The coronavirus pandemic caught most of the world ill-prepared to defend itself against a new and deadlier virus. Our unpreparedness became evident in our financial fragility, inadequacy of health systems, and fragmented international cooperation. As usual, lots of ideas as to what we need to do the day after are tossed around. Thinking, however, in terms of piecemeal steps is not enough. We will be better served if we think big and revise the premise of our current approach.
What I have in mind is a reexamination of how we manage economic growth and its risks. By growth, I primarily mean the growth of GDP and our fixation that annual output increases at the highest possible rate. By risk, I mean the exposure of a nation or the world to human illness and deaths, hardship as a result of fragile household finances, and breakdown of social cohesion.
In finance and economics, we talk of a tradeoff of risk and return. That is, higher return comes with higher risk. Businesses and individuals have to make decisions that involve this tradeoff almost every day. Each one of us is supposed to choose the combination or tradeoff of risk and return that leaves us most comfortable (or with the highest utility in economic parlance). The implication is significant. There is no one combination that is best for all of us. We can all be happy at our different tradeoffs.
What happens, however, when the tradeoff refers to the total output (GDP) of a nation and its accompanying risks? Who chooses the growth-risk tradeoff? In democracies the tradeoff is decided at the ballot box. So here is the challenge: to move a democratic country from one growth-risk tradeoff to another we need to marshal a majority of votes in favor of a new tradeoff. Leaving the rest of the world aside, it is fair to say that for various reasons, the American choice is one that favors a pro-growth tradeoff by putting lesser weight on the risks.
But does this pro-growth stance serve us well? Many (and I am one of them) argue that the economic growth, as we have practiced it for several decades, dangerously ignores some important risks. First, it ignores the risks from the consequences of economic and social inequities it creates. We should, at long last, realize that inequality of income and wealth harms everybody. Economic insecurity and fragility as well as poverty (especially among children) deprive large segments of Americans of the ability to grow their human capital and better weather shocks to their income sources. Inequities also expose financially weaker people unevenly to health risks. We are currently seeing these effects in the proportionately higher numbers of the infected and dead among minority and less economically-privileged Americans. Economic inequality can also deplete social capital and lead to political instability. Episodic and temporary rescue plans are not a sustainable solution. A country with extended fragility pays a higher cost to fight systemic disruption of its economic and social fabric.
The pro-growth bias also impacts our financial and environmental safety. Since 1980, the US has suffered three major financial crises – the banking crisis of the 1980s due to imprudent lending practices, the stock market collapse of early 2000s due to accounting and financial shenanigans, and the housing-banking crisis of 2008 again as a result of unscrupulous financial practices. In each of these crises, billions and trillions of dollars of wealth evaporated and millions of livelihoods were destroyed. And yet we don’t seem to learn. Each crisis gives birth to regulatory legislation only to be compromised or reversed by business and political interests in a few short years.* The unspoken motive of these reversals is always the same: to protect or raise private profits. However, when the crisis comes and decimates these profits, the same actors ask the government to socialize their losses by passing the bill to all of us.
Common sense would dictate that wealthy nations can afford and should invest in clean water and air. And yet our record is one of advances and reversals. Especially this administration is hell bent on its policy to juice economic growth at the expense of the environmental progress this country has made the last few decades. It is an irony that the pandemic with its restrictions on movement is making air cleaner and saves lives. Why can’t we use policies to the same effect? How many lives are we willing to sacrifice in order to eke a little bit more of GDP growth? And what about the looming risks of climate change?
The argument that underlies our current emphasis on economic growth is that it is the indispensable ingredient to our quality of life. But if that’s so, why do we then stick with a model that keeps middle class and lower incomes woefully insufficient while upper incomes grow much faster? The current premise of our economic model is also wrong on other grounds. First, it implies that quality of life is primarily measured in economic terms. But as I wrote above, our comfort and satisfaction depend on both economic resources and risks to other aspects of our lives. International country rankings show that size and growth of GDP do not necessarily predict happiness. Harnessing a country’s wealth to achieve greater financial security, richer personal fulfillment and social harmony can be even more rewarding and worth-pursuing goals.
Second, growth heavily and at an increasing rate depends on the quality of human capital. Better education, health and financial security contribute significantly to that quality and by extension to productivity, which is a major driver of economic growth.
Finally, redirecting our economic model to green energy, better and universal health care, scientific research, better education and better social services can produce engines of economic growth which also mitigate our exposure to unwanted risks.
* In their book Firefighting: The Financial Crisis and Its Lessons, Ben Bernanke, Timothy Geithner and Henry Poulsen, the major architects of the policy response to the 2008 crisis, who come from both aisles of American politics, argue that the regulatory reforms instituted after the crisis still serve us well, a view that challenges the recent demolition efforts in the hands of the Trump administration and its Republican allies in Congress.
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