Everybody says that economic growth is a good thing. I have no disagreement with that, in fact, it is an essential element for a happy society. But let’s examine why, and what the real benefits are, so when we look at various elements that could contribute to it, we can estimate their effects.

First, we are fortunate to still have a growing population. Only an economy that is growing will provide increasing numbers of jobs to be filled, to provide salaries or wages to support that population growth. Only the goods and services the new workers provide will enable the fulfillment of the material needs of the growing population.

Next, a growing economy has the ability to provide a higher level of wages. It would be impossible to create an exactly zero growth/zero decline economy, so if it’s not growing, it’s shrinking. And when it does, businesses tighten their belts by freezing wages, freezing hiring, or letting people go. Only when businesses are expanding to fill growing demand do they (net) hire, raise wages, and open promotional paths.

In a growing economy people can sense opportunity, which makes them more optimistic, happier, more likely to increase demand, more willing to take risk. These attitudes and behaviors are likely to increase demand in what becomes a virtuous circle. The converse is true in a shrinking economy.

New business formation rises in a growing economy. This results in more competitive pricing, better services and in more jobs. Young and small businesses, in the aggregate, hire more than large, established firms. New businesses are also a source of innovation, an important growth engine that will be discussed at some length in a a subsequent posting.

A growing economy will encourage investment, often in construction or in the purchase of capital goods. Either will create jobs in those providing companies, and the investment will increase the productivity of the investing company.

A growing economy results in higher incomes, higher profits, and fewer government expenditures for support programs (like unemployment compensation, food stamps, etc.). Tax revenues rise without complaint, government outlays are smaller, helping to reduce the enormous national debt we have incurred. The debt reduction will lower government interest payments, and thus produce greater deficit reduction or spending flexibility in the future.

Obviously, how widely the benefits of this growth are spread through the population is also an important subject. But without growth, the economy becomes at best a zero sum game, where how the economic rewards are spread takes front row seating, causing animosity, class separation and enmity, and feeding partisanship.

Future postings on the economy will include such sub-topics as job creation and the government, measurement and standards of living, productivity, innovation, and many others.

6 thoughts on “Economics–Growth

  1. Great post…I just commented on your prior post with something that’s actually more relevant to this one, so I’ll repeat it here:

    The value of growth in society isn’t just about our ability to pay the bills for an ageing population, though that’s part of it. It’s about the health and energy of the fabric of society. I know a company isn’t necessarily a good comparable/microcosm for society at large, but a quick look on the inside of a stagnant or GDP-growth company vs. a growth company reveals that growth companies are just healthier environments. They’re more dynamic. They create more opportunities for the people in them to learn, grow, and change. And yes, they produce more wealth. A country needs some of those things, too. Look at the lack of societal mobility in some of the more stagnant economics of Western Europe like Spain, France, and Italy. The lack of growth and difficulties in the labor markets in those countries are driving much of the social unrest and malaise there. A rising tide lifts all boats, as they say.

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  2. There is a big difference between absolute growth and per capita growth. The latter implies boosts in productivity. Absolute growth in the top line for a company may or may not be a good thing. If it comes from new product lines that are losing $$ (and these losses are not associated with “launching/investment” costs, this growth may be a very bad thing.

    Same thing with a country…growth in population may bring along increases in costs that exceed the incremental output of the increase in population.

    I believe the lack of mobility in European countries is much more a function of class structures that inhibit societal mobility…and this is like having blocked heart arteries.

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    1. Paul–there is an important difference between overall growth and per capita growth, I agree. The latter might come from productivity increase, or it might come from someone moving from the unemployed ranks to employed status. But it is hard to see how you can get per capita increases without overall growth. And I agree, that if growth in population brings more costs than incremental output, you can get some growth with per capita stagnation or shrinkage. The lack of mobility in European countries is a function of class structures, but it is also a function of a culture of risk aversion much greater than we have here. Failed entrepreneurs in the US can come back; failed entrepreneurs in Europe are branded as such for life.

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  3. Well written post and replies. Is the current thinking that the tax cut’s mainly going to the top 2%, will create the economic growth needed? I’ll call that the “trickle down” theory, and I don’t believe that works nearly as well as the bulk of the tax cuts going to the middle class. That will create demand, which will create jobs, and business will also prosper.

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    1. Thanks for your comments, Sherwin. I really don’t know what will emerge in a tax reduction bill. I do believe the most important things are to cut the corporate tax rate from 35%, which is one of the highest in the world, to a competitive 15-20%, and simultaneously, allow companies to repatriate earnings held overseas without double taxation (or at least without punitive rates). This will bring back an enormous amount of investable cash, make new investments pencil out more attractively, and stop the mergers that result in inversions, where our companies move headquarters overseas. On individual taxes, a reduction in the top marginal rates combined with elimination of some deductions could be effective without causing too much fiscal drain. The middle class could use some relief, but that is where the bulk of the tax revenues come from, even if the rates are lower than on the wealthy, just because there are so many in the middle class. We could do well just to simplify the tax code. By the way, as far as I know, most economists have never stated that reducing tax rates on the wealthy would not stimulate the economy; it was the trade unions who labeled it “trickle-down” theory, derisively, to defeat it.

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