"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Sunday, November 7, 2010

Who Cares About Growth???

Sometimes I´ve got the strange feeling that Analysts, Policy Makers or Economists have signed an unconscious agreement: Under any circumstance, no matter what they are asked about the econmy , they alwaya return to THE eternal Mantra “(Economic) Growth isn´t everything, it´s the only thing!”. The repetition has its effects , and Economic growth (the rate of change of the national product -“GDP) is quoted, analyzed and commented endlessly as if the whole world was pending on a rather weird and obscure figure. Since most of the population normally tends to listen to “experts” (especially in the field of economics), the GDP talk became a widely accepted yardstick to measure policies, and most important politicians.

Why Growth is so important? And who benefits from the “Growth” obsession? First, the GDP importance stems from its general nature and apparent neutrality, after all the figure measure the well being of the WHLOLE society. So, if GDP grows by 1%, we are “all”, on average, 1% richer. In that simplistic way it is correct though the problem lies in that the “average” citizen simply does not exists. The 1% is the growth of the overall economy, but it does not imply how the somewhat biggest pie is going to be eaten. Some might even receive less than before , even the overall pie has grown.

I would like to illustrate that point by making use of data from the American Economy. The graph describes the evolution of the GDP growth and the share if the most rich 10% of the population for the last 65 years. (Why America? The data is available and it reflects in general terms the trends in other countries).

As can be seen from the Graph, America´s GDP grew almost every year since WWII (exception in recessions) . However, the way the growing pie was distributed can be divided into two main periods. Along the first 30 years after WWII the relative share of the richest 10% citizens was stable (app.30-35%). Since the mid 70 the top 10% slice grows steadily and dramatically, and nowadays they grab almost 50% of the national income. If you want to see it in another way, 10% of the population received 60 cents of the additional wealth created during those 30 years, while the average citizen in the lower parts (the rest 90%) received 4 cents.... 60 vs. 4!.

So, if politicians and mainstream media are so obsessed with growth it must be because they care a lot about the 60% share, otherwise there is no reason why to focus mainly on that figure. As mentioned above, this is data from the American Economy, but it is possible to track the same trends in many other developed countries. Some would argue that “they deserve it “ i.e. the most top 10% are the guys that work hard, innovate, assume risks .. in effect they are the drivers of growth so they deserve a bigger share , while the bottom 90% should be thankful for getting almost 50% of the additional wealth.

Needless to say that such argument is so poor and based upon debatable hypothesis as what is growth and justice. However that argument can be easily refuted with our simple graph. If the only condition to growth is an ever increasing share for the most talented, can someone explain what happened between 1947 and 1977?? The American economy not only grew vigorously but 30% more than the following 30 whilst the “talented” share remained stable. QED

The way growth and well being is distributed should not be confined to the “moral” arena, far away from the “practical” sphere. Living together in a society implies a general, sometimes , vague, common reception of ethical values , justice and fairness . However, my point goes beyond that : The very fabric of the modern society and economy is based upon sharing the benefits of the economy : The wealth as expressed in financial assets and other depends on the capacity of the mass consumer to generate sales , profits and wealth. A polarized society with an insufficient purchasing power of the average citizen is a weak growth society which tends to rely upon external demand ( the model adopted, for example , by China ) or to engage in an endless speculation orgy of extravagances and that sort of things. In a next blog I will try to link the current trend of income and wealth accumulation and the current economic crisis.

As a finish line, I will just ask you a favor : Next time you hear a debate dealing with growth and GDP, just ask the most natural question , the basic moral imperative of an individualistic and capitalist society : What do I get out of it ??? Although I do not know you personally, I can tell you with 90% probability that you will get almost nothing….

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