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Why do we need economic growth?

Shopper with bags
That's the spirit - a London shopper does her bit for economic growth

WHO, WHAT, WHY?
The Magazine answers...

With recession looming and unemployment rising, politicians and economists are trying to find ways of stimulating economic growth. But is growth a good thing? Does it have harmful consequences? Could we live without it, asks John Sloman.

First of all, what do we mean by economic growth?

It is the annual rate of increase in real GDP, where GDP stands for "gross domestic product". This is the country's production of goods and services, valued at market prices (or at cost when the goods are not sold). The figures are then corrected for inflation by using the prices that existed in some chosen base year. Currently, GDP statistics in the UK use 2003 as the base year.

In 2006, GDP was 1,229bn in 2003 prices; in 2007 it was 1,266bn. This means that real output grew by 37bn or 3.0% in 2007.

In 2008 growth is likely to be under 1% and negative for the last quarter. Next year it will probably be negative.

THE ANSWER
Yes, if we are to meet people's aspirations
It also makes it easier to relieve poverty
But growth has a downside too

From one year to the next, the crucial factor affecting growth is spending. If people spend more, firms will sell more and this will encourage them to produce more. Whether the spending is by individuals, business, the government or people abroad on our exports, higher demand will lead to higher output.

The big danger at the moment is lack of spending. With bank loans down, and people becoming cautious about spending, we have the recipe for recession.

But the answer to getting long-term growth is not simply one of increasing spending. If we spend beyond the capacity of the economy to produce, we'll simply end up with inflation and boom will be followed by bust.

If growth is to be sustained over the years the key is a growth in investment and productivity. This is partly down to scientists and engineers in developing new efficient techniques and new products, but partly down to getting incentives right to encourage investment.

It's an election winner

Politicians see growth as very important. Elections are won or lost on the state of the economy. Look what happens if growth disappears and recession looms. People get very concerned about falling incomes and rising unemployment.

But do governments need to do more than just keep production going and avoid recession? Do we really need output to go on growing year after year after year? Well, in one sense we do. If living standards are to be maintained and population is growing, then output at least needs to grow as fast as population.

Boy playing football in Govan, Glasgow
If he's going to get richer, without the rich getting poorer, we need growth

Then there is the question of poverty. If poverty is to be relieved and the rich are not to be made poorer, then growth is necessary. Of course, making the poor richer is not easy and there are many political obstacles in the way. But at least growth makes it easier.

Imagine trying to alleviate poverty without growth. Income would have to be redistributed from rich to poor. But this doesn't go down well with the rich. Conservatives, and many in new Labour too, argue that higher taxes on the rich will discourage them from working and investing and could result in lower output.

Then there is the question of human wants. People want more. Ask anyone if they would like to be richer and very few people would say no. Why do people do the lottery? And what politician doesn't want to give the people what they want.

Finally, there is the question of debt. Some people are so keen to consume that they just borrow more and more - and this has been fuelled by banks offering easy credit. But rather than borrowing and getting deeper into debt, it would be much better if everyone could earn more. But that takes economic growth.

So is this game, set and match for the proponents of economic growth? You've probably guessed that the answer's no.

Growth can't buy love

Greater consumption does not necessarily make you happier. There are some pretty miserable wealthy people. Economists have tried to develop ways of measuring happiness and, in most cases, once people earn above a certain level of income there is not a lot of connection between happiness and income. GDP doesn't measure happiness; it measures output.

WHO, WHAT, WHY?
QM
A regular feature in the BBC News Magazine - aiming to answer some of the questions behind the headlines

Think of the things that give you happiness and/or fulfilment. Many of them do not involve consumption. Many involve human relationships and giving rather than taking. A consumerist mentality can erode your humanity.

And there is a darker side to economic growth. It may actually have a negative effect on well-being. Take pollution. Greater output tends to lead to greater pollution. Look at the worries about the rapid growth of China on the production of CO2 and global warming. Look at the worries about pollution from the USA, the country with the highest GDP in the world.

What is more, economic growth may lead to the depletion of resources - a problem that's likely to get worse as world population and world consumption grows.

Then there are things included in GDP, which are really 'bads' rather than 'goods'. For example, if you live near your work and walk or cycle, then this will probably benefit your health. Now assume that you take a job a long way from where you live and have to buy a car, or a second one. The commuting costs - the car, the petrol, the insurance - will all be counted in GDP. But the commuting is likely to decrease your well-being, not increase it.

It's not enough alone

Finally there are things such as childcare, housework and decorating. These are recorded in GDP if you employ someone to do them for you, but not if you do them yourself. If we increasingly employ people to do these things, then GDP will grow, even if no more has been done.

So, do we need economic growth?

Growth may be necessary, but it certainly isn't sufficient.

Certainly for poor people, to be able to consume more food, have better clothing and shelter, and access to education and healthcare would be an improvement in their living standards. Economic growth that allows these things to occur would be good.

But whilst economic growth may be a necessary condition for the relief of poverty and can be desirable for middle- and high-income people too, it is not enough on its own. Governments and society need to be judged on so much more than simply whether their economies are growing.

John Sloman is director, Economics Network, the Economics subject centre of the Higher Education Academy, based at the University of Bristol. He is author of Economics, Essentials of Economics and various other textbooks.

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