To what degree do we wish to discuss working toward an idealized society and to what degree do we wish to discuss what is actually possible? When one spends time exploring options it is difficult to not get caught in this trap. In this particular piece of writing I will abandon trying to fashion ideas for what may be considered possible now. The world we attempt to fit our plans into when we do this is the world of the past, which served us well while it played itself out but which is now based on outdated ideas.
What is working well in our economies and what is broken? Clearly one wants to avoid a syndrome of throwing out the baby with the bathwater. And while systems from the past may offer some workable alternatives to what we are doing now we should recognize that the model the U.S. employs has evolved into a pretty comfortable model for many people in that it offers the perception of a great deal of personal freedom, even though opportunity may vary widely given ones circumstances in life. It would be ideal to fashion a system of guidelines that clearly reflect a natural way of people to behave and so fashion a system which has a better chance of working. This was one of the major downfalls of socialism, even in countries where socialism had success, such as the social democracy of Sweden, usually only half the people were actually in favor of the system. Yet socialism by its nature requires people to do a great many things to make the system work, any system which requires a great deal of effort on the part of its people will, of course, also require a high degree of approval. This would seem to be self evident. This is as opposed to a system based on a high degree of individual freedom, where you basically let people go and hope for the best. Even if people find that their lives do not clearly pan out the way they would hope they must accept part of the blame for that.
One thing I assume about the economy moving through the beginning of this century is that growth will be slow to non-existent. The reasons for this are so pressing that it seems foolish to think otherwise. A quick list of these reasons include
First off you have the aging of populations across the globe, (there are really only a few countries that have demographics which avoid this), along with shrinking populations in many countries. People who are older are on downward consumption arcs, and they are pulling resources out of the economy, not contributing resources to it. Most people who are 70 will be consuming less than they did when they were 50, their goal, generally is to spread their assets out as far as possible.
Next you have the fiscal straits that many governments are in, if growth is going to be slow then the debt burdens they have accumulated, and in the case of countries like the U.S. and Japan, continue to accumulate, will be even harder to pay off, draining away funds that could be used for consumption. This will also mean that it is difficult for governments to spend to the degree that might be warranted. A lot of time debt is excused because of how it exists as percent of GDP. This is fine for a historical context but it ignores the some important aspects of the picture. First is that debt is only measurable against ones ability to pay, in other words how does taxable wealth compare to debt. In this light what may be a historically manageable level of percent of GDP looks much worse. When you add it to consumer and business debt, and then compare that income it becomes clear that we are in debt at a dangerous level. Not because the amount of our public debt is so high as compared to the size of our economy, but because our ability to pay even this amount is so low, since we have so many other debt obligations as compared to our income. another problem is that lets say our debt service for public, (or government), debt is 400 billion dollars a year. A small amount you might say for a 15 trillion dollar economy, but how often do we hear of how can’t afford to spend one billion dollars on some very worthy program? 400 billion dollars is a lot of money. Especially when it isn’t available to spend on infrastructure investments that do improve the economy and general quality of life.
Then there is the tapping out of consumer potential. As markets mature their growth falls off because there is only so much consumption which can be achieved. Aside from probable limits as to how high discretionary income can rise, or debt extended to support consumption, there is also the limiting factor of how much people can actually use. The only thing which may limit this effect is the effect of status on peoples buying choices, a Mercedes may just be a single automobile unit as much as a Hyundai is, but the cost is much higher, so if you make the move from one to the other it reflects economic growth. This tapping out of potential is essentially what happened to Europe. People reached a level of affluence they were comfortable with and a set of possessions they wanted, so all they were really left doing was replacing what they had as it broke or doing the occasional upgrade. But these things aren’t enough to fuel growth.
Another factor which was viewed as limiting growth for many people was peak oil, that energy costs were bound to rise as supplies of oil were depleted. This argument lost a lot of steam since the exploitation of natural gas and unconventional means of oil extraction became so popular. In fact the U.S. is set to become the worlds largest oil producer in a short period of time. Concern over energy costs has waned. Yet we should bear in mind that what this writing seeks to do is lay out a vision of where we need to go over decades, not a decade. In this light while the lowering of energy costs is to be welcomed we need to remember that we are still overly dependent on non-renewable sources of energy whose costs must rise as supplies are depleted. Does this mean that perhaps some way of utilizing coal won’t be developed which makes it acceptably safe over the span of using up our natural gas reserves? No it doesn’t. But the prudent thing to do is to plan on what we know is workable, and if we are looking at sustainability renewable energy sources are the logical path to pursue. We should consider the natural gas boom to be a blessing in that it gives us time to further develop our renewables without having to go broke doing so.
All this points to economic growth as a result of certain conditions which occurred due to a confluence of historical elements. A growing population, more people to spend money equals growth, a cheap and easily extractable form of energy, industrialization and rapid rises in productivity, achievable global trade due to the ease of transporting goods, the rise of the service economy especially intellectual goods, the advent of the IT making both trade and development of new goods and services possible, and a low requirement for public spending. These amounted to a perfect storm, as it were, to allow and create growth. But this does not mean that we should expect high rates of growth in the future. Through much of human history standards of living have remained relatively static, especially as concerns GDP per capita as opposed to the overall size of an economy, and this is a norm we are destined to return to. A state where the economy grows for a bit and then shrinks for a bit, yet remains pretty level. As such the concept of moving beyond capitalism should be pretty logical, capitalism did a fine job of exploiting the resources needed to make the industrial revolution, it was a good tool for that, but if we are looking at naturally lower growth then a different model is appropriate for managing production resources, one which isn’t so profit and growth oriented.
If one looks at recent history what have the sources of growth been? Mostly economic bubbles. Such as the housing bubble at the start of this century or the IT bubble of the 90s. The growth didn’t occur because of normal business cycles, or an economy just chugging along, it occurred because of speculative excess. Now this isn’t to completely condemn bubbles. One thing about these phenomenon is that they leave a lot of assets in their wake. Certainly the It bubble created and then destroyed a lot of wealth, but it also enabled the “wiring” of the United States, the housing bubble left behind a lot of tangible assets in the form of new homes. So bubbles aren’t completely destructive, the only problem with them being that they are capable of dragging down an entire banking sector with them, as was the case with the housing bubble. Yeah it’s great to have those tangible assets left behind, but were they worth having a depression over?
In our minds growth has come to equal potential. If in the U.S. you hear about a lack of growth that has come to equate with “the end of the American dream”, or how your children will not be able “to live as good of a life as you did”, or how our standards of living will be falling. At the worst these arguments equate those who say that growth is certain to stall with some kind of anti-Americanism, that such people just don’t believe in what has made the country great, and they are falling for some kind of socialist defeatism. So strong are these feelings that the performance of the markets has come to clearly reflect them. If you have bought stock in a perfectly well run, profitable company, don’t expect that stock to perform well unless the company can increase its profits every year. An outlook which defies logic when extended far enough. It is good to expect the functioning of the free market to clean waste and inefficiency out of the economy, but to imagine that means that companies have endless potential to increase the scope of their operations is absurd. In way such expectations drive toward something that free market enthusiasts should be wary of, monopolies. Market share should only rise so far, but a company should not dominate a market.
It is worthwhile to think about what actually did make this great also. Why was the U.S. the economic powerhouse it was, well first it was blessed with a continent ready for exploitation, (never mind genocide had to help that out), but if we look at more recent history it was World War II that made this country into the economic powerhouse it became, and it wasn’t just the industrialization associated with the war machine, it was that through the course of the war every other major economy was brought to its knees. When World War II ended the U.S. essentially had no global competition. Once other countries geared up their economies and U.S. corporations had to start competing with the likes of Toyota, etc., then it became clear how much of that mantle of economic dominance was actually deserved.
So where does this leave us? Does the end of robust growth mean that our economic prospects are gone also? Well this is up to us. It is paramount that we switch our focus from growth to quality of life issues. Maybe your standard of living doesn’t rise anymore, but if the air you breath is cleaner, if the schools you attend, or send your children to are better and safer, if the products you use are more reliable and less toxic don’t these things equate to what growth was accomplishing? In my case I would be happier knowing that the effects of global warming were being mitigated than knowing that I would be able to buy an extra LCD television next year. And that is part of the problem also. Some of these things which would make our lives better, and which we absolutely should be doing, mean spending less, mean slowing growth. And not only should we be doing some of these things but we must be doing them.
So there are real market forces that will cause us to have lower growth and there are also fiscal issues which will cause us to have lower growth. The reason for this is that our government is broke. In recent years fully a third of government has been financed through debt. So if we talk about making our health care system better, for instance, so that our infant mortality rates and life spans more closely match those in the rest of the world then we can’t take the approach that we can solve these problems through government spending. Yes we can make cuts to wasteful programs, cut our bloated defense budget, end the expense of our foreign military interventions, raise taxes on the rich, or corporate taxes, but you know what? Our debt situation is so bad that even when we do need to do these things the revenue and cuts need to go to reducing our deficit, not paying for new programs. This is something people in the U.S. should be ashamed of, really. We drove ourselves so deeply in debt and got almost nothing for it. There is government spending that can pay for itself. For instance if you have people who sit if traffic for three hours on their commutes and you do some sort of infrastructure project that reduces that time to one hour, then they will spend those other two hours doing things that create economic activity, which in turn creates taxable economic activity. But we didn’t do any of that, we wasted trillions of dollars and have damn little to show for it, and now we must pay the bills for that foolishness, plain and simple.
So in think about this and applying the idea to what sort of government spending may be sustainable moving forward there is an interesting thing to consider. If we look at countries which do support a high degree of government spending we see that they are either blessed with an economy which creates a lot of wealth from extracting natural resources, or has positive trade balance, If you don’t have either of these, and you are supporting an activist government you are probably doing so through debt.
So how do we do all the things that need to be done without government doing them? Well quite frankly we need to develop a social and economic structure that allows people to do these things and find some sort of sustainable life out of the deal. This gets into very dangerous ground. For instance lets say that since the system can’t afford to hire more teachers, and there are teachers out of work, perhaps there are people who have some means who would be happy to exchange room and board for the schooling of their children, or that they could create a tutoring co op which does close to the same thing. This concept could be done toward any number of things, gardening, repair of public places, etc. The problem here is that if you have people exchanging their time, working in exchange for room and board, or some other form of personal support outside the traditional wage system, you risk having an endowed class served by people who have little option as to what else they may do. You can look at this in the very negative light, sliding toward some kind of feudalism, or you can look at it as an extension of what occurred in the Great Depression, where the unemployed would travel from place to place looking for a meal and a roof in exchange for painting a house. One is a very scary situation of exploitation the other is a situation of communities caring for each other in the best way they can.
This is a bit difficult to envision when one considers how it is supposed to work to relieve the demands on what government supplies. Since first off the government is not in a position of giving someone a place to live, and secondly when government jobs are some of the best jobs available, in terms of benefits and security one can’t have people working for nothing competing with those jobs.
One thing is clear and that is that we need to figure out how to match an era of declining capabilities from the government due to spending restrictions and an era where we have too many people who have nothing to do. Because make no mistake, the situation for unemployment doesn’t look promising in the short to mid term. (In the longer term it maybe much better, one thing the aging of populations will accomplish is a draining of the workforce, meaning at some point we may need any able bodied person we can find). The reason for the lack of demand for labor is two fold, first globalization has created a labor glut, when you mix the amount of labor available from Virginia, to Mexico, to China, etc. and combine that with the productivity available from modern production techniques, (and lets not forget that robotics will be used more and more), there are way too many people for how many are actually required to create everything we need. There is some idea that by educating your workforce you can corner the good jobs in the global economy, this may be true to a degree, but soon even the good jobs will be commodities. There are many countries that are making big investments in turning out as many degrees in things like engineering that they can, this isn’t going to mean that we need more engineers, it means that the going wage for qualified engineers will fall.
There is one option available to reverse this trend of constantly requiring less labor for what we create and the dilemma it produces in how people earn their livings, that is to decentralize production. One of my favorite fun facts is that there is one city in China which produces nearly all the buttons used in the world. This is a sad fact when so many people around the world need to find some means of supplying their daily needs, now wouldn’t it make more sense to have a few more button factories located more closely where the final goods are used? This decentralization could be done through regulation, cutting down the size of corporations or requiring higher levels of local content, it is doable without completely changing existing economic methods. Now a traditional economic argument against this would be that you are rolling back standards of living, by rolling back productivity gains, but the fact is that productivity gains have not been channeled into wages in some time, they have been channeled into profits, since the labor glut leaves labor with no bargaining power to demand raises. So really there should be enough fat in the system to soften that blow.
A different area that shows great promise for decentralization in the economy is the grow local movement. While manufacturing creates a lot of obstacles around the idea of decentralizing, (I am sure the reader was painfully aware of how glibly I threw around concepts like reducing the size of corporations as though that could be done with the ease of writing a traffic ticket), agriculture is a rich of bed of opportunity for that. Not many of us are happy with the way we produce food, from the factory farms that raise our meat, to the pesticides and genetically engineered foods that supply our plant stuffs, and yet the fact is that most of this system would collapse if it weren’t for policy supports by the government. On the other hand we have ever increasing numbers of people willing to pay more for food which is grown and raised close to them on smaller farms. If we removed the supports from agri-business we could encourage a food industry which produces high value products and creates a lot of jobs, while at the same time being better stewards of our land and enjoy food which is more ethically created.
So we could engineer growth by re-distributing wealth through creating policy which works to offset the effects of the labor glut. Re-distributing wealth has a bad reputation among many, and for not very good reasons. It is seen as taking money from those who work hard and giving it to those who aren’t deserving. The manner in which I bring it up here though is a different case, all we are saying is that people should be paid well if they work well, and right now businesses have no reason to pay well since they are a lot of equally qualified people out of work who are willing to work for less than the people employed do. This isn’t the kind of scenario that leads to a vibrant economy. But even if you want to take the view that you are, let’s say, taxing a hard working executive to pay someone else welfare the term wealth distribution is still a poor term, the reason being that there is a difference between wealth and income. When you pay someone welfare you usually aren’t making them “wealthier”, this is because they will spend the money as soon as they get it, and really that is where the whole benefit lies. An economy does well when people buy things, people can’t buy things if they don’t have money, if you enable people to buy things then you are doing the economy, and everyone a favor. Everyone thinks that investment leads and economic activity follows, but it is the other way around, in the absence of anticipated demand businesses will not invest no matter how cheap the capital is, if anticipated demand exists then businesses will invest no matter how expensive the capital is, they will simply pass along that cost to consumers.
It is possible then to engineer growth, but we must remember growth occurs do to a certain set of stimuli being present in an economy, without those there will be little or no growth, but the stimuli is required, something has to happen to make that possible, war, technological turnover, population growth, etc. So if we are going to plan an economy which is sustainable we should lay our base line expectations on no growth and then use any extra benefit which may be achieved through growth to fund those things which create an undue burden on the functioning of the economy, since large public expenditures aren’t possible without some sort of wealth creating engine for the economy. And in the absence of growth we need to focus our cultural expectations on quality of life issues. We can do this without hurting ourselves, we can do this and help ourselves.