Is Growth Necessary For a Successful Economy?

Is growth actually the best way to measure economic success? Dietrich Vollrath says it doesn't have to be so, and explains why in Fully Grown: Why a Stagnant Economy is a Sign of Success, which is due out in January. From the University of Chicago Press review:

Our powerful economy has already supplied so much of the necessary stuff of modern life, brought us so much comfort, security, and luxury that we have turned to new forms of production and consumption that increase our well being but do not contribute to growth in GDP. 

Tyler Cowen also highlights a text excerpt which gets into some of the specifics of Vollrath's argument:

Although there were plenty of changes in the individual markups firms charge, many of them actually fell over the last twenty years. What explained the overall rise in markups from 1.18 to 1.67 was that spending shifted away from firms with low markups and toward firms with high markups. Which high markup firms did we shift our spending to? Well, a lot of service firms, including those involved in communications, technology, health care, and education. In short, the rise in economic profits and markups we see at the aggregate level is part of the overall shift toward services we discussed a few chapters ago.

Here is where things get a little weirder. Baqaee and Farhi show that the shift toward high-markup firms was good for productivity growth. Whatever the source of a high markup, it indicates a product that is very valuable relative to its marginal cost. If we take the inputs required to produce a low-markup product and use them to instead produce a high-markup product, then we have raised the value of what we produce. As this increase in value came from reallocating our existing inputs toward a different use, rather than from accumulating new physical or human capital, the shift in spending toward high-markup firms shows up as an increase in productivity growth.

Nevertheless, we still need to consider the fact additional growth remains desirable at a global level. For that matter, nations with advanced economies continue to seek local growth, particularly since many citizens and communities lack full participation in a 21st century knowledge based economy. Only consider these realities in utilitarian terms. Have we already created the greatest good for the greatest number, before making luxury the default option for economic goal setting?

If citizen and community majorities were already engaging with sustainable infrastructure; assets and services in the form of luxury product would be aggregate gains. But there's a problem. We still have insufficient market capacity for simpler and more basic forms of non discretionary options. Meanwhile, citizens and communities continue to add on debt to sustain luxury versions of infrastructure and services which are actually out of their reach. In other words, the market has yet to create the greatest good for the greatest number at basic levels of need, as opposed to the wants of discretionary choice. Yet no institutions - at least to my knowledge - are yet addressing this supply side reality directly. Which could help explain why some policy makers are likely to continue seeking higher growth levels in aggregate, whether or not economists believe it necessary to do so.

As to Vollrath's arguments, if sufficient basic non discretionary options were in fact available for low income levels, his conclusion might be essentially correct. Today's low growth economy would be reasonable, if citizens and communities were already proceeding from a financially sustainable base - one that doesn't need a growing revenue stream so as to pay down debt. However, there are problems with luxury consumption when it cancels out basic infrastructure, asset and service formation for low income levels, especially during times of great income variance such as the present. And today's non tradable sector institutions lack the incentives to ensure that lower income levels gain basic economic options by which they could live relatively normal lives.

Again, luxury consumption as a broader component of GDP is likely positive, so long as more basic forms of consumption are not suppressed. When they are, as is currently the case, societies take on additional budgetary burdens which are not easy to resolve, long term. Even though lower income levels have benefited from the real wage gains of additional output in recent centuries, much of their real wage gains are a direct result of the good deflation of countless forms of tradable sector product. Let's not forget the benefits of good deflation, and its role in economic stability over time. We still need good deflation as a contributor to many local settings and communities, so these citizens can hope to lead productive lives well into the future. More output with less cost is central to economic prosperity. Good deflation is the best way to address the extreme income variance in society which will doubtless continue.

New creation of non tradable sector good deflation is imperative, given our historical moment of relative wage stagnation which leaves supply side means as the main recourse to improve the real wage capacity of lower income levels. Only recall as well that a predominance of luxury options in product which does not scale, reduces market capacity in areas which do scale. The resulting imbalance bears considerable responsibility for wage flattening, since service sector activity generates less output in relation to tradable sector output.

In short, more good deflation is needed in areas which remain exclusively devoted to luxury. Let's create valid supply side options to ensure that those with small wages can live normal and productive lives. Should we elect to do so, policy makers might not view higher monetary GDP levels or excessive fiscal policies as the sole options for economic gains in the near future.