Monday 3 April 2023

Governments Don't Actually Prioritise Economic Growth - But They Should

Environmentalists are always complaining that governments are obsessed with GDP and economic growth, and that this is a bad thing because economic growth is bad for the environment. They are partly right but mostly wrong. First, while governments talk about GDP a lot, that does not mean that they actually prioritise economic growth. Second - properly understood - economic growth is a great and wonderful thing that we should want more of.

Governments around the world – of every ideology – are in favour of economic growth all else being equal. Economic growth increases the wealth of a population and hence improves their options and those of the government that rules them. This is extremely politically convenient as it allows governments to serve all their various constituencies without having to make hard choices between them, and so keep them happy enough that they get to stay in power. Honest politicians can provide more public services to those who demand them, while keeping the tax rate the same. Corrupt politicians can get away with funneling money to themselves and their cronies without risking revolution. More money means fewer and easier political problems.

However, just because someone values a certain outcome, does not mean that they value it enough to take the necessary painful steps to achieve it. (Or else everyone would get A’s in their exams and keep the waist size they had in high-school.) It turns out that the policies governments need to implement (or stop implementing) in order for their societies to get richer are often more politically costly than they are worth because they disrupt the status quo and the entrenched interests that benefit from it. Take for example governments’ responsibility for the housing crisis across the rich world, in which the price of housing has been rising faster than incomes.

The rising price of housing makes people much poorer than they would otherwise be, since it leaves them with much less to spend on everything else and so reduces their real set of options. With minor differences in detail, all these different countries’ housing crises are due to the same underlying problem: There are not enough housing units being built in the places that people want to live, and so people are forced to bid against each other – to spend all they can afford (by borrowing vast amounts and sacrificing other things in their lives) – to win a place to live. Meanwhile, like a sad game of musical chairs, more and more people can't afford to stay in the competition and are pushed down and out into homelessness.

But why is there a lack of supply? Why haven’t entrepreneurial real estate developers built more to take advantage of the ludicrous prices? The simple answer is that rich world governments have stopped new housing from being built with zoning laws and other regulatory processes that allow tiny groups of activists to block construction. They did so because building new housing reduces the value of existing housing and so is unpopular with the people who already have a place to live – and these are an important political constituency. There are additional knock on effects. People can’t afford to move to the places where the new economic opportunities are forming, making them – and the country poorer. Parenthood costs space and financial stability that fewer and fewer people can afford, and so fertility rates fall, and eventually also the future workforce. Inequality between housing market winners and losers tears society apart and reduces faith in politics while increasing anger. And so on.

There are lots of other ways that governments hinder economic growth not merely by their inactions, but by continuing economically foolish policies demanded by some vocal well-organised interest group or other, from subsidising fossil fuels to blocking economic migration and free trade (Brexit!), and the unnecessary licensing of professions like hairdressing and interior design. It is simply not true that governments only care about economic growth and will stop at nothing to achieve it. Governments care about the immediate political costs and benefits of their rhetoric and actions, and it turns out that many of the drivers of economic growth are political non-starters. Just look at the difficulties Macron is having trying to persuade the French people to improve the financial sustainability of their pension system.

But the political unpopularity of economic growth is unfortunate, because economic growth is wonderful. Economic growth is when ordinary people’s set of valuable options increases, so that we can do more of the things we want to than we could before. More vegan burgers, more holidays, more audiobooks, more philosophy lectures, more cat cafes, more medical research, more accommodations for the disabled, and so on. If it is a good thing when people can achieve some of the things they find valuable, it is even better when they can afford more, and also when the government can afford to organise more valuable club goods – such as universal preschool or clean beaches – on our behalf.


Now it is true that some of the things people will want to spend their additional income on may be ‘bad’ things from the perspective of environmentalists, such as gas-guzzling SUVs, plasma TVs, foreign holidays and unsustainably fished seafood. But this is not an argument against economic growth itself because there is no necessary relationship between economic growth and environmental destruction.

First, economic growth properly understood should include the social cost of any environmental harm just as it should include the social cost of a shortage of housing. Economic growth is often measured in terms of GDP, in which only market transactions and government spending appear, but that doesn’t make them the same thing. As economists since Adams Smith have argued, economic growth is the real expansion of ordinary people’s ability to obtain the things they find valuable. Sometimes that will involve substitution with significant impacts on customs and ways of living. For example, when books got printed they became cheap enough for ordinary people to read privately and silently to themselves – a revolution in the practise of reading that many presumably regretted but was nevertheless a vast expansion in people’s opportunities. Likewise, measuring economic growth properly means taking proper account of the environmental impact of people’s choices on others so that those costs can be compensated (preferably through the price system), but that is not the same thing as a veto. Those who are not satisfied with that, who wish that people would live more ‘virtuously’ and spend their money on other things, or not at all, should make the case for that directly to those concerned rather than complaining about economic growth in general.

The second reason the environmentalists are mistaken is that an expansion in human prosperity does not require an expansion in the destruction of environmental goods. The underlying driver of economic growth is an increase in average productivity across the economy as new technologies are developed and implemented, i.e. an increase in how much of the things people want can be produced with the same set of resources. Making and growing things requires inputs of natural resources, like land and minerals. But the very technological developments that drive the increase in productivity also drive down the amount of resources needed to produce each of them. Economic growth doesn't refer to an increase in the consumption of inputs (like oil) but an increase in a society's consumption possibilities (such as for light, mobility, and warmth).

It is true that the ‘paradox of efficiency’ means that when things get cheaper, people tend to consume more of them (e.g. as people get richer they eat more meat, because it tastes nicer). But firstly I refer to my earlier point that once social costs are properly accounted for in prices, what remains seems like a persuasion problem, not an economic growth problem. And secondly, there are limits to how many things people want. The great majority of modern rich world economies is not made up of material things like steaks and smartphones, but immaterial services like music and education and apps whose production requires little to no physical inputs. Hence the now well-established empirical fact that economic growth does not require an expansion of environmental impact.

Let me sum up. Economic growth is wonderful. In poorer countries, the benefits of growth in terms of allowing people to afford better food and things more than offsets the social costs of their environmental impact. In richer countries, where we already have plenty of nice food and things, economic growth means more of us can access more and better services, which have little to no environmental impact. Unfortunately we cannot expect to get this wonderful economic growth automatically, because governments operate on political incentives and many of those are lined up against the sources of economic growth. We should be trying to change those incentives by lobbying our governments to do their job of serving our collective interests by facilitating the drivers of growth or getting themselves out of the way.


Note: An earlier version of this essay was published on 3 Quarks Daily