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28 January 2011

We Need Growth and No That's Not a Bad Thing

Note: every link in here is worth reading/looking at.

A common response, especially among young liberally minded people, to my all too frequent tirades about how economic stimulus is still needed is "why do we still need growth? Do we really need more stuff?"

Of course we do - and we need it at an increasing rate. Here's why - population growth in the US is about 1% per year. Inflation is currently about 1.5% although the natural rate is more like 3 to 4.5%. Therefore, right now we need to increase GDP by about 2.5% a year just to sustain our current standard of living. Nothing tricky here just some arithmetic.

This is a table I took from Krugman here where he explains basically the same thing. This is Okun's Law by the way:

The take away from this is that an economy needs 2.5% real growth just to keep unemployment from rising and an increase of 2% of real growth to knock 1% off of unemployment.

Typical GDP growth rates are about 2.5-3.5% a year... see where this is going? Real GDP growth in 2010 was 2.6% and in the last quarter it was slightly up to 3.2% (as a part of the whole, not an additional 3.2%) so... at this rate unemployment should start to look semi normal around late 2018 or so.

Back to the point - so this sets up a system where we can only sustain ourselves through continual growth - evidence of the brutality of a market based economy!

Why not? Well population growth and inflation are a fact that must be dealt with and I don't think it's wrong that people should want employment although perhaps I think our mindset towards employment should shift to projects as opposed to a 9-5 but that's not relevant here. What is relevant is that a growing economy and an increased GDP does not necessarily mean a bigger house and an SUV. Whenever predicting how we will live in the future it's usually a good idea to look at Europe now. They've focused on increasing quality of products over tons. As Krugman puts it here:
The way I see it, by the way, is that it’s about shifting the mix away from tons of stuff to quality. You have a small electric vehicle (powered by solar-thermal) instead of an S.U.V., but it drives itself most of the time, and has a great built-in entertainment system. You live in an apartment or townhouse instead of a McMansion, but the brain-wave controlled kitchen turns out gourmet meals on demand. And if we do the GDP accounting right, this will show up as economic growth.
This is something I blogged about a while ago. I was talking about buying fewer quantity but nicer things. There's a good TED talk there too.

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