Why is an economy with 2.5%-3% growth so important?

[Massacure]

Why cannot there be an economy where there is zero growth and zero decline? That would imply status quo. Perhaps it would be better for me to say growth and decline in equilibrium with each other. Why would that not work?

[Warpy]

1. Easy paper profits for the wealthy

The illusion of growth, even if it comes from the working and middle classes sliding deeper into debt they will nevepay off, is what keeps the rich getting up in the morning.

[endarkenment]

2. With population growth zero growth is decline.

The GDP has to at least keep up with the growth in population.

[Dogmudgeon]

3. Our economy is "Finance Capitalism"

So much of the money in our economy is based on investment that if the growth rate falls much below 2.5%, recession will result. I suppose that the people with money would no longer invest, but simply save their money, instead. The same thing has been observed with the growth of energy demand and use. Econometric modeling has shown that without that rate of growth, a collapse eventually takes place. This is a controversial result, of course, but the evidence appears to be in its favor.

M. King Hubbert -- of Hubbert Curve fame -- wrote several papers and at least one book on what he called "The Steady-State Economy", which did not depend on finance and unceasing growth to keep functioning.

I consider myself to be poorly read in economics, but someone with a better grounding in the subject could probably fill in the large gaps in my explanation. I'll keep and eye on this thread -- I'd like to find out more of the whys and wherefores, too!

--p!

[enigma000]

4. Growth is change and advancement

No growth is stagnation and complacency. People will endeavor to improve themselves economically if the opportunity exists. Without growth, chances for up wards mobility is limited - this can lead to jealousy, envy, even, perhaps, social unrest. Much of the world is like that, hundreds of millions with few economic opportunities for themselves and their families.

Don't we all want our lot in life to improve, even incrementally?

[kineneb]

18. sure, but...

small example, which applies to many:
1. Person A is receiving payments for permanent severe disability
2. Person B (A's spouse) has to quit working so A is still eligable for Medicaid (expensive meds)
3. "Income" (disability payments) of A & B together is near the limit allowed to continue Medicaid
4.Equals: no incentive to increase or better one's finances, as to do so would actually result in a net loss of income due to medicine costs

There are lots of similar situations for those who depend on assistance. The system takes away more than could be earned. The Right complains about people "leaching" off the system or cheating, but do not realize the system actually encourages that behavior.

Growth of the economy is ok, if the growth is "sustainable" (borrowed from agriculture). An oil-based economy is not sustainable, and is doomed to fail, as is an economy based on continuing consumption of disposable consumer goods.

[ret5hd]

5. actually a very good question...with a surprising answer...

my answer here is overly simplified, but will get you started for better info..

because of "fiat" money...our money is debt...at its very core. debt owed to the fed by the govt and banks. debt owed to the banks and govt by borrowers.

debt accrues interest. therefore, more money has to be repaid than borrowed. more money can't be created (to pay that extra amount accrued in interest) without also creating more debt.

therefor, the economy HAS to grow (over the long term, not necessarily the short term) or the entire system collapses.

[depakid]

8. In addition- servicing debt

means paying interest. A steady state economy (as envisioned by ecological economists) looks to qualitative development, as opposed to quantitative increases in production and consumption. It looks to limit "throughput." But at this point, that wouldn't pay down debt. There's also a little problem with the current acounts (trade) deicit.

Unfortunately, as you mentioned- money is quite literally made out of debt. This can be done because of the reserve requirement. Banks only have to keep a fraction of the funds depositied on reserve. The rest, they can loan out. That's Key method(s) the Fed controls the money supply. Manipulating the reserves so that banks create more or less money.

[eallen]

6. You want no improvement in medicine, technology, nothing?

Many no-growthers have a deep misunderstanding of what economic growth consists. They think it either requires the consumption of ever more physical resources, or that it means merely an increase in dollars, along some arbitrary scale that is meaningless to real lives.

Neither is true. What is closer to the truth is this: economic growth is the continual improvement of how things are done. Economic growth means that phones are now carried wherever you go, instead of tied to the wall. Economic growth means computers are faster, smaller, and cheaper. Economic growth means that some coronary disease that once killed or required major surgery is now treatable with a stent as outpatient surgery. Economic growth means that there are now drug cocktails that keep HIV sufferers alive for decades.

Economic growth is things and services getting better and cheaper. Zero growth means nothing gets better, or at least, any improvement is cancelled by something else getting worse.

[depakid]

13. Absolutely incorrect

Economic growth as defined by GDP has little to do with "improving" things. It's not necesarily qualitative (although it can be). A country can easily fall become poorer while still experiencing "economic growth." Growth (GDP) is essentially an increase in production and consumption- measured by the transfer of funds. It's not a measure of economic welfare.

For instance, a person running up their credit cards to pay off an exhorbitant medical bill "contributes" that amount to GDP. A hurricane hits, requiring re-building. Wars occur- and they boost production (often via deficit spending).

These (and others- like ecological externalities) are really costs, though GDP counts them as benefits. And as any microeconomist will tell you, "economic" output means output for where marginal benefits are greater than marginal costs. It supposes an optimization of production. For some strange reason, macro types don't get that- their quest is maximized "growth" using slight of hand accounting.

In contrast, the idea of a steady state economy is not equivalent to "no growth." It recognizes limits beyond which growth is uneconomic. In other words- detrimental. A losing proposition.

Development- qualitative increases- "better things," and more efficient and comprehensive allocation of resources, costs and benefits with an eye toward optimization (and equity) is what it's all about.

The fact that this requires a paradigm shift- or what Schumpeter called "a change in pre-analystic vision," doesn't mean that the ideas are "wrong" or that the time for their implementation isn't (long since) ripe.

[eallen]

15. No, mostly correct.

Yes, there are some important issues in accounting for economic growth. The major one you mention but don't well explain: that we don't account for changes in capital stock. The problem isn't that we account building a benefit. It is. The problem is that we have only poor mechanisms for accounting capital stock and its loss or depreciation. As when a hurricane hits. That isn't an argument against growth, but for better accounting.

Debt-financing of purchases is not one of these accounting problem. And certainly not the fact that every purchase is also an expense. Every time you purchase anything, the price is a cost to you. You make the purchase because you think what you receive is more valuable than what you pay. Debt-financing has to do with how you time your payment.

There is an interplay between aggregate debt and how that affects growth now vs. later. I am suspicious, and it might well turn out, that we as a nation have traded growth now for too much debt that hurts our potential for growth later. That is not an argument against growth, per se, but on the importance of sustaining it. It also isn't because we poorly account for debt. Debt is quite well accounted. The problem isn't the accounting of it, but the decision to keep increasing it anyway.

[Warpy]

16. That's an illusion

since progress in one area is generally balanced by the loss of another. In other words, the growth of the jogging suit area was matched by the loss of the knickers and fedora hat segments of the garment industry; the growth of the automobile industry was matched by a loss of the horsecart and harness industries. Growth in electric powered machinery was matched by a loss of the water powered machinery producing sector. And on and on it goes. Progress and improvement continue in a no growth economy. The money supply, fueled by interest on debt, does not.

[Boojatta]

20. What about the sector that makes stuff for hydroelectric power stations?

"Growth in electric powered machinery was matched by a loss of the water powered machinery producing sector."

If it is exactly matched by the loss, then what motivated people to switch from one to the other?

[Warpy]

21. Gee tour an old factory in New England that still has the leather

belts running through the ceiling to power machinery from the water wheel that is no longer turning and compare it to a factory with electrically powered equipment.

The reason for the shift is obvious if you know what you're looking at.

The point is that progress in one area generally means obsolescence in another. It's possible to do that with a stable money supply, which is what "no growthers" are getting at.

[Boojatta]

22. Perhaps you could explain what you meant when you wrote this:

"That's an illusion since progress in one area is generally balanced by the loss of another."

What is it that you are calling an illusion?
What did you mean by the words "balanced by"?

[applegrove]

7. I think the issue here is where the economy is growing. Seems

stock markets are doing fine, wages falling. So - what are the elites going to do when workers do their part to fight inflation and keep that stock market going?

It isn't the growth rate - it is that it is not aggregate growth.

[eallen]

9. Growth isn't the only thing. But what makes you say stocks are doing fine?

The stock market is just about where it was five years ago. You would have done better putting your money into a money market fund when Bush was inaugurated, even at historically low interest rates, than putting it into stocks. That's a pretty long period for stocks to go sideways.

Economic growth isn't the only thing. But it is a very good thing, that makes most other things possible. If you want to see misery, look to the nations that experienced economic decline for years on end.

[applegrove]

10. I agree growth is important. You would never wish slow or bad

growth on anyone. Though it isn't the end of the world - it is terrible.

But - stock markets were affected by dotcom bust & 9/11. And since then they have been growing. Especially if you have a good broker.

But not so much growth in other sectors of the economy?

[eallen]

11. Take a gander at this graph.

You're right that stocks fell in 2001 and 2002, then recovered in 2003. The last two years have been about as flat a trading range as you'll see anywhere, for an overall pattern of sideways:

http://chart.finance.yahoo.com/c/5y/_/_dji

You might get away calling that a "soft recovery." But growth? No, way. Of course, stocks don't measure the economy, and one should never confuse economic growth with rising equity values.

[applegrove]

12. Exactly. This is average for whom? Not income growth by stockholders vs.

non stockholders. Doesn't tell us much.

[applegrove]

14. Medium Income isn't stagnant according to the Economist.. if you

take out illegal immigrants.

But even if you do that - you still have a huge bunch of boomers at the height of their earning potentials (in the years before they retire & while they have accumulate much).

Median Income should be huge... not "well if you take out illegal workers it is okay".

I'm just saying.

[Massacure]

17. can they economy not crash with no further growth in energy consumption?

The peaking of fossil fuels is my reason asking this. We cannot grow twice as much energy every 30 years obviously. So can energy use be capped without stalling the economy?

[applegrove]

19. By getting rid of industrial jobs and replacing them with local jobs

or if you are a corporation selling stuff overseas be in fields like nanotechnology, pharmaceuticals, software, computers, intelligence, finance, etc. all things you can license to be manufactured in China (if you are selling to china) as opposed to having to use oil to make it in the USA.

That is one way. So all civilian goods are made away from the USA and thus - when oil crunch hits - it is lampshades that will be cut back on because they are made using oil - but those jobs will be in China.

US is specializing in this. So too lots of the west. Not encouraging its kids to do into anything but sciences is the next step. No - don't go for a factory job bobby - go for health care, sciences, etc.

Seems rotten that IT jobs are going to India though. I don't think that was part of the plan. And it doesn't bode well for sending kids into Science jobs.. because those are just as replacable as IT? So what's up with that?

[Zynx]

26. If we were smart, we could do this.

Energy consumption as a percent of GDP has been on the decline for some time. I think actually capping our energy consumption would be critical to accelerating our GDP growth rate.

[LSK]

23. Europe is in the process of basing other factors into economic growth

They are trying out new index's that factor in quality of life for its citizens. America is stuck fixated on GDP and ONLY GDP.

I agree, just because GDP grows, that does not mean that the quality of life for all the citizens are improving.

[Zynx]

25. I would say this much, GDP can be a decent measure of the general trend.

It is hard to improve the lives of your citizens, assuming a growing population, when GDP is falling.

[Zynx]

24. Capitalism only works in dynamic economies.

If there is no growth, there is no return on investment, hence the whole point of capitalism goes out the window.

Very simplified, but it was to the point.