Is slow growth good or bad?

February 25, 2020

In the United States and many other advanced economies, the growth rate of GDP per person (or per hour) considerably fell in the past two decades. Should we worry about that? Most economists would say yes: for instance, the arguments go that higher growth would help increase wages and reduce inequality and contribute to the financing of the energy transition towards renewable sources of energy.

Dietrich Vollrath of the University of Houston argues, however, that low growth is not necessarily bad, but it is also a sign for success. As he convincingly explains in his recent book («Fully Grown: Why a Stagnant Economy is a Sign of Success», University of Chicago Press), growth is lower now because of past successes. In particular, women are now better educated and their labor market participation rate has increased. As a side effect, they choose to have fewer children. This has led to a demographic transition (less young people and more retired people) that dampens economic growth. In addition, when people get richer, they buy more services instead of ever more cars and washing machines. But productivity growth for some services that require personal interactions (for instance, education, health care, child care, some leisure activities) is usually low because the potential to automate or outsource is limited.

These arguments are in general well known. However, it is always important to keep in mind that these developments do not have to be a reason for pessimism, but are also a sign of past successes such as high productivity growth in manufacturing, more consumption of services, an improvement in the rights of women and a higher labor force participation of women. One does not have to agree with each argument made in the book to acknowledge that Vollrath convincingly succeeds in pointing out past successes. Low economic growth does not necessarily have to be bad, but can be the result of past favorable developments that increased our well-being.

Dietrich Vollrath (2020): «Fully Grown: Why a Stagnant Economy is a Sign of Success», University of Chicago Press, 296 pages.

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