After the shock of last spring, growth figures should be very strong in the third quarter. They will be published Thursday and Friday for many developed countries.
This is an opportunity to come back to the issue of growth. That which allows the improvement of the standard of living and which conditions the dynamics of employment and the sustainability of social systems. In the short term, economic policy is essential, in the medium and long term, it is more collective choices, trade-offs that must be validated collectively.
On Thursday 29 and Friday 30 October, the first estimates of the growth figure for the third quarter of 2020 in developed countries will be published. After the ruptures observed last spring during the lockdown, a significant rebound is expected in all economies in order to reduce the extent of the second quarter negative shock but also to regain a satisfactory pace of growth.
But why growth? why want to find growth at all costs? Is this reasonable?
On this question there are two issues to distinguish. The first is that of the short term: why is it necessary to find a sufficient level of growth year after year. The second is associated with a longer scale as it is related to the standard of living profile over time. The questions asked are not of the same type.
Growth in the short term
In the short term, the dynamics of employment and incomes are conditioned by that of current growth. The target for the economic policy and policymaker is therefore to maximize growth to promote employment and income.
On the graph, we see the simple relationship between GDP growth (which measures activity) and employment growth: the higher the GDP growth, the greater the employment. The objective of economic policy may be to enrich growth with jobs, so that for a given GDP growth rate, more jobs are created. On this point in France, we see a change from 1993.
The horizon here is that of the economic situation and the electoral cycle.
After a negative shock on activity, a growth acceleration will also allow an improvement in tax and social revenues, facilitating the rebalancing of public finances. Social dynamics are very dependent on the growth of activity. The ability to finance social systems depends on the possibility of redistributing part of this growth in economic activity. It also means that, because of the constraints, it is difficult to deny the importance of growth unless you take the risk of destabilizing the whole of society and social systems.
This is why it is necessary to implement all possible measures to regain growth after the health shock. This reduces the risk of weakening the entire social system.
Growth, in a more classic sense, is the ability to increase the standard of living of every citizen. The correct measure then is GDP per job, which is called productivity. This measure of the standard of living has multiplied by 5 since 1950, in France, until just before the health crisis.
We see, through its long growth, that there were several periods. Catching up after the war, the break-up in the mid-1970s and very little progress since the financial crisis. Growth is what will make it possible to improve everyone’s conditions and to implement redistribution systems so that everyone can benefit from the comfort provided by the rise in living standards.
A Few Remarks
Growth in productivity and standard of living is the combination of many factors: competition, innovations, capital accumulation, human capital, demographics and institutions. In a framework of strong international competition, those who are in retreat runs the risk of being dominated by a competitor and ultimately weakening the country’s own ability to maintain its standard of living. This is why the issue of growth is complex but that of decrease is even more so because the standard of living is permanently affected.
I will come back tomorrow and the day after tomorrow to the collective choices to be made but also to the externalities caused by this growth dynamic. Pollution, climate, overexploitation of the globe are all factors to be faced with growth.
This post is available as an infographic that can be downloaded