We don't want economic growth

In launching a new 50p coin to mark Brexit, Sajid Javid seems to be interpreting the role of Chancellor in the same spirit that Trigger regarded Del Boy’s request to talk about money: “I saw one of those old £5 notes the other day.” We might have hoped that his energies would be better directed towards improving the UK’s lamentable productivity performance.

In fact, though, we should not snark. Mr Javid has grasped an important point not understood by leftists and economists (two groups which increasingly overlap) – that the public do not want economic growth.

We know this because they have consistently voted against it. The party of austerity won a majority in 2015; the public voted for Brexit in 2016; and they supported Johnson’s hardline Brexit deal last month even though it will reduce (pdf) GDP over time. Philip Hammond – remember him? – claimed that “no-one voted to become poorer”. But he was wrong. They did.

It’s not just votes that tell us that people don’t want economic growth. The ONS has found that well-being has edged up since they started measuring it in 2012 despite (or maybe because of) lacklustre GDP growth.

All this is the flipside of the Easterlin paradox – the finding that, over long periods, rising income doesn’t increase happiness (pdf). If growth doesn’t make us happier, the lack of it shouldn’t trouble people much*.

There are, for my purposes, two things are going on here.

One is that what matters for well-being is not so much absolute income as our income relative (pdf) to our peers: if we are doing better than them, we’re happy and if we are doing worse, we’re miserable. Andrew Clark and Andrew Oswald have found that happiness depends more upon relative (pdf) income than absolute income, whilst Christopher Boyce and colleagues have found that it is a person’s position in the income ranking (pdf) that matters for their well-being, not their absolute income**.

If it is relative income we care about, then stagnation shouldn’t trouble us. We have as much chance of getting ahead of our peers when GDP is flatlining as we do when it is growing.

Also, though, economic growth is associated with some things many of us don’t like – with the creative destruction than runs down some industries and areas. As Banerjee and Duflo show in Good Economics for Hard Times, the economy is “sticky”: people do not or cannot adjust to such disruption. Hence Anand Menon’s heckler’s point: “that’s your bloody GDP. Not ours.” A stagnant economy in which zombie firms preserve jobs and in which we face less threat from foreign competition or new technology is perfectly tolerable for many – and better than the tumultuous, threatening growth of the 80s and 90s.

All this helps explain the Tories’ lurch towards nativism. The problem with any policies to revive growth is that they jeopardize vested interests. This wasn’t just true of Labour policy. Stian Westlake and Sam Bowman’s proposals – the best I’ve seen from outside Labour – envisage tougher competition policy and a tax on land values. Both are threats to the Tory client base.

And why bother rocking the boat? Of course, as Benjamin Friedman showed in 2006 – and as subsequent events have vindicated – economic stagnation breeds intolerance and xenophobia. For many, however, this is not a bug but a feature.

* Yes, there are big doubts about that paradox. For my purposes, however, we don’t need to believe the coefficient of well-being on GDP is zero: a small positive one is consistent with my point.

** This isn’t to say that all income inequalities depress those at the bottom of the pile. They can make younger people happier, if they anticipate getting the high incomes themselves. Graduate trainees, for example, need not get the hump at their bosses' high earnings.

Comments

[Tasker Dunham]

Don't know about economic growth but I don't want any of those rub-Brexit-in-their-faces 50p coins.

[jim2]

I live in a safe Tory seat, majority > 15,000. The local MP is hardly visible, lives a long way off and does nothing. Indeed the Tories could put up a donkey with a blue rosette and it would storm into office.

Why so popular - because the Tories do nothing, minimal extra housing, minimal extra roads, minimal schools. No business parks and definitely no industry. This is exactly what the majority here want, the majority earn well (in London), many send their kids private. The only snag is that house prices have slowed, but are still high. We have reached a stasis that is comfortable for many and any change looks like a bad thing.

Looking around quite a lot of constituencies are like mine. Some say Brexit will disturb the stasis, I reckon it will take a long time. A long slow glide path downwards.

[steve lindsey]

even though it will reduce (pdf) GDP over time.

I'm at work so can"'t follow the pdf but so far I have only seen reports that say GDP will grow more slowly than it would have done otherwise. In other words; grow.

[georgesdelatour]

“economic stagnation breeds intolerance and xenophobia”

I’m not sure this is axiomatically true, though it might be true as a crude approximation. Didn’t the 1958 Notting Hill race riots happen in a period when the UK was experiencing relatively healthy economic growth? It’s probably the worst incident of White-Black intergroup violence in the postwar era.

Another counterexample might be Fiji. The country tends to have military coups by ethnic Fijians whenever Indo-Fijians win elections. The coups usually depress the economy, but reassure ethnic Fijians of their political supremacy. I’m sure some economist somewhere will torture the data to make it say it’s all about economics not identity. But it seems unlikely.

The real point is this: relatively diverse societies are inherently more fragile than relatively homogenous societies. If your country has the demographic diversity of Fiji, Northern Ireland, Lebanon, Syria or the former Yugoslavia, you’re at far greater risk of something - maybe something non-economic - triggering an outpouring of inter-ethnic animus. If your country has the relative homogeneity of Japan, you can endure a whole “lost decade” of stagnation at far lower risk of strife.

No society has yet found the formula to permanently abolish any possible economic downturn ever. But during boom years, people tend to stop thinking about what might happen when the boom eventually slows or ends. The attitude seems to be, this social experiment will all work out fine, just as long as we can keep GDP growth at 5% per annum forever. And maybe, just maybe, that’s not smart.

[Marc]

Good point. But maybe another angle here, besides relative income, which does indeed matter a great deal, might be the psychology of voters depending on age. Indeed, when you start in life growth is really important to you. When you retire (or come close to retiring) stability not growth becomes paramount. So you tend to vote conservative because all you care about is keeping the status quo. You may fail to realize that the status quo is undermined by weak growth and therefore end up voting against your own long term economic interest, but preservation of your position and status is what you focus on. That’s why as societies age, they tend to become more conservative and unfortunately selfish.

[MJW]

Do economists (and leftists for that matter) see any correlation between an economic model reliant on cheap/low skill imported labour and an economy with low productivity/low investment in productivity? I've always been curious about why economists like Portes etc who laud economic benefits of (lower skilled) immigration appear silent on productivity. Is this a blind spot of economists that the public at large have avoided?

[Scarthin]

Partly we have become habituated to anaemic growth. Marc's reason is also spot on (and fits with Chris's original postulate).

[Ken Oliver]

"happiness depends more upon relative (pdf) income than absolute income"
Or as HL Mencken said "happiness is earning a thousand dollars a year more than your brother-in-law".

People are underestimating the effects of population aging on GDP growth in developed countries. It is ultimately an old and (in many cases) shrinking workforce that is crippling productivity growth.

he old are not at all fond of creative destruction and that's why in both politcs and economics small-c conservatism has become prevalent. And it is ultimately old populations that are driving real interest rates down too (it's a simple extension to Solow-Swan to see why).

But the flipside of that is that the old (rationally) value stability far more than growth. Sclerosis suits them just fine. That is the reason, for example, why Japan's dire economic performancehas led to no discontent - in a younger country they'd have had several revolutions since 1989.

[Dr Zoltan Jorovic]

I started reading Westlake and Bowman's proposals, but stopped when I got to the bit about restrictive planning laws being the reason our cities were not growing. This is complete crap. Check out the difference between planning permissions given, and delivery - in the borough where I live, only 25% of permitted planning has been built out. Which means 75% are sitting waiting for the developer to actually get on with it. It has NOTHING to do with planning law and EVERYTHING to do with the developers not wanting to increase supply too quickly and risk a drop in prices. Obviously this is not something any rightist commentator can admit so they perpetuate the myth. This means that I really can't be bothered to take anything else they say seriously. Nor should you.

[Laurence Cox]

To think of productivity only in terms of GDP produced per unit of labour is to take too narrow a view. We also need to consider energy productivity, that is to say the GDP as a function of energy use. In the past, when products were mainly physical, significant energy input was needed for their production and that energy scaled with the number of the product produced; in an information economy the energy use required is far smaller; what is the energy cost of streaming music or video on demand compared with the cost of providing it on a CD or DVD? Whether you have a streamed or a physical product, you can still only watch or listen to one at a time.

In an economy where the most important activity is reducing carbon emissions to net zero as soon as practical, low or zero conventional GDP growth may be to everyone's benefit. See, for example:

https://www.greenbiz.com/article/greenbiz-101-energy-productivity-mean

[Davis X. Machina]

I don't want people in power who will make my life better, I want people in power who will make someone else's life worse, and let me watch.