What COVID19’s Economic Slowdown means for the Future — Part 2 of 3
In Part 1 of this article we covered what Earth is likely to look like in the future if we stay on our current path. At a rate of two-percent yearly economic growth, the size of the economy will continue to double every thirty-five years, forever. Humanity is currently consuming nearly three-Earths-worth of resources every year, and history and experience tell us that a growing economy will only cause this number to increase.
Furthermore, an economy that grows at two-percent yearly would be nearly 160 quadrillion times its current size in two-thousand years. I quote this far future number specifically because it’s absolutely ridiculous. Even in the wildest dreams of science-fiction writing it’s difficult to imagine what an economy of that scale would look like, and what it would take to sustain it.
I’m hoping that this ridiculous number will bring us to a statement that we can agree on: at some point, the economy will probably be big enough. At some point, we will be wealthy enough that we don’t need any more, and don’t need to keep growing.
At some point, the economy will probably be big enough. At some point, we will be wealthy enough that we don’t need any more, and don’t need to keep growing.
It turns out that we already know roughly where that point is, and it would surprise most people. When a country’s per-capita income is below $15,000 (USD), growing the economy and increasing the average person’s physical wealth produces a direct increase of happiness and wellbeing. Below that rate, people’s basic needs are not being met, and therefore growing their wealth directly increases their wellbeing.
However, after this point the gains in happiness and wellbeing begin to trail off. At an income of around $36,000 the wellbeing created by economic growth is virtually zero. That might surprise many people, but it’s the takeaway from numerous studies on measures of subjective happiness over time. There are several reasons why it might be the case. Part of the reason is that when people’s basic necessities of life are met, other factors than wealth take precedence in order to determine happiness. Examples include a sense of belonging or purpose, friendships and family networks, free time for leisure and hobbies, and perceived fairness of the system. Another is that many of the mechanisms that our economy employs in order to increase growth and increase wealth have a negative effect on other aspects of society and that they largely outweigh the benefits they may have created.
The classic example is that of a “rock through a window”. If I wander out into the street and throw a rock through the window of a local shop, I’m creating GDP growth. The shop owner now has to spend money in order to hire someone to fix the window, who then has to spend money on raw materials in order to do the job. Thus, more money is moving in the economy, a job is created, and resources are extracted from the Earth and added to the human stock of wealth. But by throwing this rock I have also reduced the perception of safety and security in the community, and cost the business-owner money that shouldn’t need to be spent. Thus, the economy has grown but it hasn’t made us happier.
So, why exactly are we continuing to chase economic growth if the evidence tells us that it isn’t making us happier, and may in fact be having the opposite effect?
“There was something paradoxical in the way the opulent societies of the Global North saw themselves at the turn of the century. Their behaviour resembled that of a high speed racing driver overcome by the frenzy of the race, who fails to notice he has passed the finish line and continues to frantically pump the gas. At a certain point, the tires wear thin and the car loses speed. Instead of celebrating his victory, the driver starts to worry that he is not as fast as he used to be.”
A Future History of the 21st Century, by Federico Tabellini
The modern concept of GDP and of “growth” as a policy goal were only formulated in the mid 1930s, and began to be a crucial component of financial institutions beginning in the post-World War II economic reconstruction. Over time, many of our economic structures became tied into expected growth, and were designed to fail if growth faltered.
Our very banking system is built around ensuring a constant state of inflation, by allowing banks to “create” money by issuing debts and credit beyond what they actually hold in deposits. This constant purposeful inflation incentivizes spending rather than saving, since it ensures that present purchases will cost less than future purchases of the same product. At the same time, much of the borrowing done today is done based on the assumption that a future economy will have an easier time paying it off, since they will be many times wealthier than we are now.
Another example is old-age security, which is paid for through public revenues. That revenue is mostly derived from taxation of employment (income tax). In order for this system to be sustainable, we need to retain a ratio of many more working-age individuals than elderly pensioners, which in turn requires a constantly expanding population. Some countries that are currently experiencing a naturally declining population have even launched campaigns trying to convince citizens to have more children, because they foresee the system collapsing without growth.
None of this is sustainable in the long term, but part of the reason why it persists is because our political institutions are built around short (usually four year) cycles. A government does not need to plan for the next ten, or hundred years. Their incentive is strongly to focus on policies that are immediately visible over the next couple years, so that their re-election can be assured.
However, most of us plan on outliving our government’s current short term, and want an economy that’s strong and stable for our own senior years, and for our children and grandchildren.
There are proposed solutions out there, which I’ll be covering in Part 3.
