The Economist:
[By] making it easier for households and businesses to get credit, deregulation contributed to economic growth.
Contents
The Age of Irresponsibility
Redefining Prosperity
The Dilemma of Growth
Tim Jackson (1957)
Director, Centre for the Understanding of Sustainable Prosperity (CUSP).
- Prosperity without growth?, Sustainable Development Commission, 30 March 2009.
The Age of Irresponsibility
The banking crisis of 2008 led the world to the brink of financial disaster and shook the dominant economic model to its foundations.
In Search of Villains
The most prominent villain was taken to be subprime lending in the US housing market. …
A dramatic rise in basic commodity prices during 2007 and early 2008 … contributed to economic slowdown by squeezing company margins and reducing discretionary spending.
(p 21)
[In] mid-2008, advanced economies were facing the prospect of ‘stagflation’ … for the first time in thirty years.
Oil prices doubled in the year to July 2008, while food prices rose by 66%, sparking civil unrest in some poorer nations.
By the end of October 2008, governments across the world had committed a staggering $7 trillion of public money — over three times the Gross Domestic Product (GDP) of the UK — to securitise risky assets, underwrite threatened savings and recapitalise failing banks.
No one pretended that this was anything other than a short-term and deeply regressive solution.
A temporary fix that rewarded those responsible for the crisis at the expense of the taxpayer … excused [only] on the grounds that the alternative was simply unthinkable.
Collapse of the financial markets would have led to [the bankrupting entire nations]. …
The humanitarian cost … would have been enormous.
(p 20)
[In 2008] Goldman Sachs paid out $2.6 billion in end of year … bonuses in spite of its $6 billion dollar bailout by the US government …
[The] responses [to the crisis] were seen as short-term interventions, designed to facilitate the restoration of business as usual.
Short-selling was suspended for six months, rather than banned.
The part-nationalisation of financial institutions was justified on the basis that shares would be sold back to the private sector as soon as reasonably possible.
The capping of executive remuneration was ‘performance related’. …
(p 21)
The growth imperative [was] at least partly responsible for the loosening of regulations, the over-extension of credit and the proliferation of unmanageable (and unstable) financial derivatives.
The Labyrinth of Debt
[The] unprecedented consumption growth between 1990 and 2007 was fueled by a massive expansion of credit and increasing levels of debt. …
[For] one part of the global economy to be highly indebted, another part must be saving hard. …
The savings rate in China during 2008 was around 25% of disposable income, while in India it was even higher at 37%.
There were … clear differences between the so-called ‘liberal’ and ‘coordinated’ market economies’, with the former typically showing higher levels of consumer indebtedness than the latter. …
Personal debt in the UK more than doubled in less than a decade. …
[By] the end of 2008, the cumulative personal debt still stood at almost £1.5 trillion, higher than the GDP for the second year running. …
During the first quarter of 2008, the household savings ratio in the UK fell below zero for the first time in four decades.
(p 22)
BOX 2
(p 23)
Debt in Perspective
Debt rises in two ways:- firstly by borrowing more money (e.g. for increased public spending); and
- secondly through interest accumulated on the debt. …
The extent to which it ‘matters’ how much debt we hold depends (in part) on this balance between assets and liabilities [and,] as the current crisis has shown, on the financial reliability of the assets.
[Private / Personal] Debt
Personal … or consumer debt is the amount of money owed by private citizens. …
Personal debt in the UK … at the end of 2008 [was] dominated by home loans [comprising] 84% of total.
[As] the value of homes continued to rise people’s financial liabilities (home loans) were offset by the value of their physical assets (homes).
Problems arise when house values collapse.
[Public / National] Debt
The national (or public sector) debt is the money the government owes to the private sector. …
Increased debt is a common feature of public finances during recession. [Servicing] this debt — without compromising public services — [can be achieved] in only three ways.
- [By] achieving the desired aim of growth.
- [By] increasing the tax rate.
- [By] using the debt to invest in productive assets with positive returns to the public purse.
A continually rising public debt in a shrinking economy is a recipe for disaster.
External Debt
The total debt held outside the country by government, business and households …
The sustainability of this debt depends on [among other factors]- the extent to which it is balanced by external ‘assets’,
- the form of both assets and liabilities (including the currency in which they are held) and
- the relative strength of domestic currency on the international market.
In extreme circumstances, a country may find itself unable to attract investors willing to support its spending and unable to liquidate its assets to compensate for this.
At this point the level of external debt relative to the GDP becomes critical.
Calling in debts worth almost five times the national income (as in the UK) would be catastrophic.
People are encouraged into debt by … the desire for social status and the drive to boost high street sales.
But when this strategy becomes unstable … it places large sections of the population at risk of lasting financial hardship [— mainly] the lower income groups who profited [least] from the last two decades of growth. …
France, Germany, Canada and the US all have public sector debts above 60% of GDP.
Italy and Japan hold public sector debts that are higher than their GDP.
Norway by contrast holds no public debt at all …
In the UK, public sector debt rose sharply through the financial crisis [due to the need] to protect the banks and fund economic recovery [— pushing the projected] national debt to almost 60% of GDP by 2010.
Public sector debt is not in itself a bad thing [if it] includes money saved by its own citizens. …
But when the household savings rate collapses … a country [must borrow] from outside its own boundaries [exposing it] to the volatility of international markets.
(p 24)
External debt varied widely across nations … during 2007/8, from as little as 5% of GDP (in China and India for example) to over 900% of GDP (in Ireland).
In the UK, the gross external debt increased seven and a half times in the space of just two decades.
By the end of 2008, it was equivalent to almost five times the GDP and ranked as the second highest absolute level of external debt in the world after the US.
These external liabilities were set off — at least in part — by a higher than usual level of external assets. …
[This] position was deliberately courted by the UK in its role as an international centre of finance. …
(p 25)
[The] roots of the crisis lie at least in part in a concerted effort to free up credit for economic expansion across the world.
… George Soros traces the emergence of … a ‘super-bubble’ in global financial markets to a series of economic policies to increase liquidity as a way of stimulating demand.
Loosening restraints on the US Federal Reserve, de-regulating financial markets and promoting the securitisation of debts through complex financial derivatives were … deliberate interventions [designed] to promote economic growth.
The Enemy Within
Securitisation of mortgage debts (for example) was championed at the highest level, spearheaded by Alan Greenspan, former chairman of the Federal Reserve. …
In testimony to US Congress in late October 2008, Greenspan admitted to being ‘shocked’ that markets hadn’t worked as expected. …
For over two decades, deregulation of financial markets was championed under monetarism as the best way to stimulate demand.
The monetarists may have been reacting against the levels of public debt incurred by Keynesian spending programmes in the 1970s.
But a strategy that ended up replacing public debt with private debt was always a risky one.
[Indeed, when the bubble burst, even the injection] an estimated $7 trillion of taxpayers’ money proved insufficient to guarantee stability and avoid recession. …
[The] ‘age of irresponsibility’ is not about casual oversight … individual greed [or] malpractice in selected parts of the banking sector. …
[The] credit crisis and the ensuing recession were part of a systemic failure in the current economic paradigm …
(p 26)
The natural rate of decline in established oil fields is now believed to be as high as 9% a year. …
Economic expansion in China and [other] emerging economies has accelerated the demand for fossil fuels, metals, and non-metallic minerals …
[Competition] for land between food and biofuels [is driving up] food prices.
[Accelerating] environmental impacts [include:]- rising carbon emissions,
- declining biodiversity,
- rampant deforestation,
- collapsing fish stocks,
- declining water supplies and
- degraded soils.
- to regulate financial markets …
- to protect natural resources [and]
- [to] curtail ecological damage.
Prosperity today means nothing if it undermines the conditions on which prosperity tomorrow depends.
(p 27)
Redefining Prosperity
Prosperity has [material,] social and psychological dimensions. …
Amartya Sen … set out the [three] distinctions [in his] landmark essay [‘the living standard’ in 1984:]- [Opulence;]
- [Utility;]
- [Capabilities] for flourishing.
Figure 5: Factors influencing subjective wellbeing (happiness) Partner/spouse and family relationships 47% Health 24% A nice place to live 8% Money and financial situation 7% Religious/spiritual life 6% Community and Friends 5% Work fulfilment 2% Don’t know/other 1%
Prosperity as Opulence
Opulence refers to the ready availability and steady throughput of material commodities. …
The ‘diminishing marginal utility’ of goods … reflects the fact that [after a certain point] having more of something usually provides less additional satisfaction. …
When you’ve had no food for months … any food at all is a blessing.
[Whereas, when] the American style fridge-freezer is already stuffed with overwhelming choice [further consumption is just a recipe for] obesity and ill-health …
([This] offers a strong humanitarian argument for redistribution.}
Prosperity as Utility
Rather than focusing on the sheer volume of commodities available to us, this … version relates prosperity to the satisfactions which commodities provide.
(p 31)
In the immediate post-war years, it was a challenge to provide for basic necessities, even in the most affluent nations.
Today, consumer goods and services increasingly furnish us with identity, experience, a sense of belonging, perhaps even meaning and a sense of hope …
Measuring utility in these circumstances is … difficult. …
Economics [assumes] value is equivalent to the price people are prepared to pay for them [—] utility as the monetary value of market exchanges.
[Total spending as measured by GDP] is taken as a proxy for utility.
There is [however] a huge literature critiquing the value of GDP as a wellbeing measure [eg] its failure to account for non-market services (like household or voluntary labour) or negative utilities (externalities) like pollution.
Some have argued that the … concept of utility as exchange value is … flawed.
A key finding … is the so-called happiness or life-satisfaction paradox. …
Real income per head has tripled in the US since 1950, but the percentage of people reporting themselves very happy has barely increased at all, and has declined since the mid-1970s.
In Japan, there has been little change in life-satisfaction over several decades.
In the UK the percentage reporting themselves 'very happy' declined from 52% in 1957 to 36% today, even though real incomes have more than doubled.
[Above] about $15,000 per capita … the life-satisfaction score barely responds at all even to quite large increases in GDp …
[Strikingly,] Denmark, Sweden, Ireland and New Zealand all have higher levels of life-satisfaction than the USA, but significantly lower income levels.
By contrast, at very low incomes [a] small increase in GDP leads to a big rise in life satisfaction. …
It is in … poorer countries that growth really does make a difference.
[For] richer countries the returns on further growth appear much more limited.
[Again,] marginal utility … diminishes rapidly at higher income levels.
[On] this analysis … happiness-based [measures] of utility and an expenditure-based [measures] of utility behave in very different ways.
(p 32)
[The] two measures presume fundamentally different concepts of utility.
(p 33)
[To] equate prosperity with happiness goes against our experience of what it means to live well.
People can be unhappy for all sorts of reasons, some of them genetic, even when things do go well.
Equally, they may be undernourished, poorly housed, with no prospect of improvement and yet declare themselves … completely content …
Prosperity as Capabilities for Flourishing
Sen [argues for a] living standard based on the capabilities that people have to flourish.
[How] well people are able to function in any given [context?]- Are they well nourished?
- Are they free from avoidable morbidity?
- Do they live long? …
- Can they take part in the life of the community?
- Can they appear in public without shame and without feeling disgraced?
- Can they find worthwhile jobs?
- Can they keep themselves warm?
- Can they use their school education?
- Can they visit friends and relations if they choose?
In his later work, Sen [stressed] not so much the functionings themselves … as the capabilities or freedoms they have to do so [— that] people should have the right to choose whether or not to participate in society.
Nonetheless, there are some clear reasons to retain the central importance of functionings themselves.
In the first place [any] attempt to operationalise this idea of development ends up needing to specify what the important functionings are.
[And even] when it is the freedom to function that people value most … this is largely because the functionings themselves are valued too.
[Secondly, one must not] take the focus on freedom too far.
In a [finite world] certain kinds of freedoms are either impossible or immoral.
[Eg the] freedom …- to [endlessly] accumulate material goods …
- to achieve social recognition at the expense of child labour in the supply chain,
- to find meaningful work at the expense of a collapse in biodiversity, or
- to participate in the life of the community at the expense of future generations …
Bounded Capabilities
Capabilities for flourishing … needs to be interpreted … as a range of ‘bounded capabilities’ to live well — within certain clearly defined limits. …
The first [of these] is the finite nature of the ecological resources [upon] which life on earth [depends].
[These include:]- … material ones [—] fossil fuels, minerals, timber, water, land …
- … the regenerative capacity of ecosystems,
- the diversity of species and
- the integrity of the atmosphere, [soil and ocean]. …
The second … is the scale of the global population. …
A prosperous society can only be conceived as one in which people everywhere have the capability to flourish in certain basic ways.
Deciding on those basic ‘entitlements’ is not a trivial task. …
Physical and mental health matter.
Educational and democratic entitlements …
Trust, security and a sense of community …
Relationships, meaningful employment, and
the ability to participate in the life of society [all] appear to be important almost everywhere. …
The challenge for society is to create the conditions in which these basic entitlements are possible.
(p 35-5)
The Dilemma Of Growth
[In] defence of economic growth.- [Opulence] is a necessary condition for flourishing.
- [Economic] growth is closely correlated with certain basic entitlements — for health or education … that are essential to prosperity.
- [Growth] is functional in maintaining economic and social stability.
Material Opulence as a Condition of Flourishing
Why is it that material commodities continue to be so important to us, long past the point at which material needs are met? …
[We] imbue material [objects] with social and psychological [meaning.]
Consumer goods provide a symbolic language [with] which we communicate [about] family, friendship, sense of belonging, community, identity, social status, meaning and purpose in life.
(p 38)
The importance of income in wellbeing is largely played out (within nations) through relative effects.
What matters — more than the absolute level of income — is having more or less than those around us. …
Healthy life expectancy for English females was 16 years higher for those in the top decile in the late 1990s than it was for those in the bottom decile.
(p 39)
The population as a whole gets richer.
Some people are better off than others and positions in society may change.
But overall this positional competition adds little or nothing to the levels of wellbeing in the nation.
[Perhaps a society] in which social positioning is either less important or signalled differently — could change things.
We would need to confront the social logic that conspires to lock people into positional competition [and] identify less materialistic ways for people to participate in the life of society.
[These] strategies could allow us to … reduce our dependency on material growth.
Income and Basic Entitlements
[Life expectancies are] as low as 40 years in parts of Africa and almost double that in many developed nations.
(p 41)
As income rises, the additional benefits in terms of increased life expectancy are reduced. …
Chile (with an average annual income of $12,000) has a life expectancy of 78.3 years, greater than that of Denmark (whose average income is almost three times higher at $34,000).
[While others] with incomes in the same range as Chile (South Africa and Botswana, for instance) [have life expectancies] 30 years lower. …
In sub-Saharan Africa, 18% of children die before their fifth birthday, whereas in OECD countries, the proportion is 0.6%. …
Infant mortality in Cuba is six deaths per 1000 live births, as low as it is in the US — [despite] an average per capita income of $6,000 enjoy [or] less than 15% of the income enjoyed by Americans.
[Other] countries with an average income somewhat higher than $6,000 per capita [have] infant mortality rates … much worse than those in Cuba [e.g.] Equatorial Guinea … with a per capita income of $8,000 and [an] infant mortality of 123 deaths per 1000 live births.
[Some] low income countries [achieve] educational participation rates that are as high as the most developed nations.
Kazakhstan, with in average income of less than $8,000, scores higher on the index than Japan, Switzerland or the US, countries with income levels four and five times higher.
[Yet there are other] countries with income levels of $8,000 whose educational participation rates are only two-thirds of those in most developed nations.
(p 42)
[As] incomes grow beyond about $15,000 per capita the returns to growth diminish substantially. …
Three or four different modes of development emerge. …
In the UK … life expectancy has increased quite gradually but very consistently over the last few decades in spite of short periods of recession.
Japan … was hit quite severely during the Asian crisis in the late 1990s and suffered a prolonged period of economic turbulence [—] yet life expectancy subsequently increased faster than at any time in the preceding two decades. …
In Argentina … economic output has been highly erratic over the last three decades, but the gains in life expectancy have been substantial and consistent.
In Russia … life expectancy remained more or less constant between 1970 and 1989 but fell by 6% following the collapse of the Soviet Union [and continued to decline] even after the economy started to recover.
(p 43)
[Across] Africa since 1990 [there was a] collapse in life expectancy irrespective of growth rates [attributed to AIDS. …]
In Cuba [GDP] collapsed after the breakup of the Soviet Union in 1989, partly because of the sudden removal of subsidised Soviet oil.
[Nevertheless] one recent study [found] significant health improvements in the aftermath.
Calorific intake was reduced by over a third.
But obesity was halved and the percentage of physically active adults more than doubled.
Between 1997 and 2002, "there were declines in deaths attributed to- diabetes (51%),
- coronary heart disease (35%) [and]
- stroke (20%)".
Income growth and economic stability
It is clear … that collapsing economies do present a risk of humanitarian loss.
Economic stability or, at the very least, some form of social resilience, is important for prosperity. …
Some countries — notably Cuba, Japan, Argentina — have been able to ride out quite severe economic turbulence and yet maintain or even enhance national health [while others] have watched life expectancy tumble in the face of economic recession.
(p 44)
The transition of ex-Soviet states to a market economy was characterised by very profound changes in social structure [including] a collapse in state provision of health and social care. …
In Cuba … continuing state-led social provision [underpinned] the health improvements that followed the economic collapse.
[Up to a point humanitarian] loss in the face of economic turbulence … may be more dependent on social structure than on the degree of economic instability …
[The critical question is] whether a growing economy is essential for economic stability.
Continuous improvements in technology mean that more output can be produced for any given input of labour, capital and resources.
Efficiency improvement stimulates demand by driving down costs [and] fewer people are needed to produce the same [volume of] goods …
As long as the economy grows fast enough to offset this increase in ‘labour productivity’, there isn’t a problem. …
[But if] the economy slows for any reason — whether through a decline in consumer confidence, through commodity price shocks, or through a managed attempt to reduce consumption — then … improved labour productivity leads to unemployment [and a recessionary spiral of] diminished spending power [and falling] consumer confidence and … demand …
Social costs rise with higher unemployment.
[Tax] revenues decline [risking] cuts to public services.
Governments must borrow more … to maintain public spending [and stimulate demand thereby increasing] the national debt.
[A debt that needs to be serviced] in a declining economy. …
[If demand recovers] and it’s possible to begin paying off the debt.
It took Britain almost half a century to pay off public debts accumulated through the Second World War.
The Institute for Fiscal Studies has estimated that the ‘debt overhang’ from the current crisis could last into the 2030s.
[If] the debt accumulates and the economy fails to recover, the country is doomed to bankruptcy. …
{[As] long as the economy is growing, positive feedback mechanisms tend to push this system towards further growth.}
Once the economy starts to falter, feedback mechanisms that had once contributed to expansion begin to work in the opposite direction [and the system is driven towards a potentially damaging collapse …]
With a growing (and aging) population these dangers are exacerbated.
Higher levels of growth are required to protect the same level of average income and to provide sufficient revenues for (increased) health and social costs.
(p 45)
[The existing macroeconomic] model has no easy route to a steady-state position.
Its natural dynamics push it towards one of two states: expansion or collapse.
[The horns, then, of the ‘dilemma of growth’ are:]- Growth is unsustainable [due to accelerating] resource consumption and rising environmental costs …
- ‘De-growth’ is unstable [because of declining] consumer demand leads to rising unemployment, falling competitiveness and a spiral of recession.
(p 46)
