Friday, November 21, 2014

A Post-Growth World?

PRINCETON – In a provocative recent paper, Robert Gordon of Northwestern University concludes that the rate of technological progress has slowed sharply, and that the rise in standards of living (at least in the world’s rich countries) is thus set to decelerate. In the twentieth century, he says, per capita income in the United States doubled about every 25-30 years. But the next doubling will likely occur only over 100 years, a pace last seen in the nineteenth century.

Long-term growth considerations, while recognized as crucial, seem distant from the here and now of financial repair and restoration of confidence. So the commentary on Gordon’s paper has been largely dissociated from the policy discussions addressing the ongoing Great Recession.

But a realistic assessment of growth prospects is precisely what is needed right now to design appropriate and feasible policies. Gordon’s point is not that growth will decelerate in the future, but rather that underlying productivity growth moved to a sharply lower trajectory around the year 2000. We lived the better part of the subsequent decade with a misguided sense of extended prosperity and inflated a financial bubble. Worse, we are treating the present as if the bubbly growth from 2000 to 2007 will return.

Consider the International Monetary Fund’s regular projections of world growth. In April 2010, about 18 months after the Lehman Brothers meltdown, the crisis seemed over. The forecast was for world GDP to grow at about 4.5% annually until 2015, which is slightly higher than the pace during the pre-crisis decade, while the average annual inflation rate was projected to be lower, at 2.9%. The future looked bright.

Instead, after successive revisions, world GDP in 2012 is now expected to grow by only 3.3% while inflation is forecast to reach 4%, signaling much weaker global economic momentum than was anticipated. Lower-than-expected growth and higher-than-expected inflation have affected most economies. In 2011 and 2012, the United Kingdom stood out among the advanced economies in this regard; but the pattern holds even for Germany. The shine has similarly worn off the BRICs (Brazil, Russia, India, and China).

Although projections by the IMF and others have been persistently optimistic, each setback has been treated as a temporary deviation, associated with its own unique cause: the Greek bailout, the tragic tsunami in Japan, the spike in volatility following Standard & Poor’s downgrade of US debt, and so on. The return to 4.5% world growth has merely been pushed back – in the latest forecasts to 2015.

Faith in renewed growth is an ill-advised policy strategy. At its core, the global economic crisis is a growth crisis. Financial institutions and markets assumed productivity would continue to grow at the pace of the late 1990’s, which fostered an asset-price boom that conveyed an illusion of well-being; those not directly involved in the financial bubble were coopted through buoyant international trade. European growth, with its heavy dependence on trade, received a special boost, as did emerging markets.

Once the Great Recession began, this process operated in reverse, unwinding the excesses. But policymakers continued to benchmark recovery prospects to pre-crisis growth performance. When reality proved otherwise, the return of the past was not abandoned, but merely postponed. Continuing to assume the resumption of pre-crisis growth was necessary to justify postponing hard decisions.

For example, a growth rebound underpins the expectation that the European periphery will not restructure or inflate away its sovereign debt. The assumption that the German economy will accelerate out of its current crawl is essential to confidence in Europe’s financial safety net, and to a banking union that credibly shares risks across the eurozone. Resumption of robust world economic growth is the basis for delaying the implementation of the Basel III bank rules. And, if the BRICs slow down, they may be more prone to debt and currency crises.

What is to be done? Because the elixir of growth in policymakers’ forecasts cannot be counted on to solve the problems, dealing with financial excesses becomes even more urgent. That means more debt restructuring and more bank closures now, rather than watering down proposals to rein in freewheeling markets. Looking ahead, as Robert Shiller of Yale University has repeatedly emphasized, public policy must help to forge futures markets that hedge risks better and more reliably align incentives.

There is no magical path to higher productivity growth. Even if Gordon’s pessimism is excessive, the timing of the next breakthrough in technology is impossible to predict. So-called “structural” reforms may help, but the likely gains are small and uncertain. It may simply be time to learn how to live with less.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (5)

    Please login or register to post a comment

    1. CommentedZsolt Hermann

      This is a very important article pointing out the futility behind the 'return to growth" mantra.
      But even this paper talks about some kind of a continuing quantitative growth, productivity, just on a lower scale.
      In order to understand what is happening and how we have to "re-structure" we need to understand the system we exist in, we are part of.
      So far politicians or experts kept on concentrating on the details, trying to solve superficial symptoms, ignoring the deeper roots of the process.
      We have arrived a completely new stage of our evolution.
      Humanity has "grown up".
      If our history, evolution so far was in the progressively growing, quantitative expansion phase, now we are entering the qualitative, maturity phase.
      Both inside human society, and in between humanity and the natural system around we have reached an equilibrium, a saturation. There is no more space, volume, dimension we can expand into in a quantitative manner.
      It is exactly the same how a living creature, animal or human grows for a while and then the quantitative growth finishes and a completely new phase of existence starts.
      We still want to remain children in the toy store, we still want to roam around, exploit everything we find or meet, we want to hoard, and stockpile, and stuff everything inside ourselves.
      The same expansive, exploitative development that propelled humanity up to this point has become self destructive, we are becoming sicker and sicker, in ourselves, in human society and in terms of the natural environment too.
      Or in other words while progressive quantitative development is necessary for a growing child, it indicates cancer in a grown up adult.
      We have to understand the crossroads we have reached.
      There is no more place for bubbles, illusions, "American Dreams".
      We have evolved into this global, interconnected and interdependent network in between us within a closed, finite natural system.
      We have to learn how to live in a mature, qualitative way within these conditions without any further quantitative growth or productivity.

    2. CommentedProcyon Mukherjee

      The challenges with technology is embedded in the conundrum that current spate of consumption in goods and services is linked to ‘replacement’ of old ones with new ones and not to original goods or services that are ‘first- timers’ achieved through path-breaking innovation. While the current innovation adds to a considerable degree to the bottom line of corporations by either cost reduction or productivity improvement, they do not create ‘large’ enough disruption for new industries to be created, that service new needs and wants, which would create a growth trajectory that is much steeper. The additions bring good cheers to the speculators while long term investors have to cope with the subtractions as well (every Iphone or Ipad subtracts either a cell phone or a computer that could have been bought instead). This is the fundamental reason that some growth achieved through innovation in the current times has taken some corporations to the stratosphere, while the overall growth engine of the world is still at a mere 2.5%. This is a failure of private capital and innovation combined to be able to create broad based growth paradigms.

    3. CommentedChris Cowsley

      Each growth spurt has a technology development as its trigger. Could we be reaching the point at which all we can achieve with more better technology is more leisure? If so, we need to start measuring growth by something other than the purchase and sale of goods and services. Fulfilling leisure opportunities that are resource light are sometimes impossible to 'monetise'.

    4. Commentedprasad p

      As far as growth of Indian economy is concern crude oil is major concern.Indian growth story will be finished once Brent Crude starts to trade above 120 $/ Barrel. In fact, Once Brent Crude starts boiling above 135-140 $/ Barrel; whatever efforts taken by developed economies so far will be over and rapid, uncontrolled recession likely hover all over the world. Energy as well as Commodity prices must correct 50-60 % over the next few months else dilemma of double dip recession is sure.

    5. CommentedFrank O'Callaghan

      One of the problems with current and future technological growth is the control and direction of research.

      One glaring example is the restricted uses of technology for narrowly profitable uses. Spending a great proportion of the worlds research effort on creating plants that are effectively sterile so as to force those who grow them to continue buying rather than breed their own seed is wasteful but good for one bottom line.

      Had the same effort and resource gone into a disease-drought-salt resistant, nitrogen fixing, nutritious and easily cultivated plant it would have been better for the world but not the shareholders.

      We need to re-balance our society and it's goals. The pursuit of profit is self destructive to more than the economy.