Economics: The End of Growth

In previous posts I have made the case that the world would be quite different today if different economic policies focused on sustainable development had been followed by industrialized countries over the past 40 years, rather than policies fixated on economic growth.  Economies would be smaller, people would not be as materially well off, health care and education systems would not be as expansive.  Innovation would have continued, but would not have been driven so hard.  People would probably have been as happy with their lot as they were in the 1950s.  The environment would be a whole lot better, and the threat of global warming would not be hanging over us.  Prospects for our grandchildren would not be less than they were for us when we were young.

 However, that is not the world we have today.  We have huge economies in the Western world and still growing.  China and India along with other parts of Asia and Brazil are expanding economically at incredible pace.  Mountains of debt have grown much faster than the economies have expanded, so that more and more of economic activity goes into the repayment of debt rather than the enjoyment of life.  Natural capital is rapidly being used up, environmental limits are being felt in myriad ways, and the effects of climate change are increasing year by year.  Prospects do not look good for our grandchildren.

 Anyone who looks at the big picture knows that the trajectory of the recent past (the last 40 years) cannot continue into even the near term future (the next 30 years).  The scale of human activity will not fit within the carrying capacity of the planet.  How will things change?  No one knows for sure.  There are too many unpredictable variables and others that are completely unknown at this time.  In the face of this grim picture, the argument of this blog is that we will do better by our grandchildren if we intentionally aim for sustainable development and improving the quality of life, rather than pursuing more and more quantitative expansion, which is going to end anyway, because it is non-sustainable.

However, there is another way to look at it.

 An Alternative View

 A good argument can be made that quantitative expansion (that is, the production of more and more stuff) will slow down very soon—in fact, is already slowing down—for another very good reason: it is not affordable. In other words, economic factors will work against more economic expansion.  This is not so much a case of good economic management intervening to save the day, but rather the disappearance of an essential factor that made all of the economic expansion possible in the first place.  What is that essential factor?  Cheap energy.

You will remember I began this blog by writing about energy.  I argued that energy is different from every other commodity in our lives, because it is the basis of everything we do and can do.  In the lifetimes of all of us who are grandparents today the industrialized world expanded prodigiously on the back of cheap energy derived from fossil fuels—particularly oil.  The oil was there for the taking, and we took it.   We deliberately kept the price low by excluding the environmental costs of extraction, transportation and burning of the fuel.  Like a delirious lottery winner, we treated this bonanza as income to be spent rather than as precious non-renewable natural capital to be preserved.  We built everything we have on that model, and we are still doing it.  Except that the energy from oil is no longer cheap (think $20 a barrel versus $100 a barrel), and we haven’t invested in anything that can come close to replacing it

So this argument is quite simple.  Cheap oil is gone, therefore the economic growth it made possible will go with it.  In some places growth will slow down; in others it will stop; and in others it will go into reverse.

 Will this be a good thing? In some ways, yes.  The environment will certainly be better off, and the rate of global warming may slow down.  But many jobs that were created by economic growth will disappear.  Unemployment rates will go up.  Mortgages that depend for their payment on employment will go into default.  Governments that depend on economic growth to service their huge debts will be between a rock and a hard place.  Life for many people, at least in the short term could be tough. 

 We need to think about this and decide how best to handle it.  How to do so is the subject of this post.

 An Articulate Spokesman

 One person who has written most authoritatively about the relationship between cheap energy from oil and economic growth is Canadian Jeff Rubin, a former “chief economist of CIBC World Markets, a major Canadian investment bank with clients and operations around the world.”  The foregoing biographical quote is taken from Rubin’s latest book, The End of Growth: But Is That All Bad? (2012).  He wrote an earlier book on much the same topic, Why Your World Is about to Get a Whole Lot Smaller (2009).  Both books made it to the National Bestseller List in Canada, a tribute to Rubin’s easy going conversational style in writing about complex economic issues.

 In his biographical comments in The End of Growth Rubin describes how writing his first book ended his career of twenty years at CIBC.  An investment bank doesn’t like one of its employees, even if he is the chief economist, stirring up muddy waters about the collapse of globalization and the end of growth.  Presumably Rubin now makes his living as a bestselling author with many engagements on the speakers’ circuit.  Good for him.

 What, exactly, is Rubin saying?  Let me list some quotes from The End of Growth:

    ·    “Growth is the Holy Grail of modern societies.”

    ·    “For the economics profession, the notion of a world without growth is pure science fiction.”

    ·   “However uncertain the future appears, we know one thing for sure: a world of energy scarcity will be dramatically different from the world we have known.”

    ·   “Just as people require food, economies require energy.  The relationship is straightforward: economic growth is a function of energy consumption, full stop.”

    ·   “In the end, an economy can’t grow if it can no longer afford to burn the fuel it runs on.”

    ·   “The reality is that the price of oil has lowered the economy’s speed limit.”

    ·   “The cheap energy that allowed for economic growth in the past is gone, and it’s not coming back.”

    ·   “Prices are what matter.”

    ·   “In the here and now, an economic success in the face of triple-digit energy prices will hinge on burning fewer hydrocarbons.  That means we all have to learn how to use less energy.”

    ·   “Put on a sweater instead of cranking up the thermostat.”

    ·   “We can still shape the future we want, but only if we’re willing to relinquish the past we’ve known.”

    ·   “As the boundaries of a finite world continue to close in on us, our challenge is to learn that making do with less is better than always wanting more.”

 That list of quotes from The End of Growth outlines the main stream of Rubin’s argument: we are coming to the end of economic growth, not because we necessarily want to, but because the high price of energy will make it impossible for us to continue in the profligate ways of the past.  I hope the list of quotes might encourage you to buy his book.  It is certainly worth reading in full.  In it he covers a lot of other related territory, some of which I will get to in a moment.  But first I want to share a few quotes from his previous book (also worth reading in full), Why Your World Is about to Get a Whole Lot Smaller.

    ·   “Expensive oil may mean the end of life as we know it, but maybe that life wasn’t particularly great to start with.  Smog-congested cities, global warming, oil slicks and other forms of environmental degradation are all part of the legacy of cheap oil.”

    ·   “We aren’t going to replace our most important fuel with an energy source [renewables] that couldn’t even power our hairdryers if they were all going at once.”

    ·   “Instead of smog-choked cities ringed with suburbs and criss-crossed with highways, we have an excellent shot at finding ourselves inhabiting smaller-scaled, walkable neighborhoods and small towns built (or rebuilt) to suit the small new world.”

    ·   “What emerges is an opportunity to refurbish a world we’ve all but forgotten about.”

    ·   “Robust local businesses, backyard gardens, community-run schools, and a social safety net run by peers and neighbors—it could happen.”

    ·   “And we just might find that the new, smaller world around the corner is a far better place to live than the big oily one we are about to leave behind.”

 The impression one gets from reading a list of quotes like this from Jeff Rubin delivered in his catchy conversational style is that maybe he’s on to something, and we should pay attention.  However, the devil, as they say, is in the details, and that’s where we should go next.

 A Zero-Sum World

 One of the defining characteristics of the still young 21st century has been huge competition for resources and growth between the developed countries of the West and the developing economies of China and India.  Nowhere is this competition greater than in the demand for fuel—because economies can’t grow without energy.  However, this huge demand for fuel is increasing faster than global supply.  Jeff Rubin puts it this way: “China’s appetite for more oil will come at the expense of someone else’s oil diet.”  This is what economists call a zero-sum situation. 

 “Zero-sum” describes conditions where what is gained by one party comes at the expense of another party.  We are looking at a future of fierce competition between industrialized countries for oil at a price that will enable them to keep their economies running.

 That leads to the next reality.  “If oil is the fuel that drives economic growth, and oil consumption is a zero-sum game, then so too is economic growth.”  This is a very recent phenomenon.  Even a decade ago China’s economy could expand at twice the rate of the United States while the economies of the US and other countries could also keep on growing, because the supplies of affordable energy were there to allow it.  Now, not so much.  What this means is that “growth in certain regions of the global economy will dictate that other economies no longer grow—or even worse,” according to Rubin, “shrink.”

 For a variety of reasons we can’t be sure how much longer China and India can keep on growing as fast as they have in the recent past.  But whatever rate of economic expansion they are able to sustain it will come at the expense of growth elsewhere in the world.  That is what zero-sum means.

 For the developed countries of the US, Canada, Australia and Western Europe that means less growth, and perhaps, as Rubin puts it, “a hard turn back to the past.”  For the poor countries of sub-Saharan Africa and South Asia, which desperately do need more economic growth, “it’s debatable how much oil, fertilizer or grain will be left for [them] after global giants such as China, India and Brazil take their share.” 

 What all this means is that simply relying on high oil prices to put the brakes on economic growth could result at best in very rough justice for the poor of the world, and at worst in violent conflict between those who see their economic future threatened by others.  Without enlightened thinking about the merits of cooperation over competition, a zero-sum world might not be a very nice place for our grandchildren to live in.

 And there are other reasons to be concerned.

 The Population Bomb

 Jeff Rubin wades into the murky waters of world population growth in the face of planetary resources approaching exhaustion.  “All bets are off,” he warns, as he recounts wagers and debates going back to the 1960s about whether population growth would cause civilization as we know it to collapse.  This controversial issue actually goes back further than that into the 19th century when the Reverend Thomas Malthus “warned that population growth was an inexorable force that would exhaust the land’s capacity to provide sustenance.  He foresaw starvation and pestilence arising as an inevitable result of overpopulation, bringing about a dying off that would cull the number of people in the world.”  It didn’t happen in the 19th century, but when population was really going gangbusters in the second half of the 20th century economist Paul Ehrlich picked up the theme again in his book called The Population Bomb.

However, the grim Malthusian predictions of Ehrlich were challenged by another economist, Julian Simon, who argued that innovation would continue to solve the problem posed by population growth.  Human ingenuity would always be one step ahead of human reproductivity.  Up to the end of the 20th century when population soared past 6 billion Simon was proved right.  Despite some truly tragic episodes of famine in social and weather-stressed parts of the world, people on the whole “are living longer and healthier lives, overall child mortality rates are down and average life expectancy is up.”

 But that’s not the whole story.  Rubin cites the work of evolutionary biologist E.O. Wilson who pointed out that if you add total biomass of human bodies on the planet together, it is not only greater than any other large animal that has ever existed, but it is also causing the biomass of other animals to change, as we breed the ones we need to eat and drive the numbers of other species toward extinction.  We are reshaping the planet in other ways as well as we increase the cropland of the plants we need to eat and cut down forests to do it, and release massive amounts of nitrogen as fertilizer into the global ecosystem that washes into waterways and creates coastal dead zones around the world.  So huge is the human impact on the planet that some geologists are saying that we have entered a new geologic age called the Anthropocene, or “age of man.”

 What does the Anthropocene epoch hold in store for our grandchildren and their grandchildren after them?  As Rubin says, “all bets are off,” but we can be sure of one thing: that even as the world today cannot support 7 billion people at the consumption levels of the developed world, so much less likely will this be possible for the 10 billion that the United Nations is forecasting for 2100.  Human ingenuity will continue to make breakthroughs, but the current upward surge of commodity prices tells us that the Earth is running out of resources to support the human biomass on the planet.  It points “to a world in which technological innovations can no longer keep pace with the rate at which economies are consuming key resources.”  This is a sure indicator that economic growth as we have known it in the recent past cannot continue far into the future.

 The Sustainable Economy

 So what kind of economy might the nations of the world aspire to as the 21st century unwinds?  A good place to start in thinking about this is deciding what to call it. Herman Daly and his followers use the rather neutral and somewhat bland term, “steady-state economy.”  Jeff Rubin surprisingly uses the more disparaging term, “static economy.”  This suggests that things are stuck and not much excitement can be found.  If we use a term like “developing economy” that will cause confusion with the way we talk today about “developed” and “developing” countries, which is linked to the idea of growth.  I prefer the term, “sustainable economy,” in the sense that a country’s economic activities can continue into the future without diminishing the prospects of future generations, and in the added sense that people will be sustained by their economy in peaceful productive lives.

 So what might a sustainable economy look like?  This will be a topic I will pursue through future posts.  For now I will share some ideas from Jeff Rubin.  He points out that the whole concept of job creation through economic growth will go by the board.  Pumping up the economy through government stimulus is no answer because that just means running up deficits and increasing the already overwhelming debt; or it means printing more money, which just stokes inflation.  However, when people are out of work they expect their government to do something.

 Rubin suggests that the idea of making available work go further through job sharing is a possible strategy, and he cites the example of Germany’s job-sharing program called “Kurzarbeit” in which “four people divide the work of three jobs and split the pay checks.  The government then tops up the wages of all four workers.  This is credited with saving more than a million jobs during the last recession.”  The main downside of the program is the government subsidy, but that could probably be worked out of the system over time.  “It’s easy to envision job sharing becoming a standard practice,” says Rubin, “that helps countries around the world deal with the fallout of a static economy.”

 What else might we see? 

 Another implication of a slow down or reversal of growth will be that investment funds people relied on to support their retirement will just not be there, whether as individual portfolios or as pension funds.  That will lead to a whole reassessment of retirement.  Here is what Jeff Rubin has to say about that: “So don’t be surprised if you see a lot more gray hair in tomorrow’s labour force.  You can also expect that some of the part-time positions held down by seniors will be created through Kurzarbeit-style job-sharing plans.  That just might be the right prescription for retirees looking to top up shrinking pension checks while managing rising health care costs at the same time.”  I am also inclined to think that a less artificial break between working life and retirement can only be a good thing in a sustainable economy.

 I would also argue that a shift towards greater emphasis on local economies is certain.  Rubin and a lot of other writers I will be reviewing agree with this.  High priced oil means that neither people nor goods can do a lot of travelling.  The era of globalization based on cheap energy is fading rapidly, which means that many of the jobs that were shipped out to far distant countries where labour was cheap will be coming home into local economies.  Also, much of the food that was imported from far away courtesy of cheap oil will be replaced by food grown at home, creating jobs in the local economy.  The era of vast factory farms supplying low nutritional foods to far flung empires of fast-food outlets could also be on the way out—and that would be no bad thing.

 What else might we see shrinking?  Rubin suggests his own profession of financial services could be heading for considerable downsizing.  The wild-west style rampaging of financial cowboys could be brought up short by tighter government regulations, though this might be difficult to achieve given the close collusion that currently exists between government and the financial sector.  I will have a lot more to say about that later.

 With regard to other sectors of the economy, Rubin sees that governments with shrinking revenues will be hard pressed to maintain the same number of services as they did in the past, which will probably mean more contracting out to the private sector.  This has advantages of greater efficiency and entrepreneurial spirit, but disadvantages of less than scrupulous private operators abusing the public good.  Perhaps that will be counteracted through a more vigilant and responsible citizenry who see their role in life less as a consumer of the Earth’s resources and more as a steward with greater sensitivity to an increasingly finite world.  Rubin already sees a younger generation in so-called developed countries eschewing their parents’ materialism in favour of simpler lifestyles.  “I’m betting,” he says, “that most of us who live in OECD countries [Western-style democracies] can learn to live with less and not feel poorer for it.”

 Saving the Planet

 Rubin rounds out his commentary on the end of growth by speculating that as economic growth comes to an end so, too, will “our seemingly inexorable march toward environmental self-destruction.”  It will simply run out of fuel. He is likely partly right about this, but his rather glib assertion “that a recession is the best possible way to tame runaway carbon emissions” is likely too simplistic a take on a very complex problem.  He implies that the current efforts to curb emissions through the Kyoto process and other international programs are a waste of time and money.  “An economic slowdown,” he says, “will stop the growth emissions dead in its tracks.”  Maybe so, but if we don’t also work in parallel to shift the thinking of 21st century citizens towards stewardship of the planet, the long-term future of our grandchildren is still in jeopardy.  It will be wonderful if economic slowdown buys us some time to adjust to global warming, but there is too much at stake here to rely on economic fluctuations to take care of what are clearly problems caused by bad human choices and ignorance, including among our leaders and so-called experts in their fields.  We have to take ownership of the problems we have caused and work tirelessly to find the solutions for humanity to build a truly sustainable economy.  This will be a continuing story of this blog.

In closing here, however, I would like to fully acknowledge Jeff Rubin’s important contribution to the defining challenge of our age—how to build a sustainable global economy that will be a joy for everyone on Earth to participate in and will not deny the same enjoyment to those who follow.  By writing about this in a highly readable and engaging way, he is hopefully raising the awareness of a wider public to the many positive contributions each of us can contribute towards making sustainability a reality.

  

 

 

 

 

 

  

 

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2 Responses to Economics: The End of Growth

  1. Geraldine Schwartz says:

    I have read the last four posts at once to catch up. This is more like reading a book and proceeding at your own pace. This allows me to see the build up and where you are going. The education you are providing is superb, thoughtful and energizing.
    I see you are now coming to the place of saying ” now that you see the larger picture, now that you understand how economies are embedded in the natural world the solutions and the actions we can take to achieve them will make more sense.” As a teacher I am greatful to proceed in this way. So THANK YOU! I can also see the hard work this kind of synthesis must take I look forward to the learning ahead.
    It is also clear that this is a book since this will allow readers to go at their own pace as I just did.
    Please consider this option. It is also a course for mature learners…….. Keep it coming.
    Gerri.

    • Dear Gerri:

      Thank you for your comment. I know you are taking this work seriously and looking to follow righ action based on good information. That, too, is my objective There are many people who feel the same way. Together we will make a difference.

      Des

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