econonomic crisis

In March 2009 the UK Government’s Sustainable Development Commission, published a groundbreaking report that questions the 'relentless pursuit of growth' by governments.

It argued that the pursuit of economic growth is one of the root causes of the current global financial crisis, as well contributing to a growing environmental crisis and undermining well-being in developed countries.

The report, ‘Prosperity without growth?’ says that the current global recession should be an opportunity to forge a new economic system able to avoid the shocks and negative impacts associated with our reliance on endless growth. It called on leaders at the G20 summit in London to adopt a 12-step plan to make the transition to a fair, sustainable, low-carbon economy.

It seems Gordon Brown and other world leaders weren’t listening as they spend billions they haven’t got “to restore growth,” in a world of rapidly depleting resources. Green parties should be welcoming this warning for the endless "growth is good" mindset that will wreck our planet.

After years of crazy price inflation, house prices are beginning to drop to more affordable levels. A modest reduction in bank lending and market capitalisation would be a buffer on the free-spending leverage and investment that creates so much unnecessary growth - in speculative empty office blocks, hedge funds and a shopping binge economy.

The crisis has revealed the fragile interdependence of the globalised economy, where many countries can be involved in the supply chain to produce a single component manufactured in one of them. In a few years, the markets will face another major trauma when they realise that once plentiful oil supplies are running down rapidly and the 'globalised' economy this has supported will have to rethink completely. Major investment in a ‘Green New Deal’ to help us adjust to post oil realities would be a start. Where is the strategic thinking to build a genuinely sustainable economy in a sustainable environment?

Back in May 2008 seven former European heads of state, five former finance ministers and two former presidents of the European Commission wrote a prophetic open letter to the EU Commission. They warned that the global financial system risked systemic collapse. The financial world, they argued, “has accumulated a massive amount of `fictitious capital’ with very little improvement for humanity.”

Among the measures they proposed, was a world conference to reconsider the current international financial system. “When everything is for sale, social cohesion melts and the system breaks down.” Were world leaders asleep?

Billions to trillions

As the economic crisis unfolds, we need to ask whether throwing trillions into the marketplace will do more harm than good? Governments around the world have already pumped in around $10 trillion into banks. This should have solved the toxic sub-prime mortgage problem, but the underlying problem is the financial ‘debts and bets’ market amounting to $500 trillion, when the annual GDP of the whole planet is around $50 trillion. Where has all the money gone? We need to think radically about how to ditch this impossible financial burden. Bankers need to do more than say sorry as they walk away with obscene rewards for failure.

‘Prosperity without growth’ warns that our reliance on debt to finance the cycle of growth has created a deeply unstable system which has made individuals, families and communities inherently vulnerable to cycles of boom and bust, while increasing consumption does not make us happier.

It says economic growth has delivered its benefits at best unequally, with a fifth of the world’s population earning just 2 per cent of global income. Even in developed countries, huge gaps remain in wealth and well-being between rich and poor. The pursuit of growth has also had disastrous environmental consequences. In 25 years the global economy has doubled and the increase in resource consumption has degraded an estimated 60 per cent of the world's ecosystems and led to the threat of catastrophic climate change. Global carbon emissions have risen by 40 per cent since 1990.

While modernising production has led to greater resource and energy efficiency, it has also led to increased extraction. 'Decoupling' environmental impacts from economic growth are delusionary and unrealistic. Even based on a moderate level of growth of 2 per cent per year, meeting 2050 carbon reduction targets would mean achieving a carbon content a staggering 130 times lower than the average carbon intensity today.

The Age of Irresponsibility

Significant scarcity in key resources – such as oil – may be less than a decade away. A world in which things simply go on as usual is already inconceivable. But what about a world in which over nine billion people in just 40 years aspire to the level of affluence achieved in the OECD nations? Such an economy would need to be 15 times the size of this one by 2050 and 40 times bigger by the end of the century. What does such an economy look like? What does it run on? Does it really offer a credible vision for a shared and lasting prosperity? These are issues that can no longer be relegated to the next generation.

The growth imperative has shaped the architecture of the modern economy. It stood at least partly responsible for the loosening of regulations and the proliferation of unstable financial derivatives. Continued expansion of credit was deliberately courted as an essential mechanism to stimulate consumption growth. Growth is necessary within this system just to prevent collapse. The report warns that the dynamics of the emerging ecological crisis is likely to dwarf the existing economic crisis. Failure to take the dilemma of growth seriously may be the single biggest threat to sustainability that we face.

Unless growth in the richer nations is curtailed the ecological implications of a truly shared prosperity are dauntingly unrealistic. The truth is that there is as yet no credible, socially just, ecologically sustainable scenario of continually growing incomes for a world of nine billion people. In this context, simplistic assumptions that capitalism’s propensity for efficiency will allow us to stabilise the climate and protect against resource scarcity are nothing short of delusional. A different kind of macro-economic structure is essential for an ecologically-constrained world.

Macroeconomic Sustainability

Herman Daly’s pioneering work defined the ecological conditions of a steady-state economy in terms of a rate of material throughput that lies within the regenerative and assimilative capacities of the ecosystem. The key features are: (1) sustainable scale; (2) fair distribution of wealth; and (3) efficient allocation of resources. A steady state economy is broadly in balance but the volume is not growing.

What we still miss from this, says the SDC, is a viable macroeconomic model in which these conditions can be achieved. Gross Domestic Product (GDP) accounting has several failings. It fails to account properly for changes in the asset base. Gross fixed capital investment is measured, but depreciation of capital stocks goes unaccounted for and the GDP is almost completely blind to levels of indebtedness. No attention is paid to the costs associated with the degradation of natural capital from economic activity. By contrast, there are all kinds of things that are absorbed in the GDP – the costs of congestion and oil spills, for example. These kinds of perversities have been the focus for long-standing critiques of conventional macroeconomics

One model suggests that it is possible to stabilise economic output, even within a fairly conventional macro-economy. A crucial role is played by work-time policies to prevent rising unemployment.

The second model addresses the implications of a shift away from fossil fuels. It shows that there may only be a narrow ‘sustainability window’ through which the economy can pass successfully. But crucially, this window is widened if more of the national income is allocated to savings and investment. Sustainability will need enhanced investment in public infrastructures, sustainable technologies and ecological maintenance and protection.

Above all, we must abandon the presumption of growth in material consumption as the basis for economic stability. It will have to be ecologically and socially literate.

‘Peak everything’

Charles Hall, professor of Environmental Science at the State University of New York and John Day, professor emeritus at Louisiana State University warn that the world today faces enormous problems related to population and resources.

The most immediate issue is the decline in oil reservoirs, a phenomenon referred to as “peak oil,” because global production appears to have reached a maximum and is now declining, while demand is rising. However, a set of related resource issues are coming home to roost in ever greater numbers and impacts—so much so that author Richard Heinberg speaks of “peak everything.”

These ideas were discussed intelligently but have now largely disappeared from scientific and public discussion. Most environmental science courses focus far more on the adverse impacts of fossil fuels than on the implications of our overwhelming economic and agricultural dependence on them. The failure today to bring the potential reality and implications of peak oil, indeed of peak everything, into scientific discourse and teaching is a grave threat to industrial society.

Most agricultural technology is extremely energy intensive. The net effect is that roughly 19 percent of all of the energy used in the United States goes into its food production system. Fossil fuels have been crucial to the growth of many national economies. The expansion of the economies of most developing countries is nearly linearly related to energy use and when that energy is withdrawn, economies will shrink accordingly.

Hall points out that there are virtually no functioning forms of transportation beyond bicycles that are not based on oil. Clothes and furniture and most pharmaceuticals are made from and with petroleum, and most jobs would cease to exist without it. No substitutes for oil have been developed on anything like the scale required, and most are very poor net energy performers. Despite considerable potential, renewable sources (other than hydropower or traditional wood) currently provide less than 1 percent of the energy used in the world and the annual increase in the use of most fossil fuels is much greater than the total production in electricity from wind turbines and photovoltaics.

In 2008, the US Census Bureau reported that eight out of the 10 fastest growing counties in America are in the Southwest. All rely on the Colorado River to remain viable. Last year, a study by the Scripps Institution of Oceanography concluded that there’s now a 50-50 chance both Lake Mead and Lake Powell—the Colorado’s major feeders—will be bone dry by 2021.

The entire region runs on hydroelectric power and the study found this energy tap could turn off by 2017.

Most of the globe will be facing massive water shortages by 2025, according to the UN and 20 percent of the world’s population currently lack access to fresh water. Yet we still think that expanding desert cities like Las Vegas is a good idea?

Prosperity and growth delusions

If prosperity depended on growing populations to feed economic growth, the Philippines and many countries in Africa would be rich, not poor. Many countries have small populations and are quite prosperous and successful - New Zealand and Botswana, for example. For centuries, before the industrial revolution, humans have lived in a relatively steady state economy. We also have the advantages of a large legacy infrastructure of roads, hospitals, housing, hydro schemes. Even more importantly we have a far greater insight on high-tech solutions to many of our needs.
Apart from the vital necessity to stabilise and reduce populations to a genuinely more sustainable level, we can and must cut back on so much unnecessary production and services and planned product obsolescence.

There is a vast amount that could be done without impacting on our lives in any way. Some reductions would actually be welcome - less road lighting in the country to preserve the night sky, a ban on TV advertising screens in supermarkets, cutting back the often gross number of TVs installed in bars; stopping fat Sunday papers loaded with fall out ads and leaflets and making do with a 'weekend' Saturday paper. We don't need an additional Sunday paper in this electronic information age and it would save a significant number of trees. Job losses from a transition to a steady state economy could be mitigated by sharing work more effectively, giving people more quality leisure time in return for slightly lower salaries.

Lower demand from a stabilised population and consequently more affordable housing is good news not bad for the vast number of people. It is only the discredited bankers and property investors who gain from endlessly inflating property prices and marketing it as 'good news'.

Instead of subsidising economic growth governments can instead subsidise economic contraction. It is potentially a hugely 'virtuous circle' that we have not even begun to market. But we must ensure poor people in developing countries have an equitable stake and 'buy in' to the vision and transition to a new steady state consumer economy. It is a rich and exciting challenge, not a gloomy one.

Green parties in a steady state of confusion?

The Green party of British Columbia in Canada is debating a steady state economy as part of its policy and Caroline Lucas, leader of the Green Party of England and Wales has already endorsed support for a transition to a steady state economy.

Welcome as this is, the Green party movement worldwide now faces a dilemma. It has largely failed to publicly recognise or promote the need to address the human overpopulation challenge - which is a prime driver undermining any possible transition to a steady state economy. You can't have steady state economics and 80 million extra consumers arriving on the planet each year, no matter how divergent some of their footprints may be. All they stress is trying to reduce everyone’s consumption, to accommodate more people into an ever more stressed quality of life. What is the logic in cutting everyone’s’ consumption only to double the number of consumers?

The UK Green Party has produced a policy document on a population policy, but, so far it is not being given any prominence. Among the modest policies it endorses are for the Office of National Statistics to monitor the ecological impact of the UK population; to promote informed debate on a sustainable population for the UK, taking into account levels of consumption and to provide free family planning, readily available in all localities.

A transition to sustainable living

In January 2009 South Korea launched a green-focused recovery package where over 80 per cent of the stimulus is targeted towards environmental goals. It estimates, as a result of this action, over 960,000 new jobs will be created over the next four years and it will place South Korea at the forefront of 21st Century economies.

Costa Rica is another country trying to make economic development and environmentalism work together in a more holistic strategy. The process began in the 1990s when Costa Rica came to fully appreciate its incredible bounty of biodiversity — and that its economic future lay in protecting it. So it did something no country has ever done: It put energy, environment, mines and water all under one minister.

As a result, Costa Rica invested in hydro-electric, wind and geo-thermal power and now gets more than 95 percent of its energy from these renewables. In 1985, it was 50 percent hydro, 50 percent oil. Costa Rica also discovered its own oil five years ago but decided to ban drilling, so as not to pollute its environment!

It took the view that landowners who keep their forests intact and their rivers clean should be paid, because the forests maintained the watersheds and kept the rivers free of silt — and that benefited dam owners, fishermen, farmers and eco-tour companies. The forests also absorbed carbon. To pay for these environmental services, in 1997 Costa Rica imposed a tax on carbon emissions, which goes into a national forest fund to pay indigenous communities for protecting the forests. It has become a major source of income for poor people and enabled Costa Rica to actually reverse deforestation. It now has twice the amount of forest as 20 years ago.

Nature provides an incredible range of economic services — from carbon-fixation to water filtration to natural beauty for tourism. If government policies don’t recognise those services we end up impoverishing both nature and people.

The track to a steady-state economy

Rob Dietz, executive director of the Center for the Advancement of the Steady State Economy (www.steadystate.org) says the current financial crisis occurred because paper assets grew much faster than real wealth. “When investors started to realise that paper assets were out of sync with reality, they attempted to sell them. All the paper assets that we thought had value suddenly didn’t, and people are loosing their retirement funds and other savings, and now they are losing their jobs and their ability to pay for basic necessities.

“Economic growth and wellbeing are definitely not the same. Recent research shows that while the two are correlated, when economic growth passes a threshold of enough income per person to meet basic needs plus some comforts, further growth does not enhance wellbeing. “Technology allows us to use resources more efficiently, but gains in efficiency also tend to increase overall use and extraction.”

A steady-state economy that features stabilised population and individual consumption is the solution for long-term wellbeing. A steady-state economy neither grows nor contracts. The door is open for investments, but they are directed toward activities that promote development over growth. “We need to start measuring exactly what we want to maximise or optimise,” says Deitz.

Reversal of Fortune

Author and environmentalist Bill Mckibben points out that in 1979, the sociologist Amitai Etzioni reported to President Carter that only 30 percent of Americans were "pro-growth," 31 percent were "anti-growth," and 39 percent were "highly uncertain."

“Then Ronald Reagan convinced the electorate it was "Morning in America"—out with limits. Today, mainstream liberals and conservatives compete mainly on the question of who can flog the economy harder.

But though the economy continues to grow, most of us are no longer getting wealthier. McKibben says the average wage in the United States is less now, in real dollars, than it was 30 years ago. More than 60 countries around the world have seen incomes per capita fall in the past decade. Fossil fuel has been a one-time gift that underwrote a one-time binge of growth.

On current rates of growth in the Chinese economy, in 20 years the 1.3 billion residents of that nation alone will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest, according to eco-statistician Lester Brown. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. And that's just China; by then India will have a bigger population, and its economy is growing almost as fast.

Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways. Humans have never done anything more profound, not even when we invented nuclear weapons.

“For most of us, growth has become synonymous with the economy's health,” says McKibben. “We lap up and promote the economy’s every sniffle with enormous devotion in the daily economic news bulletins, even as we more or less ignore the increasingly urgent fever that the globe is now running.”

McKibben cites the work of English agronomist Jules Pretty, who has studied nearly 300 sustainable agriculture projects in 57 countries around the world. Pretty found that over the past decade, almost 12 million farmers had begun using sustainable practices on about 90 million acres. He found sustainable agriculture increased food production by 79 per cent per acre, while practices such as cover-cropping and fighting pests with natural adversaries had increased production 150 percent. With 4.5 million small Asian grain farmers, average yields rose 73 per cent.

Inertia is a powerful force. In our new world we have much to concern us and much to hope for. To achieve a genuine steady state economy we must also meet the challenge of stabilising and gradually reducing our population, through universal access to family planning and in future, cutting perverse birth incentives for large families. We must also aim for ‘balanced’ net migration. Immigration to developed countries is massively increasing population growth in countries with already high environmental footprints.

Instead of arguing whether nuclear is better than coal or wind or solar is practicable, important as these issues are, we need to focus on establishing an equitable steady state economy founded on a much lower consumption base.

Governments see themselves as growth managers, not growth-stoppers, but you don’t manage growth, growth manages you. (3,450 words)

Policies we need to consider urgently (From the SDC report)

Policies for Sustainable Scale

• Monetary policies that tighten the money supply.
• Tax reforms that tax "bads" (e.g., pollution) rather than "goods" (e.g., value added by labor and capital).
• Taxes that provide incentives to limit throughput (e.g., carbon taxes).
• Policies that favor energy conservation (e.g., vehicle mileage and exhaust standards).
• Zoning policies that limit sprawl and promote energy conservation.
• Incentives for limiting population growth.
• Tradable permits with quotas for limiting pollution.
• Individual transferable quotas for extraction of natural resources.

Policies for Fair Distribution

• Caps on income (especially unearned income) and wealth.
• Policies that support a minimum income.
• Removal of public subsidies for extraction of natural resources with distribution of royalties to the public (see the Alaska Permanent Fund as a policy example).
• Increased urban land taxes coupled with decreased property taxes on structures.

Policies for Efficient Allocation

• Subsidies for ecosystem preservation.
• Inclusion of non-market values in prices of natural resources (e.g., inclusion of the value of flood control and water purification in the price of timber from an intact forest).
• Limits on the scale of advertising to prevent wasteful consumption.

Herman Daly's Top Ten Policy Recommendations

(Excerpted from a paper written for the UK Sustainable Development Commission)

1. Cap-auction-trade systems for basic resources—use cap to limit biophysical scale according to source or sink constraint, whichever is more stringent. Use auction to capture scarcity rents for equitable redistribution. Allow trade for efficient allocation to highest uses.
2. Ecological tax reform—shift tax base from value added (labor and capital) to "that to which value is added", namely the throughput of resources extracted from nature (depletion), through the economy, and back to nature (pollution). Such a shift internalizes external costs as well as raises revenue more equitably. It also prices the scarce, but previously unpriced, contribution of nature.
3. Limit the range of inequality in income distribution—set a minimum income and a maximum income. Without aggregate growth, poverty reduction requires redistribution. Complete equality is unfair; unlimited inequality is unfair. Seek fair limits to inequality.
4. Free up the length of the working day, week, and year—allow greater options for leisure or personal work. Full-time external employment for all is hard to provide without growth.
5. Re-regulate international commerce—move away from free trade, free capital mobility and globalisation, and adopt compensating tariffs to protect efficient national policies of cost internalisation from standards-lowering competition from other countries.
6. Downgrade the International Monetary Fund, World Bank, and World Trade Organization to something like Keynes' plan for a multilateral payments clearing union, charging penalty rates on surplus as well as deficit balances—seek balance on current accounts, avoid large capital transfers and foreign debts.
7. Move to 100% reserve requirements instead of fractional reserve banking—put control of money supply in the hands of the government rather than private banks.
8. Enclose the remaining commonwealth of rival natural capital in public trusts, and price it, while freeing from private enclosure and prices the non-rival commonwealth of knowledge and information—stop treating the scarce as if it were non-scarce, and the non-scarce as if it were scarce.
9. Stabilise population—work toward a balance in which births plus immigrants equals deaths plus emigrants.
10. Reform national accounts—separate GDP into a costs account and a benefits account. Compare them at the margin, and stop growing when marginal costs equal marginal benefits. Never add the two accounts.

Summary

Global economic turbulence and the prospect of deep recession present an enormous challenge. An unprecedented opportunity now exists to transform our economy and our society for the better. Targeting investment carefully towards energy security, low-carbon infrastructures and ecological protection offers multiple benefits.

• freeing up resources for household spending and productive investment by reducing energy and material costs.
• reducing our reliance on imports and our exposure to the fragile geo-politics of energy supply.
• providing a much-needed boost to employment in the expanding ‘environmental industries.’
• making progress towards the demanding carbon reduction targets.
• protecting valuable ecological assets and improving the quality of our living environment for generations to come.

This ‘green’ investment includes retrofitting buildings for energy efficiency, additional support for renewable energy technologies, encouraging sustainable mobility, modernising the electricity grid, and investing in eco-system protection and maintenance. The SDC finds support for the view that up to 4 per cent of annual GDP should be committed immediately to economic recovery. Estimates of the appropriate green content of this vary. Green contributions across the world range from nothing at all to 80 per cent in South Korea’s green new deal recovery package.

A Canadian low growth economic model

A study carried out by Canadian economist, Peter Victor, explored potential models for achieving a stable, but non-growing economy. He looked at a ‘business as usual’ ‘Collapse’ scenario and a ‘Resilience’ scenario.

The most influential factors were changes to investment and the structure of the labor market. Net business investment is reduced in the Resilience scenario, with a shift in investment from private to public goods.

Most importantly, unemployment is avoided in the Resilience scenario by reducing both the total and the average number of working hours. Labor productivity is assumed to increase. And this normally leads to a reduction in available work. But here unemployment is averted by sharing the work more equally across the available workforce. Reducing the working week is the simplest structural solution to the challenge of maintaining full employment with non-increasing output.

The traditional function of investment is framed around labor productivity. This role is likely to diminish in importance. Innovation will still be vital, but it will need to be targeted more carefully towards sustainability goals. Specifically, investments will need to focus on resource productivity, renewable energy, clean technology, green business, climate adaptation and ecosystem maintenance and protection.

Some investments in renewable energy will only bring returns over much longer time frames than traditional financial markets expect. Investments in ecosystem protection and maintenance is vital in protecting environmental integrity and in turn vital for sustaining production and employment over the long-term. In a conventional growth-based economy this is problematic. In a sustainable economy this kind of investment needs to be seen as an essential. (1,039 words)

Originally published on this site on 10 May 2009