Don't Grade the Economy on a Curve

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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GDP grew at an annualized pace of 1.7 percent in the second quarter, triggering a rash of positive headlines . . .

. . . wait, positive headlines? For growth under 2 percent? If that were our annual raise, we'd be grousing in the break room. Why are headline writers happy to see such an anemic rate?

Well, because it beat expecations. But talk about the soft bigotry of low expectations! I mean, there is good news, in that the sequester is apparently resolutely refusing to completely trash the economy, the way many had feared it might. But growth is still 1.7 percent. And growth for the first quarter was revised downward to 1.1 percent, from a prior estimate of 1.8 percent. Overall, there's not too much to be happy about here.

Perhaps, as Neil Irwin suggests, we've all started grading on the curve. Carmen Reinhart and Kenneth Rogoff tell us that growth is usually very slow after financial crises; it takes a lot of time to rebuild damaged balance sheets from households to the government. And, after all, many other countries are doing worse. At least we're growing.

But there's a problem with grading on a curve: It's no good being the top person in the class if no one in the class can do basic math.

We're not ready for a post-growth America. Maybe Alan Jacobs is right and we should get ready. But right now, excessively slow growth will make all sorts of problems worse. It makes our debts -- both government and personal -- harder to pay. Other obligations, notably entitlement programs, also become more difficult. So do social relations. People are conditioned to expect fairly steady economic growth, and everything about our lives and our household budgets is predicated on it.

To take just one example, think about retirement savings. If the economy is going to grow at 3 percent a year, then you can pour a relatively modest 15 percent of your income into savings and probably retire in comfort. But if it is going to grow at 0 percent, then stocks won't deliver much in the way of aggregate returns, so you need to save more like 40 percent of your income, if you want to enjoy a retirement that's now often almost as long as your working life.

People do not realize that that when they put a fairly small percentage of their income into a retirement account, they're banking on a pretty steady growth rate. It just doesn't occur to them, because economic growth has been going on for so long that it feels like a law of nature, not something that's highly contingent.

If those assumptions are upended, all sorts of things about our lives will have to change -- and not for the better. And those changes are bound to make us a little cranky. If growth remains low, we will need civic society and personal relationships more than ever. But it's hard to pull together when you've got 300 million cranky people fighting each other for a slice of a fixed economic pie.

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