Growth is essential for social harmony

There are few areas of robust growth around the world, with the IMF repeatedly reducing its growth forecasts in recent quarters. This period of slow growth is particularly dangerous because both industrial countries and emerging markets need high growth to quell rising domestic political tensions. Policies that attempt to divert growth from others rather than create new growth are more likely under these circumstances. Even as we create conditions for sustainable growth, we need new rules of the game, enforced impartially by multilateral organisations, to ensure countries adhere to international responsibilities.
THE CONVENTIONAL DIAGNOSIS AND REMEDY: Why is the world finding it so hard to restore pre-Great Recession growth rates? The obvious answer is that the financial boom preceding the Great Recession left industrial countries with an overhang of debt, and debt, whether on governments, households, or banks, is holding back growth. While the remedy may be to write down debt so as to revive demand from the indebted, it is debatable whether additional debt-fuelled demand is sustainable in the long run. At any rate, large-scale debt write-offs (or fiscal transfers to the heavily indebted) seem politically difficult even if they are economically warranted.
How does one offset weak household and government demand if debt write-downs are off the table? Ideally, the response would be to incentivise investment and job creation through low interest rates and tax incentives. But if final demand from consumers is likely to be very weak for a considerable period of time because of debt overhang, the real return on new investment may collapse. The Wicksellian neutral real rate - loosely speaking the interest rate required to bring the economy back to full employment with stable inflation -- may even be strongly negative. This typically has been taken as grounds for aggressive monetary policy. Because policy rates cannot be reduced significantly below zero (though a number of European countries are testing these limits), equilibrium long-term interest rates may stay higher than levels necessary to incentivise investment. Hence, central banks have embarked on unconventional monetary policy (UMP), which would directly lower long rates.
Another way to stimulate demand is for governments that still have the ability to borrow to increase spending. Since this will increase already-high levels of government debt, proponents suggest investing in infrastructure, which may have high returns today when construction costs and interest rates are low. However, high-return infrastructure investment is harder to identify and implement in developed countries where most obvious investments have already been made - political influence is as likely to create bridges to nowhere or unviable high-speed train networks as needed infrastructure. Also, while everyone can see the need for repair and renovation of existing infrastructure, this requires far more decentralised spending than mega projects, and may be harder to initiate and finance from the centre.
Put differently, high-return infrastructure investment is a good idea but may be hard to implement on a large scale for most advanced country governments. To the extent that such debt-fuelled spending creates a self-fulfilling virtuous cycle of confidence and activity, it can be a bridge to sustainable growth. But to the extent that it misallocates capital (because there are insufficient "shovel-ready" projects, so much of the emergency spending is diverted to rent-seeking pork), it can worsen public anxieties about the future, reducing corporate investment and increasing household savings.
All this highlights another concern. Even if stimulus works in raising growth temporarily -- and the above discussion suggests it may not - this growth has to be a bridge to sustained aggregate demand. But what if it isn't?
THE PRODUCTIVITY PUZZLE, SECULAR STAGNATION, AND OTHER CONCERNS: The arguments I have just enunciated for action apply to an economy where nothing fundamentally is wrong except perhaps excessive debt - what is needed is a cyclical return of growth to potential growth. Yet a number of economists such as Tyler Cowen, Robert Gordon, and Larry Summers have raised the possibility that potential growth in industrial countries had fallen even before the Great Recession. Perhaps then the growth that we are trying to return to is unachievable without serious distortions.
The term "secular stagnation" used by Larry Summers to describe the current persistent economic malaise, echoing Alvin Hansen's speech in 1938 in the midst of the Great Depression, has caught on. But different economists focus on different aspects and causes of the stagnation. Summers emphasises the inadequacy of aggregate demand, and the fact that the zero lower bound as well as the potential for financial instability prevents monetary policy from being more active. Among the reasons for weak aggregate demand include ageing populations that want to consume less and the increasing income share of the very rich, whose marginal propensity to consume is small.
Tyler Cowen and Robert Gordon, on the other hand, emphasise a weak supply potential. They argue that the post-World War II years were an aberration because growth was helped in industrial countries by reconstruction, the spread of technologies such as electricity, telephones, and automobiles, rising educational attainment, higher labour participation rates as women entered the work force, a restoration of global trade, and increasing investments of capital.  However, post-war total factor productivity growth - the part of growth stemming from new ideas and methods of production -was lower than its 1920-50 high. More recently, not only has productivity growth fallen further (with a temporary positive uptick towards the end of the 1990s because of the IT revolution), but growth has been held back by the headwinds of plateauing education levels and labour participation rates, as well as a shrinking labour force in some countries because of population ageing.
It is obvious from these lists of factors that it is hard to disentangle the effects of weak aggregate demand from slow growth in potential supply. Population ageing contributes to both. Indeed, one may cause the other. For example, anticipating a slowdown in growth potential, households, worried about impending retirement in the face of undeliverable pension and healthcare entitlements, may try and build savings. This will depress demand further. Conversely, anticipated weak demand may reduce incentives for corporations to invest in physical and human capital, causing supply potential to grow more slowly.
Structural reforms, typically ones that increase competition, foster innovation, and drive institutional change, are the way to raise potential growth. But these immediately hurt protected constituencies that have become accustomed to the rents they get from the status quo. Moreover, the gains to constituencies that are benefited are typically later and uncertain while the pain is immediate and its incidence clear. No wonder Jean-Claude Juncker, then Luxembourg's prime minister, said at the height of the Euro crisis, "We all know what to do, we just don't know how to get re-elected after we've done it!"
THE GROWTH IMPERATIVE: If indeed fundamentals are such that the industrial world has, and will, grow slowly for a while before new technologies and new markets come to the rescue, would it be politically easy to settle for slower growth? After all, per capita income is high in industrial countries, and a few years of slow growth would not be devastating at the aggregate level. Why is there so much of a political need for growth?
One reason is the need to fulfil government commitments. As sociologist Wolfgang Streeck writes, in the strong growth years of the 1960s when visions of a "Great Society" seemed attainable, industrial economies made enormous promises of social security to the wider public. Promises have been augmented since then in some countries by politically convenient (because hidden from budgets) but fiscally unsound increases in pension and old age healthcare commitments to public sector workers. And most recently, the government debt taken on before and after the Great Recession has added to government commitments, even while the Baby Boomer generation has started retiring in large numbers. Without the immediate promise of growth, all these commitments could soon be seen as unsustainable.
Another reason to desire growth is that economies tend to favour insiders - those who have jobs for example. The brunt of the joblessness caused by slow growth is borne by new entrants to the labour market. Not only are they unemployed in larger numbers, but the lifetime earnings of cohorts that enter the labour force in difficult times is lower. Growth is necessary for inter-generational equity, especially because these are the generations that will be working to pay off commitments to older generations. Given these are also the cohorts that can take to the streets, growth is essential for social harmony.
Not only are the benefits of growth unequally distributed across generations, they are also very unequally distributed within generation. Because of changes in technology and the expansion of global competition, routine repetitive jobs, whether done by the skilled or the unskilled, have diminished greatly in industrial countries. Many of these jobs, ranging from assembly line worker to legal aides or insurance clerks, have either been automated or outsourced. The desirable high-paying jobs are non-routine skilled ones such as that of a consultant or an app designer, but they require skills.  The middle class recognises that they need quality higher education and training to not slip into competing with the poor for low-skilled non-routine jobs such as security guard or gardener. But the poor quality early education they have received, as well as the prohibitive cost of quality higher education, puts many better livelihoods out of reach. With every percentage point of growth creating fewer "good" jobs for the unskilled or moderately skilled, more growth is needed to keep them happily employed. Equally, the rapid deterioration in skills for the unemployed is an additional reason to push for growth.
A presentation by Dr. Raghuram Rajan, Governor, Reserve Bank of India, at a  Public Lecture on 'Going bust for growth: Policies after the global financial crisis' held on June 11, 2015 in Dhaka and organised by the Bangladesh Bank. Dr. Rajan thanks Dr. Prachi Mishra of the Reserve Bank for very useful
comments and research support.