The first challenge to this came from a handful of ecological economists – mostly in the second half of the twentieth century. These marginal voices argued that growth has environmental limits and that pursuing infinite material expansion would push humanity against a wall both because of resource depletion (on the input side) and pollution (on the output side).
Since then, whether it is possible to continue to grow the economy forever has triggered heated debates. Some simply argue we can’t. But others say growth can be combined with fewer environmental inputs and impacts, and some think this is a false dilemma altogether.
But post-2008, the economic growth debate has taken a new unexpected twist. Now the idea that developed countries’ economic growth will resume at all is being challenged by the mainstream itself. And this time the “limits” are not just environmental: they are linked to the internal workings of contemporary capitalism.
Has mainstream policy-making failed?
The first bombshell was dropped in 2014 by former Secretary of the US treasury Larry Summers. Summers warned that developed countries should prepare for a prolonged era of little or no economic growth – secular stagnation – because of an excess of savings not being channelled into investment: savings are being hoarded and monetary policy has become ineffective in addressing this problem.
The root of this problem is a lack of sufficient demand in the economy – and this is linked to inequalities: if lower and middle class incomes are growing, they are likely to spend this additional money, creating demand and consumption in the economy.
If, as for the last two or three decades (depending on the country), they are not growing – notably because real wages are stagnant – then economic performance will be sluggish.
Because of the lack of demand, companies have no incentive to invest – despite low interest rates giving them a near-zero cost of borrowing. They know there won’t be additional demand for what they produce to justify their investment.
In short, Summers deems conventional economic policy tools insufficient and thinks developed countries should prepare for a “Japanese” scenario: many decades of very low – or no – growth and high debts.
Or have we reached peak productivity?
In a recent book, Robert Gordon goes even further by taking on one of the key drivers of growth – productivity, our capacity to produce more with fewer inputs as a consequence of technological innovation.
His analysis suggests we shouldn’t expect high productivity growth in the future: contemporary technological developments are considerable, but not compared to the innovations that took place in the 20th century. And the slowdown of productivity growth is supported by data.
Gordon sees this slowdown in productivity combining with other factors: an ageing population, declining labour participation rates and inequalities all act as a constraint on future growth. He concludes that we shouldn’t base policy decisions on the assumption of future high growth rates in the US (and by extension in other developed countries).
What are the implications?
Both hypotheses have very different policy implications.
In principle, Summers’ “secular stagnation” can be avoided through a combination of aggressive public spending (fiscal policy) and massive redistribution of income and wealth.
Redistribution, for example, would mean more demand in the economy because more money would flow to the lower and middles classes, who tend to spend more of their income than the rich. This in turn would prop up investment and growth.
In short, Summers’ “limits” are down to erroneous economic policies: by following a different macroeconomic approach growth could resume.
Gordon’s take, on the other hand, is that the high productivity growth and technical innovation we’ve been taking for granted may in fact come to an end.
It’s not that technology won’t evolve, but that the relative importance of innovation in propping up economic growth has declined and may decline even further. And even if it doesn’t the other headwinds we face will lead to stagnation anyway.
If this is right, then there isn’t a simple macroeconomic fix which could do the trick.
So what if Gordon is correct in that the constant growth era is almost over in the developed world?
Policy-makers often lazily rely on economic growth to be a silver bullet which magically solves all problems: bringing down unemployment, pulling people out of poverty or even reducing debt-to-income ratios. A world of low growth means we need to find much more inventive solutions address these problems.
For example, by drastically reducing working hours and sharing work better between the overemployed and unemployed we could ensure full employment, increasing everyone’s wellbeing.
Tackling inequality could wipe out deprivation and poverty. More redistribution would also increase the income of lower and middle classes – and prevent them from getting more and more indebted just for making ends meet.
Finally, less growth in developed countries could bring less pressure on natural resources and fewer emissions. And this would provide more breathing space for developing countries to grow and improve their living standards.
Even if some form of secular stagnation materializes this needn’t be something negative: there are solutions for everyone to prosper in a low growth environment – if we have the political courage to challenge key tenets of the current system.