The benefits and costs of economic growth
Most governments aim for high rates of economic growth, believing that this will lead their countries to higher living standards. In pursuing monetary policy, the government is trying to influence aggregate demand by managing costs and the availability of loans. Consider the main arguments that confirm the benefits of economic growth, and the arguments that warn against it.
Most governments aim for high rates of economic growth, believing that this will lead their countries to higher living standards. In addition, governments seek national prestige. To achieve these goals, governments use monetary and fiscal policy instruments. Monetary policy is implemented by changing the amount of money in circulation.
In pursuing monetary policy, the government is trying to influence aggregate demand by controlling the costs and availability of loans. The effectiveness of monetary policy depends on the elasticity of investments and the elasticity of demand for money in relation to the interest rate. The following two rules can be formulated here.
The less elastic the demand for money in relation to the interest rate, all other things being equal, the more effective the monetary policy.
The more elastic the investment relative to the interest rate, all other things being equal, the more effective the monetary policy.
The government has another way to increase the amount of money – through the printing press: it can simply print additional banknotes. In conditions of perfect competition, this only leads to higher prices. In the real economy, due to the fact that buyers and sellers respond to new conditions with a delay, an increase in money in circulation leads not only to a rise in prices, but also to some economic growth.
The fiscal policy is pursued by the government in an effort to influence aggregate demand by changing the volume of public spending and regulating taxes. This policy becomes more flexible if the government does not seek to maintain a balanced budget. It is perfectly acceptable to have a budget surplus if you spend less than the taxes collected, or a budget deficit if you spend more than the taxes collected. In the latter case, additional costs may be covered by loans or by printing new money.
The effectiveness of fiscal policy depends on the elasticity of demand for money in relation to the interest rate and the elasticity of investments in relation to the interest rate.
With the goal of high rates of economic growth, people in power should keep in mind that growth brings both benefits and costs. Both should be properly evaluated so as not to make erroneous decisions. Consider the main arguments that confirm the benefits of economic growth, and the arguments that warn against it.
1. Economic growth leads to higher living standards. Since economic growth means an increase in per capita income, it suggests that more or better quality (or both) of goods and services may be available for consumption by everyone. Of course, it may be that economic growth does not lead to real, but only to potential growth in wealth.
2. Economic growth can limit poverty. The view that economic growth makes it possible to limit poverty is debatable. There is no consensus on what poverty is: whether it is an absolute or relative concept. If this is a relative concept, then poverty under the existing system of income distribution will always exist, regardless of whether there is economic growth or not. For example, if each person’s income has increased by one hundred rubles, the poor will remain in the same relative position in which he was, and will remain poor. It should be noted that the poor make up the part of society that benefits least from economic growth.
3. Economic growth makes it possible to increase the fairness of income distribution without making anyone worse off.
Now let’s call the costs of economic growth. It is they who make some economists doubt the feasibility of continuous economic development.
1. Economic growth involves change, from which many benefit, but some suffer. For example, technological advances can create many new jobs, but at the same time can make existing jobs obsolete and unnecessary. The need to move to find a new job or retrain to learn new professions imposes significant costs on those who have lost their jobs.