Learning to Love Stagnation

Growth Isn’t Everything—Just Ask Japan

The price is right: shopping before Black Friday in Ohio, November 2014. BLOOMBERG VIA GETTY IMAGES / DANIEL ACKER

From Wall Street to K Street to Main Street, pessimism about the global economy has become commonplace. The world economy may have finally emerged from the financial crisis of 2008, but according to conventional wisdom, it remains fragile and unsteady, just one disruption away from yet another perilous downturn.

In October, the International Monetary Fund warned that a return to robust global growth remained “elusive.” Others are gloomier. Former U.S. Treasury Secretary Larry Summers has said that the world faces looming “secular stagnation”—a persistent period of low growth, low inflation, and low interest rates—as the developed countries remain caught in a deflationary trap, China struggles with an uncertain transition to a consumer economy, and the developing world reels from the collapse of commodity prices and the contraction of global credit. A rising chorus of voices is also warning of the dangers of income inequality, and no wonder: middle-class wages in the United States have been stagnant for more than three decades, while the wealth of the top one percent continues to rise.

GDP growth is no longer an especially useful way of measuring the health of modern economies.

Familiar as it is, however, this story is also fundamentally flawed. It depends on measurements of economic growth, such as GDP, that are ill suited for the modern digital age, and it ignores some crucial good news: the decrease in the cost of living across much of the world. Although global economic and political institutions tend to focus on maximizing GDP growth, a future in which economic growth remains low would not be nearly as bad as most people assume—provided that the cost of living also continues 
to fall.

This is more than just a problem of perspective. The view that growth is stagnating leads to a crisis mentality that makes policymakers adopt measures designed to boost growth: stimulus spending, tax cuts, investments in higher education. Some of these may be beneficial, but they can also crowd out other actions

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