The Case for Economic Growth
It may not lift all boats as it used to, but it's still essential.

Sunday, April 2, 2006

FOR PERHAPS half a century, the central preoccupation of economic policy has been to promote growth. Until 1980, the reasons for this were evident: Expanding national output boosted everybody's living standards, and advancing living standards were presumed to underwrite that most American of occupations, the pursuit of happiness. Yet the cult of gross domestic product is now open to question. Because of rising inequality, growth is a less reliable provider of higher living standards to most Americans, as earlier articles in this series have noted. And a new area of research, blending psychology and economics, challenges the assumed connection between income and happiness.

Despite headlong growth in rich countries since 1950, there has been no rise in the share of people who describe themselves as "happy" in opinion surveys. So what, you might say; how can people accurately report on such a fickle and subjective mood?

Well, self-reported happiness can be cross-checked by asking friends and colleagues how happy someone is, and neuroscientists have figured out how to measure the experience of good feelings in the left front of the brain. People who say they are happy do turn out to be objectively happy. The stature of this new science was recognized four years ago when one of its founders, psychologist Daniel Kahneman, received a Nobel Prize in economics.

The evidence from this new science is unsettling for advocates of growth. It shows that as nations escape poverty they benefit greatly; progressing from African-style penury to the condition of South Korea or Portugal entails huge jumps in happiness. But once nations pass the $10,000-per-person mark, roughly a third of today's level in this country, the happiness payoff ceases. Individual Americans can still grow happier by becoming richer, because it feels good to do better than the neighbors, but society as a whole can't raise its income relative to itself. As a national objective, therefore, GDP growth no longer makes such obvious sense.

An impressive range of thinkers, from Benjamin M. Friedman, a former chairman of Harvard University's economics department, to British economist Richard Layard, has accepted this critique of growth. We would not go as far as they do: Even if a higher national income does not measurably raise human happiness, it will expand opportunities to travel, learn, yak with grandma on her cellphone -- surely this is worth something? Moreover, there remain two other reasons to care about growth.

The first comes from Mr. Friedman: It's that as Americans get richer relative to their past, forward momentum makes them optimistic and tolerant: They expect life to get better, so they act more generously toward racial minorities, immigrants and the poor. In a recent book on this subject, Mr. Friedman has argued that steady economic growth promotes enlightened social policies. In the late 19th century, stagnation in the American South created the conditions for the reimposition of segregation. In the 1960s, galloping growth created the conditions for civil rights legislation and the Great Society programs. Perhaps if France were growing more robustly, it would not have experienced the riots and demonstrations of the past few months.

The other argument for growth is a particularly American one: To exercise global leadership, the United States needs financial clout. In a narrowly economic sense, it's great if foreigners catch up to U.S. living standards; this means richer markets for American products, so everybody gains. But in a political sense, a loss of economic preeminence would be crippling -- both for American statecraft and for the enlightened causes that it defends. The world relies on the United States to secure the world's sea lanes, lead the push for trade liberalization, fight international diseases, contain terrorism and stabilize failed states. The rise of China, with its vast population and illiberal values, underscores the importance of U.S. vitality.

In sum, the case for economic growth remains convincing, but policymakers need to balance its pursuit with a concern for equity. Mr. Friedman's argument -- that growth can cause a society to feel more optimistic -- depends on the sharing of its benefits. Equally, our sense that higher incomes expand the range of human experience, even if they don't expand the sum of happiness, carries weight only if the boost to incomes is broadly shared. The policy challenge, therefore, is to promote growth while also promoting equity. That is where this series will go next.

This is the third editorial in an occasional series on inequality.