Why is Growth So Important?

Why has everyone become so divided over the desirability of continued growth? Deflation is becoming a real threat, even if it is hard to visualize as central bankers continue applying the monetary brakes in a slow motion process. Now, even Bernanke can speak openly about "lower potential GDP" while scarcely eliciting a startled reaction. Some are convinced that recent monetary gains are more than sufficient - a view which is mostly backed by the Fed. Yet, as this recent Reuters article indicates:

The public mood remains sour. Sixty percent of Americans in March said that the economy was on the wrong track, according to Reuters/IPOS polling data, although that was an improvement from 71 percent in May 2014.

What's more, as political candidates gear up for the next election, they tend to seek out economic advisers who are anything but pro-growth. Even though some economists recognize that monetary policy remains tight, as Adam Ozimek recently noted, the stories being told are too different to gain a unified public response. As a result, even though Ozimek writes for Forbes, this publication often presents the exact opposite argument. Forbes staff member John Tamny, for instance - responds to a plea for continued growth from Greg Ip with the assertion that "Recessions are absolutely beautiful, and should be renamed recovery."

Policy makers can be tempted to resort to monetary deflation when growth becomes imbalanced, in part because structural adjustments require mutual understanding and societal coordination. When structural change seems "impossible", a process of denial can set in, as Scott Sumner has observed regarding changes in core beliefs among economists. Policy makers have taken to reasoning with the public that a slowdown in growth is nothing to "worry" about. But deflation can easily get out of control, in spite of careful management to maintain economic stability. All the wishful thinking in the world cannot make an economy "stand still", when monetary policy pulls away from preexisting commitments for aggregate spending capacity, without creating a new series of economic arrangements.

Thus if central bankers wish to make an economy "stand still" on monetary terms, structural arrangements need to have been made beforehand to make certain that economic access and labor force participation remain stable. Otherwise, a growing number of individuals find themselves excluded, over time. There's a lot of truth in a sentiment also highlighted by Lou Holtz: We are all either growing or dying - unfortunately there is no in between. The same is true of economies. What's more, the growth most capable of providing economic stability, is that which occurs on gradual terms - think of the race between the tortoise and the hare. While one would think of incremental growth as completely logical, the "winner take all" and "all or nothing" options of the present, insist on growth being otherwise.

Fortunately there are ways to address a lack of economic access which need not mean more pressure on primary equilibrium. In other words, it is possible to target growth which would not place further demands and burdens on either governments or taxpayers. One means to do so would be the creation of more inclusive finance structures. However, it is important to distinguish these from what exists in primary equilibrium, because lower income levels often need to experience ownership on completely different terms.

Rather, allow innovation to structure product so that consumption becomes more tailored for the consumer, instead of always expecting the consumer to have to "reach" for the product in question. Otherwise, one gets results such as ill advised mortgages with small down payments on non innovated housing. This approach is part of the process which leads the Fed to assume the process of "walking a tightrope". As it turns out, the tightrope is completely unnecessary. The idea that economies must hinge on credit access - instead of economic access - is part of what leads economists to place undue emphasis in interest rate targeting.

In spite of real gains since the Great Recession, economic access around the world remains problematic in multiple capacities which have yet to be addressed. The remarks made about economic migration by the EU border chief in this article, are almost word for word what one hears about illegal immigrants in the U.S. In too many instances, people from all walks of life are still trying to navigate their way through what appears as though closed doors. This is no time for monetary policy makers to be self congratulatory and claiming all is well. After all, when they do so, other policy makers tend to do the same. History in the coming years will be shaped by whether nations are able to envision growth on more inclusive terms for their own populations. As Michael Barone summarizes in a recent AEI post regarding today's uncertainties:

Let's hope the post-2007 negative trends are temporary and limited. But let's start thinking hard about how to reverse them.

Is Washington still willing to do this? Again, we can only hope so.