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In Search of Real Growth

July 17, 2012 by Amity Shlaes

“It would seem that not all economic ‘growth’ adds value to the economy.” So writes Myron Scholes in his insightful contribution to our new book, “The 4% Solution.” Scholes distinguishes between artificial growth that boosts numbers without adding what he calls “fundamental value” to the economy. Examples of artificial growth include building a road just in the name of creating temporary jobs, or a rise in housing prices that has nothing to do with home improvement or even demand but rather is the result of cheap credit courtesy of the Fed. The better kind of growth, Scholes says, is that growth that actually increases our net wealth, “and is usually driven by progress in human or physical capital or advances in technology.” Agreed. Scholes’s analysis applies to China, which, he accurately points out, features growth that probably isn’t as strong as official numbers suggests. But the U.S. too needs to reconsider our metrics. My own view is that our job these days, even at a project called “4% Growth,” is to doubt the growth numbers, and to begin to look for newer measures of growth that capture “fundamental value” more precisely than does GDP. Scholes notes that “shock creates change. We had a shock recently. Let’s not let a good shock go to waste.” Here the professor is speaking generally about all kinds of opportunities. But one can also hope that the shock of recent experience also inspires us to find more accurate ways to quantify growth.

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