Why are we obsessed by growth?
- 25 July 2012
- From the section Business
The latest figures have shown that the UK economy contracted more than expected between April and June.
The output of the economy as measured by gross domestic product (GDP) figures fell by 0.7%, according to figures from the Office for National Statistics.
It follows a period of small rises and small falls in growth showing the economy has basically been stagnant.
Why is that lack of growth a problem?
"In the long term, we grow because technology gets better and we get better at producing things," says Jonathan Portes, director of the National Institute of Economic and Social Research.
"In the short term, growth is an indication that the economy is producing as much as it could be and resources are not being needlessly wasted.
"At the moment we are producing considerably less than we could be because the economy is being mismanaged."
One of the resources not being used as much as it could be is labour.
"If the economy is growing at less than about 2% a year then unemployment rises because output is just not rising fast enough," says Prof John Van Reenen from the London School of Economics.
"With a growing population and rising wages, the economy has to grow to create jobs."
Having more people out of work increases the amount that the government has to pay in benefits and also reduces the amount it receives in taxes.
That is a particular problem at the moment, given the debt problems currently facing the government.
"Debt matters because it has to be paid," Jonathan Portes says.
"Growth would make it significantly easier to deal with. If we are growing slowly it gets worse and worse."
A classic example of what happens when there is no growth is Japan, which has had almost no real growth for the past 20 years.
"Japan has stagnated, although it is not a broken society," says Jonathan Portes.
"But low growth has been bad for young people who cannot find decent jobs."
Low growth has also meant that its government debt as a proportion of GDP, which is a key measure, has spiralled.
It currently has a debt-to-GDP ratio of over 200%, which is the highest in the developed world.
'More and more junk'
But some people think that a zero growth economy could be a good thing.
Brian Czech, president of the Center for the Advancement of the Steady State Economy (Casse) says that the UK economy has already grown beyond its optimum size.
"There are too many problems caused by increasing production and consumption of goods and services," he says.
Casse argues that growing the economy further creates social and environmental problems that outweigh its benefits.
"Lots of sacrifices come with growing GDP, such as working too long hours, the depersonalising of workplaces and spending on advertising to persuade people to buy more and more junk they don't need," Mr Czech says.
Casse's position is certainly not a mainstream economic view, although there are strong arguments that GDP by itself is not enough to measure the state of a country or an economy.
On Tuesday, the Office for National Statistics released its latest findings in its measurements of national wellbeing.
Also, inequality in the UK economy means that growth would not necessarily benefit everyone.
But for the moment, GDP growth will remain the focus for analysts and news organisations alike every three months.
"GDP is not perfect and it ignores intangibles such as happiness and the environment, but it is still the best measure of all we produce," says Jonathan Portes.
John Van Reenen adds: "When GDP grows, the size of the economic pie grows."
"That allows you to slice the pie to get what you want, be it higher wages, more leisure time or increased government spending."