The Ever Increasing GDP

The Gross Domestic Product (GDP) is one of the main issues highlighted by the media. The media is incessantly bombarding us with information pertaining to GDP. It is considered to be the “be all end all” metric. News about increasing GDP is taken with great enthusiasm whereas news about decreasing GDP creates an atmosphere of pessimism.

Needless to say, that any matter which is so important to the economy will get politicized. Therefore GDP also has the power to make or break governments. This is why governments all over the world always promise an increasing GDP during their regime.

When you add up all the economic noise and the political promises we get a scenario wherein we are expecting the GDP to grow endlessly until perpetuity! When we consider the fact that growth in GDP is caused by using up the natural resources, and that those resources are finite, the absurdity of this expectation become clear.

So, this leaves us with the all important question, “Is it possible for the GDP to continue rising forever?” This article is meant to discuss this issue is greater detail.

Unrealistic Expectations of Perpetual Growth:

There is a famous saying which says that “A person who expects perpetual growth is a either a mad man or an economist” This statement finds its most appropriate use while describing the GDP phenomenon.

Recession is considered a negative state for the economy. The mere mention of the “r” word is enough to strike fear into the hearts of workers all over the world. Recession is equated with job loss and poverty all over the world and hence attracts immense negative sentiment. A close cousin of the “r” word is the “s” word. Since slowdown signals a forthcoming recession, mention of the word slowdown also attracts a very negative sentiment and adverse reactions.

Now, the text book definition of slowdown is reduction in the rate of GDP growth. If the GDP were growing at 10% last year and it grew at 9% this year, we call it a slowdown! Since the word slowdown has such a negative connotation, all measures are taken to avoid using it.

Therefore, our society is implicitly harboring the expectations of perpetual growth at an ever increasing rate!

Perpetual Growth vs. Finite Resources:

The real problem of perpetual growth comes to the forefront when it is juxtaposed against the way nature really is. GDP growth is to a large measure dependant on the natural resources. The land we have, the amount of fossil fuels we have, the amount of coal, mineral ore etc that we have on hand. True that technology can play quite a major role in harnessing these resources better but our society is still by and large completely dependent on these resources.

These resources are governed by natural laws. The process by which these resources are created takes years and sometimes even centuries. We therefore are dealing with a finite amount of natural resources on our hands.

The expectation of perpetual growth at an ever increasing rate is therefore terribly off base and has no logical backing if we confront the facts!

Penalty for Falling Growth:

The real problem with this wrong expectation is the political impact that they have. The cycle generally begins with media painting pictures of gloomy days coming ahead. Soon the mania catches on and negative sentiment becomes the norm. Many times this has led to governments being voted out of office.

Corporations, governments and individuals therefore have a perceived incentive to delay the recession as much as possible. Pay attention to the words perceived incentive. There is no incentive in reality, but the perception makes it real.

Loopholes to Delay Falling Growth:

Governments all over the world have therefore resorted to many gimmicks to ensure that they can delay the onset of a recession as much as possible. These incentives will be discussed in detail later in this module.

For the moment it is important to realize that GDP measures spending and if governments can find a way to keep on spending, they can at least temporarily create a world in which the GDP will rise indefinitely at an ever increasing rate.

The repercussions of doing so will be grave in the future. However, at least momentarily the perceived objectives can be achieved and recession can be delayed.

End Result of the idea that GDP Must Always Increase:

The idea that GDP must always rise has disastrous consequences in the long term. Some of these consequences have been listed below:

  1. Ever increasing fiscal deficit and the debt spiral

  2. Massive and wasteful government spending

  3. Massive corruption and loot of the taxpayers money while conducting the government spending

  4. Corporate mal-investments

  5. Ever increasing household debt burden

Each of these consequences will be discussed in more detail as we progress through this module. For the moment, it is important to understand that the idea of an ever rising GDP is a fundamentally flawed fallacy.

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