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Opinion: How low growth might be in our best interest

MILAN, Italy (Project Syndicate) — Economists
concern themselves not only with addressing difficult questions
thoughtfully, but also with formulating the questions
themselves. Sometimes, rethinking those questions can hold the
key to finding the answers we need.

Consider the productivity debate. Economists trying to explain
the apparent structural slowdown in productivity growth have
been asking the following question: Where is the missing
increase? Their response covers concerns about measurement,
structural shifts in the labor market, a potential paucity of
investment opportunities, productivity-diluting technological
innovations, and technology-driven skills mismatches.

But it may also be useful to consider a more fundamental
question: How much productivity growth do we really want, and
at what cost?

There is no doubt that productivity growth is desirable. It is
a primary driver of economic growth (especially in countries
where labor-force growth is slowing) and income gains. Strong
growth in gross domestic product and rising incomes can then
support the fulfillment of fundamental human needs and desires.

This link is particularly obvious in developing countries,
where economic expansion and rising incomes are preconditions
for poverty reduction and improvements in health and education.
But the link between aggregate growth and individual welfare is
no less visible in advanced countries — particularly those now
struggling with slow growth, high unemployment, output gaps,
debt overhangs, misaligned exchange rates, and structural
rigidities.

But this does not mean that policy makers’ primary goal should
be more productivity growth. Societies — including governments
and individuals — care about a range of things, from health
care and security to fairness and freedom. Inasmuch as
productivity growth — and, in turn, GDP and income growth —
advances these societal objectives, it is highly desirable.

There is, however, a tendency among economists and policy
makers to overemphasize such market-related measures of
performance, while overlooking the reason why that performance
matters: human wellbeing. Efforts to implement a more
comprehensive framework for assessing economic performance, one
that reflects social needs and desires, have been largely
unsuccessful.

In order to determine how much productivity growth we want, we
need to take a broader view, one that enables us to decide how
best to allocate society’s limited resources, especially its
most valuable human resources. Such a perspective should
recognize the possibility that market-related measures,
particularly real (inflation-adjusted) income growth, may no
longer be as important as they were in the past. And it must
account for a society’s priorities, revealed in the ways in
which its members use their resources.

Health-related discoveries and advances, for example, have
brought massive societal benefits since World War II: increased
longevity and reduced child mortality and morbidity, not just
higher productivity and GDP. That is why the government of,
say, the United States invests so much in medical research: the
National Institutes of Health alone has an annual budget of $32
billion with which to fund infrastructure and research projects
that employ a subset of the country’s greatest scientific
talent.

Similarly, the National Science Foundation and the scientific
research arm of the Department of Energy receive a combined
total of about $12 billion per year, which they use to advance
a wide variety of goals in engineering, energy efficiency, and
green energy, and the natural and social sciences.

The economic return on public investment is even more difficult
to calculate for security-related spending, where the total
resources allocated to enhancing it and the effectiveness of
those resources may be unknowable. But there is little doubt
that security has a powerful claim on people’s wellbeing and
thus on resource allocation.

In some cases, people’s desires may actually clash with the
goal of improving productivity. Social media, for example, has
often been derided as a feeble or even negative contributor to
productivity. But productivity is not the point of social
media. What people value about it is the connectivity,
interaction, communication, and diversion that it enables.

In fact, for many individuals, particularly in wealthier
countries, the top priority is not simply becoming richer, but
rather living a richer life, and it is toward the latter goal
that they will channel their time, income, and creativity. As
societies become richer, the relative value placed on different
dimensions of life may shift.

Societies’ allocation of resources will imprecisely but
persistently follow these shifts. This is especially true when
it comes to human resources, but public-sector resources also
tend to respond to the same preferences and values over the
longer term, regardless of the imperfections in our mechanisms
of social choice.

This kind of evolution is not unique to high-income countries.

China has reached — or perhaps passed — the stage during which
a laser-like focus on productivity and GDP growth corresponds
with ordinary citizens’ sense of wellbeing. As a result,
China’s resources are increasingly being redeployed toward a
more balanced portfolio that still includes growth, but adds
environmental protection, social welfare, security, and
innovation in a wide range of fields that overlap only partly
with productivity and income growth.

All of this suggests that a substantial share of the decline in
productivity growth may not be the result of some deep problem
with resource allocation or some consequence of exogenous
technological innovation cycles over which we have little
control. Rather, it could reflect a natural shift in priorities
to other dimensions of wellbeing.

This shift is not without its risks. Without productivity
growth, the incomes of those at the lower end of the
distribution will likely remain flat, exacerbating inequality
and, as we have been seeing lately, jeopardizing social and
political stability. Given this, governments should devote
resources to reducing inequality, regardless of the shifting
preferences of the average citizen.

Societies could, we have little doubt, elevate productivity and
income growth substantially, if they managed to redeploy their
resources entirely in that direction. But whether bucking
revealed preferences embedded in private and public investment
choices would make us individually and collectively “better
off” is dubious, at best. More likely, it is simply not true.

This article has been published with the permission of Project SyndicateShould We Be Worried About
Productivity Trends?

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