Is Growth Good?

I spent a year in New Zealand in the 1980s, at a time when that country's economy was still struggling to make the transition from essentially exporting agricultural commodities into something more dynamic. A popular joke was to describe the government in those days as having unwittingly adopted the economic policy of the fringe "Values Party" (a predecessor to the NZ Green Party). The Values Party called for, among other things, zero economic growth.

That was a good joke but it points to an underlying problem: Economic growth often has terrible long-term environmental consequences. More economic activity means more demand for fuel and thus more pollution, global warming, etc. Conversely, economic stagnation can be beneficial. The recent drop in oil prices reflects the market's assessment that a global recession will mean less in the way of energy consumption. (Lower demand means lower prices.)

To be sure, the relation between growth and the environment is complex. The most technologically advanced countries generate and use energy much more efficiently than subsistence farmers (who often burn forests) or newly industrializing countries (which tend to burn coal).

The policy upshot of this analysis seems blindingly obvious. On the economic side, Congress should pass a stimulus package; on the environmental side, the stimulus should direct a substantial chunk of cash to green technology. To an important extent, both the Democratic leadership and the Obama campaign get this. (Contrast the prior stimulus package?)

However, if Social Security is the third rail of American politics, then gas prices must be the fourth. (Yes, I know that's a meaningless metaphor; there are only 3 rails; but you get the point). Falling gasoline prices should provide a perfect opportunity for a Pigovian tax to keep prices at the pump above $4/gallon, coupled with tax credits to individuals and businesses to offset the net pocketbook impact of any such tax. But say that on the stump and you'll instantly be met by catcalls and the sensible-sounding-but-ultimately-empty rejoinder that you don't raise taxes during a recession.

Posted by Mike Dorf