Life in the Rear-view Mirror

The Growth Conundrum

Even though we are navigating in rocky waters, our economic ship is set for full steam ahead. It's insane!

The only metric that governments use for setting economic policy is GDP growth, which is directly linked to growth in consumption: precisely what we don't want or need. To avoid the collision of the two freight trains, and save Mother Earth, we need to consume less, not more.

All economic models are based solely on GDP growth. The conventional wisdom is that when the growth rate is positive, the economy expands, and that is great news for everyone. When it's negative, the economy contracts and it is bad news for the unemployed, who account for a small fraction of society. Since when is economic policy set for the benefit of the disadvantaged? Economic growth benefits the wealthy segment of society and that's why it's national policy!

In any case, we have been led to believe that a growing economy benefits everyone, like a rising tide lifts all boats, big and small. I certainly sang the praises of a growing economy in the past, but now I'm not so sure. There are several reasons for my rethink. Foremost is the concern that an expanding global GDP leads us to its logical end: the exhaustion of natural resources. Secondly, it's harmful to the environment. And thirdly, it's harmful to our health.

The more I analyze it, the more convinced I become that current economic policy is wrong. Nobody has ever published the results of a detailed analysis to prove that an expanding GDP is the most appropriate policy. Governments accept it as a matter of fact because that's the economic mantra. Moreover, the invisible hand that guides government policy has an interest in robust GDP growth. Rather than taking notice of the increasing health and environmental consequences of an ever-expanding GDP, policymakers simply ignore the facts, or misinterpret them. They can only serve one master, and that's not the public at large.

It's true that people are living longer now, but only because there is a huge medical industry to keep them alive, which didn't exist before the Second World War. People are living longer because they take countless medications to counteract the negative health effects of a growing GDP. Both of my grandmothers lived a long life without ever seeing a medical doctor or taking pharmaceuticals. They had their own natural remedies for treating colds, fevers, and other common ailments. They had clean air and uncontaminated food, which we don't!

One of the reasons, but not the main one, why policy makers try to avoid economic contractions is that they lead to higher unemployment, which could hurt the chances of being re-elected. Last year, the U.S. unemployment rate was still higher than when the financial crisis began, in 2008. However, in Germany it was well below it. Yet, the American government ploughed trillions of dollars into the financial system to stimulate GDP growth and employment, and the result was that Americans were still worse off then Germans. Where did all that money go? Need I tell you?

Germans hold the right to work much more sacrosanct than North Americans, and the German economy did not suffer as much during the crisis. That is to say that, in addition to GDP considerations, Germany included other considerations, such as work sharing, into policy decision-making and the results vindicated the German approach. That's not to say that it's the ideal that the rest of the world should aim for, but it's a step in the right direction. It demonstrates that economic models, which take other factors into consideration, can work when there is a will to do so.

When the financial crisis hit the world, North American companies reduced production by shutting down manufacturing lines in factories. All the people that worked on those lines were laid off. Those that kept working didn't even know there was a recession. Those that lost their jobs were the only ones that suffered. The difference in Germany, and a few other countries, was that companies kept all the lines working. No one was laid off: they just worked fewer hours. Everyone knew there was a recession, everyone suffered a little, but nobody suffered a lot. What a difference good policy makes!

When economic contractions are handled the way Germany did, by reducing work hours but keeping everyone employed, they can actually be quite beneficial for society, as they can reduce some of the excesses that build up during periods of high economic growth. They are the way of moderating overconsumption. A person that overeats day in and day out will soon need a change of wardrobe, but one who balances periods of feasting with periods of fasting will not be faced with an expanding waistline.

The same is true for the economy: periods of contraction balance out periods of excesses. The concept is at least as ancient as the Bible, which tells us that seven fat years will be followed by seven lean years. The wise ruler is the one that can anticipate the economic cycle, and can reduce the excessive swings between one period and another. It seems that modern governments (policy makers) could benefit by rereading the Old Testament.

Never mind, as evidenced by the ever-expanding government debt, policy makers have discarded the Old Testament lessons altogether! Rather than reigning in debt during good times, so that they can help during bad ones, they overspent during both good and bad periods. The result is that over one third of government expenditures now go to paying interest on the debt. This is a generalization used to make the point, but in reality, some countries are even worse off, like Greece, for example. However, Japan, which is not considered an economic basket case like Greece, has a national debt that is even more scandalous: it's approaching 300% of GDP. It makes the U.S. national debt (100% of GDP) look good in comparison!

What is the rationale for high debt levels? It's certainly not for the greater benefit of society. One would be correct to say that interest payments on the debt are a transfer of wealth from the poor to the rich. It works in two ways. Firstly, government largess, which is financed by debt, is bestowed on the rich; and second, the interest on the debt is paid to the rich, who bought the government bonds.

Imagine how much better off we might have been, if governments had not mortgaged our children's and their children's future. Rather than paying interest on the debt, that money could have been used to improve the nation's physical and social infrastructures. An ever-expanding GDP is not in the best interests of society: it only benefits the very wealthy. It's also not in the best interest of Mother Earth: it makes the overconsumption freight train go faster.

With each passing year, it's becoming abundantly clear that the phenomenal economic growth the world experienced during my lifetime will be a thing of the past: a unique occurrence that may not be repeated for a long, long time, if ever. On a global basis, future per capita GDP cannot continue to grow because it's not sustainable. Sooner or later we'll be hitting those sustainability limits; and it's not going to be pleasant when we do.

The growth rates experienced in Japan, in the past twenty years or so, are probably an indication of what we have to look forward to; and even those are probably optimistic. In Japan, per capita GDP grew from about $7,000, in 1960, to $30,000, in 1990 - a fourfold increase in 30 years, or about 10% per year. However, from 1990 to 2014 it grew only $7,000 to $37,000, closer to 1% per year, despite the phenomenal growth in government debt during that same period. It's become abundantly clear that most of the money the government pumped into the economy went straight into the hands of the super rich, otherwise it would have shown up in these numbers!

GDP growth, the only metric used by governments to measure the progress and well being of a nation, is not working for the masses. We need more enlightened economic policies. For starters, full employment should become the key economic parameter. By intelligent work sharing we can have full employment even with negative GDP growth!

If the economy contracts, so be it! When people earn less, they spend less, which means they consume and pollute less. The path to sustainability requires us to consume much less because it's essential for the preservation of Mother Earth, the environment, and our health. It's the only way we can slow down the overconsumption freight train. If done properly, the only segment of society that will be hurt by negative GDP growth is the super rich. Their huge profits and bonuses will shrink, but we don't need to shed any tears for them.

For too long, governments have given preferential tax treatment to the wealthy on the assumption that they generate jobs. Well, those jobs have come at too high a price! We need fewer jobs, so we can stop pampering the rich. We can cope with fewer jobs by better work sharing, and better income and wealth distribution. The pursuit of high economic growth rates, financed by high levels of government debt is not a sustainable policy. It has brought us to the edge of the precipice. We either change course or perish!