The moral consequences of economic growth

<p><em>Romesh Vaitilingam interviews Benjamin Friedman for Vox<br />
<br />
January 2009<br />
<br />
Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/3397]</em></p>
<p><strong>Romesh Vaitilingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam. And today's interview is with Benjamin Friedman, Professor of Political Economy at Harvard University.</p>
<p>Ben and I met at the American Accounting Association's annual meetings in San Francisco in January 2009, where we spoke about his recently published book, &quot;The Moral Consequences of Economic Growth.&quot;</p>
<p>I began by asking him why he had chosen this striking title.<br />
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<strong>Ben Friedman</strong>: I wanted to convey that what I think economic growth is all about, ultimately, is not just the material aspect of how people live and how that improves, but rather how economic growth, or importantly today, the absence of economic growth affects societies more broadly.</p>
<p>The more I think about the subject, the more I thought about the subject when I was designing the book, the more I realized that I was exactly along the lines that many of the key thinkers of the Enlightenment Period, the late 18th Century, had in mind - especially Smith, Turgeau, but others as well &ndash; and that what they thought of themselves doing was not economics. They didn't even have the word economics at the time. They thought of themselves as doing moral philosophy.</p>
<p>And so, what I wanted to do was write about and think through the broad societal implications of whether we have economic growth, or not. And I wanted to do it in a way that connected very self-consciously with this moral philosophical approach to thinking about individuals and societies that was at the centre of the Enlightenment enterprise.<br />
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<strong>Romesh</strong>: So, what are the moral consequences to economic growth? What are the kinds of issues that you look at?<br />
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<strong>Ben</strong>: I look at four or five quite specific issues. One is opportunity. A key issue for any society is whether the young people who are given an opportunity to get ahead are simply the sons and daughters, and nieces and nephews of people who are already at the very top, or whether opportunities are made available more broadly.</p>
<p>I argue in the book on the basis &ndash; not just of theory, but also lots of social and political evidence for the U.S. and Western Europe and other countries &ndash; that when the broad bulk of the citizenry is moving forward in its living standard and has a sense of optimism that that forward progress will continue, then not only is the society better able to afford to make opportunity available more broadly, but people are more likely to support it.</p>
<p>A second issue is tolerance. Tolerance with respect to what? As an American, I would immediately think of race relations. As an American, I would immediately think of attitudes towards immigrants. But, I also have in mind things like religious tolerance, or discrimination, ethnic prejudice, and the like.</p>
<p>A third issue that I have in mind is generosity toward the poor. It's all very well to provide opportunities, but everybody knows that for one reason or another, lots of people are not going to be able to take advantage of the opportunities that are provided.</p>
<p>In economics, we talk often about people's individual endowments. We have this marvellous phrase called &quot;labour market luck.&quot; Well, some people are not well endowed and others have bad luck, and then what? What are we going to do?</p>
<p>Once again, the idea that I advance in the book is that when the broad bulk of the society's population has this sense of forward progress in their material living standard, then people are also prepared to be tolerant in each of these ways.</p>
<p>And then finally, the fourth one that I'll mention is democracy, by which I mean creation of new democratic political institutions in societies around the world that are not yet functioning democracies, but even for a society like ours that already is one, the strengthening and nurturing of the democratic institutions that we already have.</p>
<p>Now, in each of these four cases, and in a few others besides, my argument is that sustained economic growth broadly distributed across the population leads to forward progress also in these moral dimensions, to call it that using the 18th century sense of the word.</p>
<p>And conversely, when people have a sense of stagnation &ndash; which frankly I'm afraid they're going to if they don't already now - then not only does the record show that no further forward progress is made, but often there's a period of rigidification, retrenchment, retreat, often with very unfortunate circumstances.</p>
<p><strong>Romesh</strong>: What about the potentially negative consequences of economic growth? I mean, people talk about that perhaps rising incomes don't make us any happier. People talk about damage to the environment. And people talk about rising inequality. I mean, these are all kinds of issues that are in some ways linked to economic growth.<br />
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<strong>Ben</strong>: These are three separate issues that are all quite relevant. So, you're being very insightful here. Let me deal with them in turn.</p>
<p>First, on the question of whether growth makes us happier, the argument that I make on the basis of a model that I've developed in the book is that higher incomes don't make us happier. We're not necessarily any happier today than we were 30 years ago, or our ancestors were 300 years ago.</p>
<p>The argument I make is that the difference is not between one income level and another income level, but whether incomes are rising, or stagnant, or falling. And incidentally, this is a principle that goes right back to Adam Smith.</p>
<p>Smith articulated it very sharply in his writings so that the notion that thinking higher income levels don't make us happier is somehow inconsistent with neo-classical economics as we know it is fine if you don't want to consider Smith as having anything to do with neo-classical economics.</p>
<p>But for most of the economics profession, that likes to trace the roots of our discipline in its modern form to Smith, people ought to be aware that that's a very Smithian idea.<br />
Second, you asked about the environment. This is a complicated issue. I have a lengthy chapter in the book about consequences of growth for the environment.</p>
<p>Crudely put, the issue is what are we supposed to think about a billion plus Chinese, and a billion plus Indians, coming up to a living standard over time that's going to look something like ours in the United States? What about all this?</p>
<p>I divide the environmental issue into three components. One is old-fashioned environmental concerns. That is clean air, clean water. I take a rather optimistic view on this. I'm quite persuaded by the evidence on the so-called environmental Kuznets curve that as countries become richer, they are willing to devote resources to cleaning up the air, and the water, and other elements of the environment.</p>
<p>Second issue is running out of things. Are we going to run out of oil? Are we going to run out of copper, or lead, or titanium, or any of these other key items. And this is exactly what the market is for.</p>
<p>The answer is that if and when we start to run out of oil for real, the price will go up. And when the price goes up, people will drive less or they will drive different types of cars. We saw a little of that when oil was at $140 a few months ago. But I think that will be back. And this is just what the market mechanism is meant to concern itself with.</p>
<p>And then, the third element is one on which I take much more negative, pessimistic view. And that's consequences for climate change, global warming, and the like. And here, the problem, frankly, is not an economic one, but a political one.</p>
<p>A standard principle of political economy is that you want to address externalities - because that's what we're talking about here - at a political level that is as coterminous as possible with the geographic scope of the externality, so that if you're dealing with people dropping refuse and empty coffee cups on the streets of a city, the city can deal with that.<br />
And if you're dealing with utility plants in Michigan and Ohio that are putting stuff in the air that the air currents then blow downwind to New York, and Massachusetts, and Connecticut, you can't do that at a city level. And you can't deal with that even at a state level. You need it, at the least, at some kind of regional approach.</p>
<p>Well, global warming is just that. It's global. It doesn't make any difference whether the carbon goes into the air from Brazil, or China, or Mexico, or the United States. And so, it's necessary to deal with global warming and global climate change at a global level.</p>
<p>But, I think you'd have to be living in a closet not to understand that we have very imperfect global political institutions these days. And so, this is a real problem, but not for an economic reason, for a political reasons.</p>
<p>The final and third issue that you brought up is growth and equality. And here, I look at lots of evidence in the book. There was a time when people were quite persuaded by Simon Kuznets's view that after some point, economic growth inevitably led to narrowing inequality.</p>
<p>I think people are less persuaded of that than they were 20 years ago, and with good reason. The evidence has not been supportive of that part of the Kuznets idea.</p>
<p>But, I think it's not right to say either that economic growth inevitably leads to perpetually increasing equality. We don't want to replace the Kuznets's idea with the upside-down Kuznets's idea. That would be wrong too. So, I think this is a very complicated issue.</p>
<p>There's lots of good thinking being done by lots of good people, many of whose work I talk about in the book. And I think one should not be complacent. But at the same time, one should not despair.</p>
<p>The issue is there are kinds of growth, and kinds of growth. And the issue is what economic policy - which is an important part of the book - has to do with making sure that the growth is, after all, widely distributed. Because, to go back to where I started, the kind of growth that I argue leads to these positive moral outcomes is growth that's broadly distributed.</p>
<p>This is not a consequence of what happens when the GDP accounts change. This is a story that flows from the attitudes and impressions and ideas, and sensibilities of ordinary people who, over time, are smart enough to know whether they are getting ahead or not.</p>
<p>And if the economy is growing at some modest rate, but that growth is all accruing to a few people who were already at the top end of the scale - which frankly is a description of what's been happening in the United States in our decade - then, that does not deliver the kind of moral benefit that I describe in the book.</p>
<p><strong>Romesh</strong>: Final question. We're entering a recession, potentially longer term stagnation, depression even. What do you think the potential consequence is of no, or very low, or even negative economic growth over a period of time might be?<br />
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<strong>Ben</strong>: For all the reasons that we've been talking about, I think the prospects of yet further stagnation in the incomes of ordinary citizens in the developed world as well as the developing world are very serious.</p>
<p>In the United States today, for just the reasons that we were talking about a moment ago, the median family income has barely changed at all over the entire decade.</p>
<p>Last year, the last year for which we have data, 2007, the median family income in the United States was $61,400. In the year 2000, when the decade began, it was $61,100. So, that's an increase of only about a half a percent over an entire seven years, not a half a percent per annum, a half a percent total over seven years.</p>
<p>Now, that's already stagnation for the majority of American families. And as you point out, we're now already in an NBER recession. Many people think it's going to be the largest recession, certainly since the 1981- 82 recession, possibly worse than that, and possibly the worse recession that we will have had since the post-World War II period began.</p>
<p>If that's true, then we are looking at ordinary citizens, the majority of them, going through an entire decade, maybe a decade an a half, of completely stagnant incomes, and living standards.</p>
<p>The historical record shows that this is the circumstance under which not good things happen. There are some dimensions of our political, social, moral lives that are unlikely to go backwards.</p>
<p>So, to cite the obvious thing, nobody is going to take away the vote from women. Nobody is going to repeal the 15th Amendment so that blacks are not able to vote. So, there must be some kind of ratchet effect at work. I leave that to the political scientist. But there certainly are examples, and plenty of them, that I talk about historically in the book in which there's an ebb and flow and progress made can be undone.</p>
<p>So, attitudes towards immigrants come and go in the United States. Religious prejudice wanes but then it comes back in many countries. Many countries, including our own, have gone through periods in which people put a lot of effort and resources into making opportunities available broadly for young people.</p>
<p>But then, there are other periods in which this isn't much emphasized, and very few resources are devoted. Another example is generosity toward the poor. We all have seen within our own lifetimes, periods when providing for the disadvantaged is a major public policy priority, and times when it's not.</p>
<p>And of course, when you refer to the possibility of a Great Depression &ndash; not in the United States interestingly, but in Europe - we have to remind ourselves that sometimes the adverse consequences of economic stagnation and decline can be really catastrophic.</p>
<p>So, I think that on just the grounds that you are pointing to, there was already ground for concern because of the stagnation of income for the majority of our country's families, even before the recession began. And now, the fact of a recession and prospect that it could be either deep, or long, or both, raises real concerns.<br />
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<strong>Romesh</strong>: Ben Friedman. Thank you very much.<br />
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<strong>Ben</strong>: Thank you.</p>