The hollow growth debate

In: Uncategorized

21 May 2012

This is a blog post for Fundweb.

Having written a whole book on the cultural aversion to prosperity it is intensely frustrating to watch the supposed great debate about economic growth. Of course it is easy for authors to over-estimate their influence.

But here are what I regard as 10 of the key confusions in the current discussion:

1. Almost everyone in mainstream policy circles regards themselves as pro-growth. This is as much true of supposed conservatives as self-proclaimed leftists. There is of course a huge gap between wanting to see growth and pursuing policies that can achieve it over the longer term.

2. Just as almost everyone is subjectively pro-growth so there is near universal support for austerity. In France, for example, François Hollande, the incoming socialist president, suggested balancing the books just one year later than Nicolas Sarkozy, his conservative rival. This was despite Hollande’s desperate attempts to present himself as offering a radical pro-growth alternative.

3. To the extent there is any content in the great debate about growth it is primarily about timing. In particular at what rate the economic stimulus should be withdrawn. Despite appearances there are no big principles involved.

4. Debt is being fetishised in the discussion. High debt levels are a symptom of economic weakness rather than its cause. The origins of high debt lie in the state-backed extension of credit as a short-termist way of counteracting the effects of a sluggish economy. Even if debt were substantially reduced it would not tackle the fundamental lack of dynamism in the western economies. In any case, despite all the talk of reducing fiscal deficits (the amount governments borrow each year), debt levels (the stock of debt) look certain to increase.

5. The fundamental challenge is to tackle what I have called growth scepticism: the idea that growth should respect several types of limits. Politicians typically support growth in principle but then add numerous caveats. They argue that growth makes people unhappy, damages the environment and encourages greed. Any rhetorical support for growth is therefore hobbled by extreme anxiety about its supposed damaging implications. For example, British politicians advocate growth but then fail to support the necessary expansion and construction of airports.

6. In practical terms the challenge is to work out how to encourage a restructuring of the real economy. That is to create the basis for a new round of investment and durable growth.

7. The state can play a positive role in this process by encouraging the improvement of infrastructure particularly in transport and energy. There must also be more willingness to close down weaker areas of production and back investment in new sectors.

8. A fundamental cultural shift is needed to encourage more risk-taking and put more emphasis on production.

9. The eurozone has particular problems because of its artificial character. It binds together nation states with widely varying levels of productivity into an inherently unstable monetary bloc. This arrangement was itself a way of evading tough economic decisions. Monetary and fiscal manipulation – for example, by keeping Germany’s exports artificially cheap – were pursued as a substitute for economic restructuring.

10. Having said that, Britain and America share many of the eurozone’s weaknesses. All these regions combine a pervasive growth scepticism with an atrophied productive economic base.