Economic and Non-Economic Consequences of Economic Growth

Vijay K. Mathur

Economic growth in any country is the most well understood and significant index of the economic wellbeing of the population.  It is usually measured as the percentage change in the gross domestic product (GDP).   However, it is not explicitly known to most that it may also spread a sense of happiness, hopefulness and tolerance, hence a sense of cohesiveness among people.  The divisiveness among people occurs when there are winners and losers, and the winners are reluctant to provide opportunities to losers to achieve a satisfying economic status and are self-centered in pursuing their own economic gains, even at the cost to others.

Professor Benjamin Friedman in his book “The Moral Consequences of Economic Growth”, provides some thought- provoking insights into the non-economic consequences of economic growth.  He states, “The value of rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political, and ultimately the moral character of a people.” In his view, economic growth that lifts all boats “…fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy”.  These attributes are also the hallmark of innovation and growth.  Fear of growth due to negative side effects of environmental damage, congestion and diminished biodiversity are unwarranted, since growth provides more resources to offset these effects. 

In a winner and loser society, where winners are relatively better off and the losers are relatively worse off against some benchmarks, economic and social divisiveness among people increases and perception of fairness falters.  Professor Friedman remarks, “ The central question is whether, when people see that they are doing well (in other words, enjoying ‘more’) compared to the benchmark of their own prior experience, or their parents’ – or when they believe that their children ‘s lives will be better still – they consequently feel less need to get ahead compared to other people.” If most people perceive that they are worse off as compared to these benchmarks, it creates a ripe environment for divisiveness, hostility and intolerance to economically well-off groups and other competing groups.   The opportunistic political leaders and their sympathizers use this rift for their own political, social and economic ends.   

President Trump constantly reminds his supporting base that winners, immigrants and international trade are responsible for their plight.  But, he is also telling them that he is working on policies to stimulate economic growth.   However, there are no visible signs of meaningful and sustainable high growth policies.  The economy is growing between the average annual rates of 2% to 3%, but as compared to historical standards, it has not trickled down in significant wage gains to workers severely affected by the deep economic recession of 2007-08.   

The Wall Street Journal, August 24, 2017, reported that world wide economic growth has picked up and forecasts for US are in the range of 2 to 3 percent per year.   This US growth forecast will not improve the economic predicament of most Americans in the lower rung of the income distribution without substantive policy initiatives to stimulate productive investment in human and physical capital and R&D. The Trump administration’s aspirations for higher economic growth are incongruous with their regressive budget and tax proposals and strategies to restrict international trade and immigration.  Former Congressman Jack Kemp once remarked,  “Economic growth doesn’t mean anything if it leaves people out.”      

NAFTA trade pact is in jeopardy since Mexico and Canada are not willing to agree with the stringent concessions the Trump administration wants in the trade agreement.  The President has already withdrawn from the Trans Pacific Partnership trade pact with countries in South East Asia, a burgeoning regional trade market.   Restricting trade could prove to be a severe blow to economic growth.

A great source of unhappiness and divisiveness among the general population is the increasing income and wealth gap. C.I. Jones of Stanford University shows in his study on growth that, since 1980, GDP per person grew at the average rate of 6.8% per year for the top 0.1%, while it grew at the rate of only 1.82% per year for the bottom 99.9%, thus widening the income gap over time.   This has created a perception of unfairness and has led to general intolerance, especially fueled by the rhetoric of the President against immigrants and so-called elites.   

The increasing income gap is accompanied by an increasing wealth gap.  The study by Daniel Carroll and Nicholas Hoffman, Economic Commentary, Cleveland FED, June 28, 2017, finds that wealth mobility has also decreased over the past three decades.  On average, household are more likely to stay within their wealth quintiles over a period of 10 years than in the past two decades.  

Some claim that income inequality is essential for economic growth, but the evidence for the US is at best murky.  However, evidence points out that any marginal growth effects of inequality may not be economically beneficial to most people in the lower income distribution.   Aspirations for high growth rates and its trickle down effects in the Trump administration should be tempered by the fact that during 1973-1995, 1995-2001 and 2001-2017 the average annual growth rates of GDP per person were 1.82%, 2.17% and 1.72% respectively (see C.I. Jones).  

Hopefully, President Trump and his team recognize that in a slow growth economy policies matter to make people feel economically secured, to bring harmony among people, and to promote a healthy and vibrant society.

Mathur is former chair and professor of economics, now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.  He now lives in Ogden, Utah.