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Can We Have Prosperity Without Growth?

20/2/2015

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Prior to the financial crisis, one of the larger concerns facing us all was the impact of our economic development upon the planet. The conversation was discussed in a way that held that there was a trade off between economic growth and prosperity on the one hand, and environmental degradation and resource depletion on the other. These links were well made.

For over 200 years, prosperity had risen. If we compare the average living standard prior to the industrial revolution to the average living standard today, then, at least in the UK, even after the great recession, we are better off today by an order of magnitude. We live longer and healthier lives, with a far greater level of material consumption than our forebears could even dream of. This improvement in our lot is the result of 200 years of economic growth, fuelled by the many technological and organisational developments during that period. Indeed, in our own times, the history of the last 40 years is one of literally hundreds of millions of people moving out of poverty in China and India as a result of economic growth in those countries. To date, economic growth is the vehicle by which prosperity has been delivered.

It is also the case that economic growth has been achieved at the cost of environmental degradation and resource depletion. One only has to think of modern levels of air pollution, acid rain, and the changing climate to take the point that 200 years of economic growth across the globe has had a detrimental impact upon the environment. Some may argue that environmental degradation is a price worth paying for material prosperity, but fewer people nowadays adhere to that cause. Economic growth has also led to the depletion of a number of key resources. Not only the obvious ones such as energy resources, but also implicit ones such as our ability to convert carbon dioxide into breathable oxygen on a planetary level. In that respect, we are poisoning the air we breathe, the water we drink, and the food we eat.

We have allowed this to happen because the cost of the material goods and services that we consume contains a significant external cost that isn’t taken into account in the market price. In the absence of a mechanism to bring the social cost - the private cost we pay, along with the external costs which we don’t pay – into line with the market cost, then the process will continue unabated. Increased prosperity generated by economic growth, at a cost of increased environmental degradation and resource depletion, is a process that can run until we hit the resource limit of a finite planet or until we make our planet unlivable. We do not hazard a guess at which will be the sooner.

For some years, a number of people and organisations, concerned at how this process could run unchecked, have attempted to draw our attention to the problem. Tim Jackson’s 2009 book “Prosperity without Growth: Economics for a Finite Planet” provides a good example of the work in this genre [1]. By and large this constituency has been listened to politely, but no effective action has been taken to address the issue. The great recession has provided us with some interesting data on why that might be and what the problems of addressing the issue might look like.

In 2008-09, in many advanced economies ceased to grow. Many shrank. Since the onset of the great recession, the policy response is to return to business as usual in terms of growth. There has been moderate success in achieving this over the past eight years in the US and the UK. There has been very little success to date in Europe and Japan. As parts of the global economy starts to climb out of stagnation, perhaps it might be time to take stock.

The recession has been kinder to the plant. Resource depletion has abated as falling levels of demand softens the markets for resources, the most dramatic example of which is the fall in the price of oil. With lower levels of economic activity the degradation of the planet will have slowed. To that extent the great recession has made the global economy more viable for the environment. We have seen, however, less growth and less prosperity. In the advanced nations poverty and inequality has increased, and it is the desire to alleviate that  poverty and inequality that underwrites the desire for higher growth. We seem to be in a vicious circle that has no apparent resolution. Perhaps we are looking at the wrong issue?

PictureThe Brundtland Model
A different way of looking at the issue has been provided by the Brundtland Commission [2]. This constructed a model, as described in the accompanying diagram, consisting of three elements. It suggests that a long term sustainable solution to our predicament needs to balance the interests of the economy, the environment, and society. The great recession has eased the tension between the economy and the environment, but at the cost of making the tension between the economy and society that much greater. To respond to this by returning to ‘business as usual’ might ease the tension between the economy and society, but at the cost of increasing the tension between the economy and the environment.

The apparent problem requires not only policies to address the question of environmental degradation and resource depletion, but also to address the question of poverty and inequality at the global level, if we are to reach an outcome that is lasting. If a solution emerges which people feel is unfair, however ‘unfairness’ may be defined, then there will always be an incentive to move towards a fairer solution through greater economic growth, leaving us back where we started. Previous attempts to resolve the consequences of economic growth, such as climate change, have stalled precisely on the questions of equity. The benefits of climate resolution are shared equally, but the costs aren’t. Until they are, then those nations suffering as a result of climate mitigation, which are mainly the emerging economies, have very little  incentive to reach a resolution to the problems of
environmental degradation and resource depletion.

Can we have prosperity without growth? It could be possible if we were to develop a feeling of ‘enoughness’ amongst those of us in the rich world, and a willingness to share our surpluses with those who do not have enough in the emerging world [3]. However, the evidence suggests that this is too utopian for our current frame of mind, which means that growth will be the key to prosperity for the foreseeable future, and that environmental degradation and resource depletion are something that we will have to learn to live with as we move into the future.

Stephen Aguilar-Millan
© The European Futures Observatory 2015

References:
[1] “Prosperity without Growth: Economics for a Finite Planet.” by Tim Jackson (Earthscan 2009). For my review of the book on Goodreads, see: https://www.goodreads.com/book/show/10805219-prosperity-without-growth 

[2] For more information on the Commission, see: http://en.wikipedia.org/wiki/Brundtland_Commission.

[3] See: “How much is enough?” by Robert & Edward Skidelsky (Allen Lane 2012). For my review of the book on Goodreads, see: https://www.goodreads.com/book/show/15707945-how-much-is-enough.


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Is Deflation Good For Us?

7/2/2015

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It is normally the case that periods of stagnation are accompanied by a period of general deflation. This is a process where companies reduce the prices of their goods and services in order to reduce inventory and to continue trading. Equally, the consumers of the goods and services may be tempted to delay the point of purchase in the expectation of further price reductions. The process then continues with both sides of the equation reinforcing each other over a period of time. The question arises of whether or not this is a good thing.

Deflation has visited Japan for many years now, and is currently making itself felt in Europe. The rate of inflation in the Eurozone fell to –0.6% in January, which is an unwelcome development if we are looking to see the revival of the world economy [1]. Much of this can be attributed to the fall in the price of energy over the second half of 2014. Some can also be attributed to the falling cost of food as a result of bumper harvests. The rest of our current deflation is attributed to deficiencies in demand, especially within the Eurozone. In may respects, this is a consequence of a policy of austerity.

Some politicians have triumphed deflation and very low inflation rates as a vindication of their economic policies. For example, George Osborne in the UK is reported as having said, "Inflation is 0.5% - lowest level in modern times. Welcome news with family budgets going further & economic recovery starting to be widely felt." [2] The Chancellor is almost certainly correct. Falling prices will help to make household budgets go even further. As Osborne’s deputy Danny Alexander put it, lower inflation was "like a giant giant tax cut for the economy" [2]. In the normal course of events, a significant reduction in the price of energy, coupled with a relatively mild winter, should serve to boost household disposable income during the spring of 2015. As long as households spent this windfall rather than save it, we would normally expect one of the results of deflationary pressures to be an increase in economic activity as a result of increased household consumption. If this happens, George Osborne and Danny Alexander will be vindicated.

However, there are two clouds on the horizon. The first is that one person’s expenditure is another person’s income. If I buy a newspaper, the price of the newspaper is both my expenditure and the income of the newsagent. If prices are being squeezed at the retail end of the supply chain, then there is a danger that the deflationary pressure could be served all the way along the supply chain. We are starting to see this happen. As stated above, there is some downward pressure on food prices, and this is starting to have an effect on farm incomes. It is reported that milk is now cheaper to buy than water [3]. Throughout the energy sector in the UK, investment plans are starting to be scaled back and parts of the workforce laid off [4].

This marks a rather dangerous point. If falling prices lead to falling incomes, and if falling incomes lead to the scaling back of employment, then we will have reached a very dangerous deflationary spiral. This is exactly what happened in the 1930s. If left unchecked, a bottom will be found, but at the cost of mass unemployment. Unless there are major changes to economic policy in the Eurozone, this is exactly where Europe is heading. As we have said before - thanks to Wolfgang Munchau - Europe is following ‘the wacky economics of Germany’s parallel universe’ [5]. Recent events suggest that Europe will be locked into this deflationary spiral for some time to come.

The second cloud on the horizon relates to the cost of money. Nominal interest rates are at rock bottom levels – what economists call the lower bound (i.e. zero). Some monetary authorities have even set negative nominal interest rates (i.e. you pay the authorities to look after your money). However, it is not the nominal interest rate that describes the cost of money, the real interest rate does that. The real interest rate is the nominal interest rate less the rate of inflation. So, if the nominal interest rate is 5%, if inflation were to be 2%, then the real interest rate would be +3%. The cost of money to borrowers would be rising each year. Equally, if the rate of inflation were to be 9%, then the real rate of inflation would be –4%. The cost of money to borrowers, in real terms, would have fallen. The role of deflation is to accentuate the cost of money to borrowers. If inflation is –2% (i.e. we are in a situation of deflation), and if the nominal rate of interest is zero, then the cost to borrowers is +2%, in other words it is becoming dearer.

The rising cost of money as a result of an era of deflation is likely to dampen economic activity. The very households whose real disposable income has risen, if they are heavily indebted, might choose to pay down some of that debt rather than spend the money because the cost of that debt is rising in real terms. This form of disguised saving has the potential to nip in the bud the beneficial effects of falling prices. If it does so, then it has the potential to make the deflationary spiral much worse than it otherwise would have been.

Is deflation good for us? In some respects it is. It will lead to rising household disposable incomes, particularly for those who are disposed to spend their windfalls rather than save them. These are usually the poorest in society, who have suffered from fuel poverty in recent years. That is wholly beneficial. However, the silver lining also has a cloud attached to it. If falling prices lead to falling incomes and employment, then there is a danger that deflation will have a depressing effect on economic activity. If deflation really takes hold, then it may also lead to increased saving in the form of debt repayment, which will also have a depressing effect on economic activity and may serve to reinforce the deflationary spiral. This is wholly a detrimental effect, and can be seen within the Eurozone today.

It is too early to tell if we have more to gain than to lose from the current period of falling prices. We need to be vigilant of weak signals of an emerging future to see how things are likely to go. For example, we might like to take note of figures of credit card indebtedness to see if households are using the windfall of lower energy prices to pay down their debt. We might like to see if weaker incomes in the energy and food sectors have a knock on effect by reducing demand in those sectors which service these industries. If deflation is being passed on. We might like to see if either of these factors is having an effect on general retail sales. Is the windfall of rising household disposable incomes being spent or saved? Although the future is currently uncertain, signals about its progress will become evident in the months to come.

Only then will we know for sure if deflation is good for us.

Stephen Aguilar-Millan
© The European Futures Observatory 2015

References:

[1] See: http://www.ft.com/cms/s/0/3172b7bc-a868-11e4-bd17-00144feab7de.html#axzz3Qyt7ZP75.

[2] The statements from George Osborne and Danny Alexander are reported in: http://www.bbc.co.uk/news/business-30794673.

[3] For some background to this see: http://www.theguardian.com/business/2015/jan/12/dairy-farmers-go-unpaid-milk-becomes-cheaper-than-water.

[4] See: http://www.bbc.co.uk/news/uk-scotland-scotland-business-30817678.

[5] See our piece on how Europe is on the wrong path: http://www.eufo.org/the-futurist-blog/the-fourth-reich.

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