Tag Archives: sustainability

What if economic growth is no longer possible in the 21st century?

Co-Written with Lew Daly.

For decades, rapid economic growth has been the norm for developed countries. An educated workforce, a large population boom, major technological advances, and abundant fossil fuels were the key components of growth, generating substantial and broadly distributed increases in standards of living in many countries. We have grown so used to such growth that we inevitably view it as a panacea for a host of economic ills, whether it’s a deep recession or income inequality.

We now understand, however, that the postwar growth paradigm is not environmentally sustainable. We also know that the shared prosperity it once delivered is itself unraveling. With these combined trends, something has to give in order to maintain living standards.

One possible scenario, with surprisingly good news for average Americans, is that constraints on growth will force political leaders to accept redistribution as a policy tool. Indeed, if we cannot grow our way to broadly shared prosperity again, redistribution is the only way to save the middle class.

Many economists have warned that the old model is dying out. In a much-cited paper, Robert Gordon argues that the rapid growth we take for granted is not only historically anomalous but likely to slow significantly in the 21st century, pointing in particular to diminishing returns from technology as one major drag. Developed countries have already picked the “low-hanging fruit” of technological advance (in Tyler Cowen’s phrase), and future innovations will produce far less growth, he argues.

Steven King, chief economist at HSBC, similarly argues, “The underlying reason for the stagnation is that a half-century of remarkable one-off developments in the industrialized world will not be repeated.” Gordon also points to rising inequality, which has led to stagnating middle-class wages, as a drag on future growth. As a result of these trends and others, average annual growth will fall below 1 percent in the 21st century, he predicts.

Then there is the impact on the global economy that will result from combating global warming. Working from a conservative carbon budget of 450 parts per million (PPM), Humberto Llavador, John Roemer, and Joaquim Silvestre predict that achieving this target will require a substantial slowing of growth, mainly borne by the United States and China. The U.S. and China must keep growth within the threshold of 1 percent and 2.8 percent of GDP per year, respectively, for the next 75 years, they say.

In an interview, Roemer tells us that these results are optimistic; after all, some economists have argued that growth may not occur at all. In the paper, the three argue that “there is no politically feasible solution to the climate change problem unless” both the U.S. and China “honestly recognize the connection between restricting emissions and curbing growth.” In contrast, the Congressional Budget Office’s long-range analyses use a growth projection of 2.2 percent on average over the next 75 years.

Other economists have come to similar conclusions about the connections between growth and sustainability. Early in 2012, Kenneth Rogoff argued that maximizing growth must be weighed against the negative possibilities of growth, like global warming. Indeed as James Gustave Spethnotes, environmental impacts are the most significant challenges to growth: “Economic activity and its growth are the principal drivers of massive environmental decline.”

Growth constraints will push the issue of distribution to the forefront of political discussions. In his forthcoming book Capital, Thomas Piketty predicts that growth will slow to between 1 and 2 percent — 19th-century levels — by the end of the 21st century. This trend, he further argues, will be accompanied by higher returns to capital and lower returns to labor, thereby exacerbating inequality.

The conclusions that flow from these observations are stark. The old economic paradigm relied on unsustainable growth, so we must change the paradigm. For decades, our rising standard of living came at a deep cost to our environment and our children’s future. There is simply not enough planetary bio-capacity to grow our way out of the messy moral discussions of distribution. The idea that inequality is merely an inefficiency to be corrected with a technocratic fix or perpetual growth is no longer tenable.

Fortunately, we have plenty of GDP that could help the middle class, with approximately $200,000 a year potentially available for each family of four. Given that the median family of four only gets about $67,000 a year at this point, it should be clear that it is possible to grow and strengthen our middle class, significantly, while adjusting to the lower GDP growth we are likely to experience in the future.

The question is, will political leaders accept the need for distributional remedies, or will they continue to side with the wealthy against the struggling middle class?

Originally published on The Week.

Why more GDP might not make us happy

Eugenio Proto and Aldo Rustichini have written a new column for VOX in which they argue that once GDP per capita reaches a certain level, it actually begins to correlate with lower life satisfaction.

Of course, this result shouldn’t be too surprising; GDP is a measure of economic production, and an excellent measure at that. But as Robert Kennedy noted in his 1968 speech,

Our Gross National Product [a measure of economic production that considers ownership rather than geographic location], now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

Simon Kuznets, the Nobel-prize winning economist who developed GDP, wrote in The New Republic, “Economic growth involves a variety of costs that must be recognized. Because of this, “goals for ‘more’ growth should specify more growth of what and for what.”

When people talk about GDP, they rarely understand the limitations of GDP as a measure of progress. GDP does not account for the social or environmental consequences of growth, nor the economic sustainability of growth. It doesn’t consider whether we’re producing bombs or butter. It doesn’t consider whether our economic growth may be coming at the expense of consumer safety, a worrying problem in the wake of thecontaminated water in West Virginia.

For poor and developing countries, positive GDP growth serves as a proxy for eliminating immiseration. For a developed country, immiseration is not as great a threat, and environmental and social sacrifices that may have been tolerated for growth are no longer countenanced. Already countries like Brazil, China and India are worrying about the environmental consequences of untrammeled growth. In American, people want more time with their families and shorter commutes.

A better measure of what matters is the Genuine Progress Indicator (GPI), which takes into account 26 economic, social and environmental indicators. States across the U.S. are beginning to implement GPI, and they’ve discovered that much of their recent GDP growth hasn’t budget the GPI. Here’s what it looks like in Vermont:

Eric Zencey, a key architect of Vermont’s move to GPI and one of the economists who is developing it with the Gund Institute, told me, “sound business practices requires deducting costs from benefits. We can change the conversation to what matters.” Here’swhat GPI looks like for the U.S. as a whole:

This helps explain why GDP is divorced from life satisfaction for developed nations.