Is 5% Growth Just A Matter of Business Leadership or Sustainability?

In the video clip above, CNBC Contributor Jack Welch, toward the end of the clip, takes on Prof. Kenneth Rogoff over the question of how rapidly the US economy can grow and the sources of that growth. Rogoff recently wrote two pieces for Project Syndicate titled Rethinking the Growth Imperative and Is Modern Capitalism Sustainable? You are probably familiar with Ken Rogoff since he wrote, with Carmen Reinhart, the prescient book This Time is Different: Eight Centuries of Financial Folly. You are also probably familiar with Jack Welch because he was chairman and CEO of General Electric. You might also be familiar with the interviewer, Andrew Ross Sorkin, who wrote the book Too Big To Fail. A face off between Welch and Rogoff would be pretty interesting TV on CNBC. Until that happens, we'll have to speculate on how the argument might go from their comments and writings.

Let's start out with Jack Welch who makes a pretty good case in the video above for the conventional wisdom surrounding economic growth. He is basically saying that he and other elites in his position want growth regardless of what some Harvard professor that writes academic articles might think. Obviously, growth has been good for Jack Welch and for CEOs like him. Does he show any concern for sustainability? No. Does he show any understanding of growth and income inequality? Not really, even though he says that he doesn't want to think about other social classes and gives a "rising tide" argument (the tide must have gone out during the last 20 years). Does he mention financial bubbles? No.

Sorkin makes the point that businesses have made lots of money during periods of both high regulation (pre-Reagan embedded Liberalism) and the neoliberal period after Reagan. Jack says, basically, so what! If we focused on a 5% growth target, business could make even more money.

Now for Prof. Rogoff's article that Jack doesn't care about and probably hasn't read. Rogoff does some simple math with growth rates that is worth quoting here since it will set up my next point.

There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations. Consider a simple thought experiment. Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1% per year over the next couple of centuries. This is roughly the trend per capita growth rate in the advanced world in recent years. With annual income growth of 1%, a generation born 70 years from now will enjoy roughly double today’s average income. Over two centuries, income will grow eight-fold.

Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2% annually. In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century.

Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold. Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth? Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more?

Forecasts for US growth in 2012 (here) predict growth in the 1-2% range, not in the 5-8% that Jack Welch would like to see. The forecasts also make pretty clear that growth in the 2004-2007 period, while more like what Jack Welch would want, was really the result of a financial bubble. Prof. Rogoff's work on "Financial Folly" has sensitized him to the problem; Jack Welchs' time at GE hasn't. However, as Mr. Welch makes clear, he's going to win and the pressure for financial manipulations to create the next bubble will be intense and will be successful.

In the future, I will be doing GDP growth forecasts for as many countries in the world system as time permits (here). My guess would be that sustainable annualized growth of 1% would be far more the norm that the 5% growth target that dominated the thinking in the growth-and-collapse countries.