a revolution, not a business cycle." Even though it may be "irrational" to think it, "What if … we don't grow out of choice? …. What if we demand less, use less, and want less forever?" Jim Geisman continued this line of thought in saying, "Overall, I think growth is overrated … unsustainable." Andrew Lianwarne suggested that "we need to reshape the way our economic system operates if we are to establish a stable economy without continued expansion." P. Maxson, assuming also that growth has limits, asked, "will we manage this change, or will we let ourselves be mauled by it?"
A more basic question may be whether a stable economy and high standard of living is even possible without growth? What do you think?
During the past several weeks, economists have begun to predict substantially slower growth rates for the world's economy into the foreseeable future. Characteristic of this is the reduction of roughly 100 basis points annually in the expected growth rate of the United States from 2 to 3 percent per year to 1 to 2 percent. Those responsible for the projections tell us that as a result, we can expect substantial reductions in sustainable employment, incomes, and profits, not to mention the standard of living to which people can aspire. You may or may not agree with these projections. But they suggest that it's time that we ask whether we have been using the right measures for growth.
First, when we speak of growth, it usually refers to growth in gross domestic product, the value of all goods and services produced during a period of time. It makes no assumptions about the usefulness of various types of production. The presumption is that macroeconomic growth translates into greater top line opportunities for individual organizations. With no improvement in productivity, that means a similar increase in jobs and income. (More realistically, it means modest increases in both productivity and jobs.) It also means, even without a change in tax rates, a larger tax base. This is important to the extent that it is a major component of a government's plan to manage its capital accounts, which in turn has important implications for international credit markets and in the case of the U.S., the dollar, and the Treasury's ability to borrow at reasonable rates of interest.
But is all growth similarly useful? For example, is growth in the production of food, steel, or for that matter information the equivalent of growth in the production of financial services? The latter grew so rapidly in the U.S. in recent years (with every mortgage backed security and credit default swap transaction counted, resulting in substantial contributions to growth rates) that, at its peak, it may well have accounted for a substantial portion of the 100 basis point differential between past and projected growth rates. One can argue that each transaction may have produced top line growth for individual companies and tax revenues for the government, but did it create as much value for the individual citizen and the economy as a whole as the production of an equivalent amount of food, steel, or information? If much recent growth has resulted from real estate and financial bubbles, will slower growth really have as profound an impact on our way of life and the corporate business model as some are predicting?
Are our measures of growth flawed? If so, what does slower economic growth mean? As one example, might it actually produce more equitable compensation and penalize the wealthiest more than others in the United States, thus reducing what some have concluded is an unsustainable gap between rich and poor? What do you think?