Our Economic Growth Delusion

Inspired by David Pilling’s Book, The Growth Delusion

Last week the United States economy had a second consecutive quarter of GDP decline. Some are adamant that we’re in a recession, others say not yet. Everyone agrees on one thing - growth would be much preferred, but should it?

Prayer at the altar of economic growth has transcended party lines since the dawn of the 20th century. Growth is the mantra of the modern world. When Netflix announced its growth was slowing the stock price fell more than 65%. The fundamental assumption that all growth is good is the heart of our Growth Delusion.

“One problem with growth is that it requires endless production, and its close cousin, endless consumption…. The basis of modern economics is that our desire for stuff is limitless. Yet in our heart of hearts we know that way lies madness.”

David Pilling (The Growth Delusion)

Even economists recognize that having more doesn’t always bring more happiness, yet most of our economic system is built around increasing the productive output of corporations. The case against GDP has been well laid out by economists, presidential candidates, and most introductory textbooks. It’s in this good company that I argue that growth is folly. Any manager will tell you — “what get’s measured get’s improved”. It’s time to start measuring what really matters for the well-being of nations.

How Growth Works

Everything a growing GDP needs to be big and strong. (Hint: it’s not milk)

Growth is not automatic. Even to stand still economies must move incredibly fast. Labor is the biggest input into production, and GDP growth is primarily driven by increases in the raw number of workers (labor supply), or by increasing the productivity of an individual worker (innovation).

American labor supply grew at a steady rate in the 20th century thanks to women entering the workforce. After the 1970’s female labor force participation rate (LFPR) continued to rise albeit at a slower pace, but women got more educated, started planning for longer careers, and delayed family formation. This cultural shift is what Harvard economist Claudia Goldin calls The Quiet Revolution. Immigration, another important source of labor supply has not increased meaningfully immigrants comprised 13.7,of less than 0.5 percent.) in the past 70 years.

Labor Force Participation Rate of Women (1947-2022)

Despite demographic trends, GDP has almost doubled over the last 20 years thanks to technological innovation. Cheap computing, the internet, the rise of AI, and social media. These trends have transformed the world in a short period giving rise to careers that didn’t exist 30 years ago.

Nominal GDP (1947 to 2022)

All Exponential Curves are Logistic

This (probably) can’t go on forever.

Most systems that experience exponential growth can’t do it forever. Eventually, things taper resulting in the infamous s-curve, or logistic curve. Outbreaks of disease, total population, and women’s LFPR are a few examples of logistic growth. At first, growth may be slow and painful, but at some critical mass exponential functions take over. Once natural limitations are hit growth begins to slow once again, and eventually tapers to zero.

GDP may still be in its exponential phase, but it’s hard to know where on the curve we are. Decreasing labor supplies might result in slowing GDP growth. Innovation in AI might increase productivity exponentially and growth might accelerate beyond our wildest dreams. Ultimately consumption and resources are finite and economic growth can’t continue forever - but maybe that’s a good thing.

GDP Shouldn’t Matter

A better way to measure economic well-being.

GDP is a narrow measure of economic health, it includes sales of cigarettes, weapons, and fossil fuels. Most importantly income inequality ensures that most Americans haven’t reaped the benefits of GDP growth. Despite continuous improvements in productivity, wages have stagnated and costs have skyrocketed. Teachers are leaving their jobs, college is more expensive than ever, consumer debt continues to increase, and financial security is out of reach for the majority of Americans.

Labor Productivity and Wages over Time (1947-2022)

The modern economic state is bleak, but you can’t tell that from the GDP or S&P 500. It’s time to start measuring economic well-being using indicators that actually matter for the average American. Simple indicators like median wages, GDP per capita, life expectancy, and hours worked can tell us a lot about how well our economy is doing for the majority of people. Some economists have proposed other measures like the Genuine Progress Indicator (GPI) or Human Development Index (HDI).

“Growth was a great invention. Now get over it.”

David Pilling (The Growth Delusion)

So are we in a recession? Maybe. Does it matter? It depends. If wages continue to increase, unemployment remains low, and consumer spending remains high then probably not. If people start getting evicted, defaulting on their debt, and losing their jobs then it does. Fundamentally the stock market and broad economic indicators don’t capture the economic experiences of most Americans. It would do us good to consider a broader spectrum of indicators to measure the health of communities and work towards improving them, even at the cost of growth.