Sunday, May 03, 2009

growth and sustainability - tip of the iceberg

The driver of economic growth is, well, it's growth. Our modern economic system is built on the idea of long-term growth. But what happens when growth is no longer possible? What kind of transition will it be, how messy will the process be, how long will it last before there is a true change? How long will money as we know it last?

A very simple type of growth is population growth. Right now, the population of the world is still growing. We arguably already have more than enough people on the planet, especially if the goal is for everyone to reach an Americna standard of living and a subsequent American level or per capita resource consumption. What happens when population in a country or region or eventually the entire world begins to plateau and possibly decline. We have an economic system predicated on continuous growth. The health of people's financial investments is linked to corporate performance which is in turn linked to how much those companies can grow. It's not exactly a Ponzi scheme, but what happens when the next level is smaller than the one before it?

The demogrpahics of Japan present an interesting example on aging and ultimately decreasing population base. Will it lead to a financial stagnation of sorts when it occurs elsewhere? Western Europe should serve up some interesting examples in the next few decades as well.

We can certainly move to the next level of growth: efficiency. If you cannot push the top line higher, then you need to push the cost line lower and/or the productivity per unit higher. However, there's only so much efficiency that can be wrung from any system. And the danger of an efficient system comes from the damage wrought by any significant disruption. At a certain point, the efficiency game has played itself out because further gains come with risks that are deemed too high. (Or they come anyway, the risks are too high, leverage is up, and any small waver causes the system to break. Sound familiar?)

The other issue is that the system, this economic machine is ultimately made up of discrete elements. They're called people. And people do not feel like statistics when they think about themselves. From a macro-level, we're all anonymous blips in the system. But here, on the street, with people, this is about individuals trying to carve out a life for themselves. At some point, it's not about growth for people, but about quality of life. Now, we've pitched in America for a long time that quality of life is synonymous with growth because money is supposed to buy happiness. More money means more goods, services, conspicuous consumption, ringtones, plastic crap, more, more, more! But this thinking is short-sighted and the end game is an ugly battle for scarce resources, including some we take for granted. Quality of life must take on a very different meaning than conspicuous consumption if we wish to have resources that will last into the next century.

How do we make that transition and change the mindset on quality of life that is not synonymous with material wealth? We could go French and start working 35 hours a week and pretend we don't care what the rest of the world thinks of us. Alas, America doesn't have that option. The last 60 years of foreign policy prevent us from having our cake and eating it too. The price we pay for being so big and so dominant for so long is that we made a lot of enemies, though some missteps along the way added to the total. In the face of that challenge, we must pursue an agenda that considers sustainability a high priority.


buickguy said...

Very well said as far as you go, but "How do we make that transition and change the mindset on quality of life...?" I look forward to your next installment. Or, maybe it will take you a little longer to find that elusive answer. Don't stop your search.

Mike said...

There's a lot that will change during our lifetimes in the sustainability direction, and much of it won't be synonymous with "economic expansion". We've gotten a hint in the past months with this economic downturn.

I think (without proof) that most of the downturn is not due to wall street's gluttony (although that couldn't have helped), but due to the average american's spending. The average savings rate ( used to be small (0.5%) and is now much larger (4%). While that means Americans will be on better financial footing, it means a 3.5% smaller economy this year ... more so, due to lost jobs. The increased savings rate is getting amplified by economic multipliers to yield a much larger (~6%) decrease in GDP.

Scott said...

if you ran for president, I'd vote for you.