Economic Growth Perception: Why Prosperity in Modern Times Lacks the Feels of the 1980s and 1990s
The comparison between economic growth in different economic scales can often lead to a misunderstanding of the real economic condition and prosperity of a nation. A common argument often raised is that 4% growth in a 10 trillion economy should be equivalent to 2% growth in a 20 trillion economy, and yet modern times do not feel as prosperous as the 1980s and 1990s. This article seeks to explore the mechanisms behind the perception of prosperity and the reality of economic growth.
Understanding Economic Growth
Economic growth is measured by changes in the production of goods and services in an economy. It can be expressed in terms of percentage growth or the absolute value of GDP (Gross Domestic Product) over a specific period. However, the perceived prosperity is not solely determined by the absolute or relative growth in GDP. Several factors play a crucial role in how people perceive their economic wellbeing.
Real vs. Nominal Values of Growth
The confusion often arises from the difference between real and nominal economic growth. Nominal growth refers to the raw percentage change in GDP, while real growth adjusts for inflation. In the context of the comparison cited, simply comparing the percentage growth without considering inflation can lead to a misinterpretation of the true progress. For instance, a 4% nominal growth in a 10 trillion economy could still mean a decline in real terms if inflation outpaces the growth, whereas a 2% nominal growth in a 20 trillion economy might still reflect an increase in real wealth if inflation is lower.
The Role of Inflation and Wealth Distribution
Inflation significantly affects the purchasing power of money. When the inflation rate is higher than the rate of nominal economic growth, people feel economically insecure despite the positive growth in nominal GDP. The 1980s and 1990s saw relatively lower inflation rates, allowing people to benefit more directly from nominal growth, which contributed to a sense of prosperity.
Furthermore, the distribution of these economic gains plays a vital role. In the modern era, a large portion of new economic gains is captured by the wealthiest individuals, often referred to as the "top 1%." This concentration exacerbates wealth inequality, leading to a sense that, despite GDP growth, many people do not benefit equally. The economic benefits are disproportionately distributed, leaving the majority with only "scraps" as mentioned earlier.
Financial Intermediation and Economic Growth
Another critical factor is the role of financial intermediation, where the growth is capitalized by those who have borrowed money. When a government or business borrows money for development projects, the cost is eventually passed on as interest payments, reducing the overall benefit to society. This aspect can further dilute the direct impact of economic growth on the average citizen's prosperity.
Conclusion
Perceived prosperity is much more than just economic growth rates. It involves understanding the real value of economic gains, the role of inflation, and the equitable distribution of these gains. While nominal GDP can show positive growth, it is crucial to consider the context of inflation and the unequal distribution of wealth. Ensuring that the benefits of growth are more widely shared can help restore a sense of genuine prosperity similar to that experienced in the 1980s and 1990s.
By addressing the issues of inflation, wealth inequality, and more equitable financial distribution, policymakers can contribute to a more prosperous and fair society. As we move forward, it is imperative to foster economic policies that ensure growth benefits the majority rather than a select few.