What Does Slower Economic Growth Really Mean?

Being a fan of Jim Heskett I include this post!

Source: http://hbswk.hbs.edu/item/6189.html

Executive Summary:

Online forum OPEN till June 25. Economists predict substantially slower growth rates for the world’s economy into the foreseeable future. But is all growth equal? asks HBS professor Jim Heskett. If much recent growth has resulted from real estate and financial bubbles, will slower growth have as profound an impact on our way of life and the corporate business model as some are predicting?

What do you think?

Economists predict substantially slower growth rates for the world’s economy into the foreseeable future. But is all growth equal? asks HBS professor <strong>Jim Heskett</strong>. If much recent growth has resulted from real estate and financial bubbles, will slower growth have as profound an impact on our way of life and the corporate business model as some are predicting? What do you think?</p>

During the past several weeks, economists have begun to predict substantially slower growth rates for the world’s economy into the foreseeable future. Characteristic of this is the reduction of roughly 100 basis points annually in the expected growth rate of the United States from 2 to 3 percent per year to 1 to 2 percent. Those responsible for the projections tell us that as a result, we can expect substantial reductions in sustainable employment, incomes, and profits, not to mention the standard of living to which people can aspire. You may or may not agree with these projections. But they suggest that it’s time that we ask whether we have been using the right measures for growth.

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First, when we speak of growth, it usually refers to growth in gross domestic product, the value of all goods and services produced during a period of time. It makes no assumptions about the usefulness of various types of production. The presumption is that macroeconomic growth translates into greater top line opportunities for individual organizations. With no improvement in productivity, that means a similar increase in jobs and income. (More realistically, it means modest increases in both productivity and jobs.) It also means, even without a change in tax rates, a larger tax base. This is important to the extent that it is a major component of a government’s plan to manage its capital accounts, which in turn has important implications for international credit markets and in the case of the U.S., the dollar, and the Treasury’s ability to borrow at reasonable rates of interest.

But is all growth similarly useful? For example, is growth in the production of food, steel, or for that matter information the equivalent of growth in the production of financial services? The latter grew so rapidly in the U.S. in recent years (with every mortgage backed security and credit default swap transaction counted, resulting in substantial contributions to growth rates) that, at its peak, it may well have accounted for a substantial portion of the 100 basis point differential between past and projected growth rates. One can argue that each transaction may have produced top line growth for individual companies and tax revenues for the government, but did it create as much value for the individual citizen and the economy as a whole as the production of an equivalent amount of food, steel, or information? If much recent growth has resulted from real estate and financial bubbles, will slower growth really have as profound an impact on our way of life and the corporate business model as some are predicting?

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Are our measures of growth flawed? If so, what does slower economic growth mean? As one example, might it actually produce more equitable compensation and penalize the wealthiest more than others in the United States, thus reducing what some have concluded is an unsustainable gap between rich and poor? What do you think?

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