Today, Hamilton Place Strategies released a new report that finds if policymakers want to maximize long-term growth, injecting more risk and reward into the economy may be needed, even if it comes with economic downturns. The economic trauma of the Great Recession sparked a good deal of “never again” policy-making in Washington. The result has been slow, but steady, growth.

This dynamic raises the obvious question: If we want to maximize economic growth, how long does slow-and-steady growth need to last to make it a better policy choice than boom-and-bust?

This analysis shows that if policymakers are trying to maximize long-term growth, they should aim to return to the average growth rate of previous expansions – even if it comes with another Great Recession. Key findings include:

  • At current growth rates, even a global record-length expansion would fall short of more booms-and-busts if the boom is equal to the average of the past five expansions.
  • If we believe those growth rates aren’t possible due to demographic and productivity changes, and our only option is to return to the growth rates of 2000’s with policies that cause another deep recession, then the current slow-and-steady growth model will likely maximize GDP.

There are other implications to the business cycle ups-and-downs that we need to think about from a policy perspective. A boom period can enable labor mobility, career changes and risk-taking that are helpful at an individual level. A big crash can result in older workers permanently exiting the workforce, cutting their careers short, while slow growth can stunt job prospects and wages for younger workers before they even begin theirs.

The trade-offs of growth and timing affect GDP, but more importantly, they affect people. The point of public policy is not to create the safest economy possible, even if growth is slow: the point is to create an economy that allows people to pursue their potential and create a better life for themselves and their family. Sometimes that means a safer economy, and sometimes that means accepting the risks that come with a faster growing economy.

The Macro Risk-Reward Tradeoff: How To Balance Stability And Growth by Hamilton Place Strategies on Scribd