2013 : WHAT *SHOULD* WE BE WORRIED ABOUT?

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Expert, Financial Derivatives and Risk; Author, Extreme Money: The Masters of the Universe and the Cult of Risk
A World Without Growth?

Arthur Miller wrote that "an era can be said to end when its basic illusions are exhausted". Economic growth, the central illusion of the age of capital, may be ending.

Growth underpins every aspect of modern society. Economic growth has become the universal solution for all political, social and economic problems, from improving living standards, reducing poverty to now solving the problems of over indebted individuals, businesses and nations.

All brands of politics and economics are deeply rooted in the idea of robust economic growth, combined with the belief that governments and central bankers can exert substantial control over the economy to bring this about. In his 1929 novel The Great Gatsby, F. Scott Fitzgerald identified this fatal attraction: "Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that's no matter—tomorrow we will run faster, stretch out our arms farther.

In reality, economic growth is a relatively recent phenomenon.

It took approximately five centuries (from 1300 to 1800) for the standard of living, measured in terms of income per capita, to double. Between 1800 and 1900, it doubled again. The twentieth century saw rapid improvements in living standards, which increased by between five or six times. Living standards doubled between 1929 and 1957 (28 years) and again between 1957 and 1988 (31 years).

Between 1500 and 1820, economic production increased by less than 2% per century. Between 1820 and 1900, economic production roughly doubled. Between 1901 and 2000, economic production increased by a factor of something like four times.

Over the last 30 years, a significant proportion of economic growth and the wealth created relied on financialisation. As traditional drivers of economic growth, such as population increases, new markets, innovation and increases in productivity waned, debt driven consumption became the tool of generating economic growth. But this process requires ever increasing levels of debt. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth, an increase from around $1 to $2 of credit for every $1 of growth a decade ago.

Debt allows society to borrow from the future. It accelerates consumption, as debt is used to purchase something today against the promise of paying back the borrowing in the future. Growth is artificially increased by spending that would have taken place normally over a period of years being accelerated because of the availability of cheap money. With borrowing levels now unsustainable, debt engineered growth may be at an end.

Growth was also based on policies that led to the unsustainable degradation of the environment. It was based upon the uneconomic, profligate use of mispriced non-renewable natural resources, such as oil and water.

The problem is the economic model itself. As former Fed Chairman Paul Volcker observed on 11 December 2009: "We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export. It's involved with the financial crisis but in a way it's more difficult than the financial crisis because it reflects the basic structure of the economy." The simultaneous end of financially engineered growth, environmental issues and the scarcity of essential resources now threatens the end of an unprecedented period of growth and expansion.

Policy makers may not have the necessary tools to address deep-rooted problems in current models. Revitalized Keynesian economics may not be able to arrest long-term declines in growth as governments find themselves unable to finance themselves to maintain demand. It is not clear how if, at all, printing money or financial games can create real ongoing growth and wealth.

Low or no growth is not necessarily a problem. It may have positive effects, for example on the environment or conservation of scarce resources. But current economic, political and social systems are predicated on endless economic expansion and related improvements in living standards.

Growth is needed to generate higher tax revenues, helping balance increased demand for public services and the funds needed to finance these.

Growth is needed maintains social cohesion. The prospect of improvements in living standards, however remote, limits pressure for wealth redistribution. As Henry Wallick, a former Governor of the US Federal Reserve, accurately diagnosed: "So long as there is growth there is hope, and that makes large income differential tolerable." 

The social and political compact within democratic societies requires economic growth and improvements in living standards. Economic stagnation increases the chance of social and political conflict. Writing in The War of the World: History's Age of Hatred, Niall Ferguson identified the risk: "Economic volatility matters because it tends to exacerbate social conflict….periods of economic crisis create incentives for politically dominant groups to pass the burdens of adjustment on to others… social dislocation may also follow periods of rapid growth, since the benefits of growth are very seldom evenly distributed….it may be precisely the minority of winners in an upswing who are targeted for retribution in a subsequent downswing".

Politicians, policy makers and ordinary people do not want to confront the possibility of significantly lower economic growth in the future. Like Fitzgerald's tragic hero Gatsby, the incredulous battle cry everywhere is: "Can't repeat the past? Why of course you can!" But as philosopher Michel de Montaigne asked: "How many things we regarded yesterday as articles of faith that seem to us only fables today?"

A recent book The World Without Us was based around a thought experiment–what would a world bereft of humans revert to. We should be worried about what a world without growth, or, at best, low and uneven rates of growth will look like.