Sunday, October 16, 2011

The End of Growth?

One thing that both the Coalition Government and the Labour opposition have in common in terms of economic policy is the pursuit of growth (anyone remember what that is?), and the assumption that we'll somehow be able to grow our way out of the current mire. With the Government, it's the private sector that will magically take up the slack from public sector layoffs. With the opposition, it's more about stimulus - VAT cuts while still keeping half an eye on deficit reduction.

There are a few problems with that thinking. First, we've had no significant growth in the Western economies since the credit crunch, despite quantitative easing and Keynsian stimuli. Second, many economists are warning that there may be no meaningful growth for some years and that we're headed for a double-dip recession. Third, the growth that occurred prior to the credit crunch was in part fuelled by debt, meaning that the period of anaemic 'real' growth goes back further than headline growth figures suggest.

What exactly is economic growth? One definition is "the increasing capacity of the economy to satisfy the wants of its members. Economic growth is enabled by increases in productivity which lowers the inputs (labour, capital, material, energy, etc.) for a given amount of output. Lowered costs increase demand for goods and services."

Let's look at those enablers of growth for a second. Labour costs have been lowered over the past decade by the increasing relocation of labour-intensive work to low-wage economies. As countries like India and China develop, the cost of their labour will likely increase. Energy costs are also likely to increase, partly because of increased demand from emerging economies, and partly because of peak oil - the increasing cost of extracting oil, and the problem of supply being limited and starting to diminish. Material costs similarly will rise with increasing demand from emerging economies both for raw materials like copper. The cost of the ultimate raw material - food - will rise as the world population expands and as the emerging middle classes in China and elsewhere increasingly eat a meat-rich Western diet. The cost of capital is raised by the need to recapitalise the banks, and the banks' current unwillingness to lend.

That's set the scene. I hope I didn't scare you too much. I'm suggesting that even in the more optimistic scenarios that don't involve sovereign debt defaults or banks going bust, we're all going to have to tighten our belts and consume less for a good while. Indeed, former Prime Minister John Major said so recently on the Andrew Marr show. In very simple terms, in all likelihood we can't grow our way out of the current economic mess. Growth is at an end.  That means that the traditional assumption of goods and travel becoming cheaper and available in larger quantities to more and more people needs to be ditched, and instead we need to start planning on conservative stewardship of our resources and a retreat from consumerism.

So what are we going to consume less of? Everyone has to eat, pay rent or mortgage and heat their home, and cutting down in those areas will be tricky. Travel is one area where discretionary journeys can be cut down, and people can travel less by combining essential trips, working from home more, and so on. Where public transport is an option, people can go car-free, taking advantage of car clubs for trips that really do require a car. And of course, this being a cycling blog, you would expect me to suggest that people use bikes. Now, the important thing is, this is already starting to happen. Petrol and car sales are declining, and bike sales are increasing. But as usual the Government is behind the curve.

The transition to lower car use needs to be supported by policy. But current policy still has the built-in assumption that more and more people will be driving further and further. We're building more roads . The Government still aims to convert us from fossil-fuelled cars to electric cars that actually cost more to run, despite the abject failure of that policy so far. They also want us to increase our travel costs by driving at 80MPH! Meanwhile TfL are still trying to increase traffic flow rather than turn roadspace over to the increasing number of cyclists.

It's time politicians of all parties stopped reading the public bedtime stories about how everything will get back to normal and there'll be a happy ending, and start planning on people having to do more with less. A good place to start is by moving away from our increasingly-unaffordable dependency on cars.


  1. The really scary idea is this (it is not mine):
    All governments seem to think that growth is good. However, economic growth does not exist in a vacuum. With economic growth comes consumption of real-world, physical goods. Physical goods require resources – energy and stuff to make them from.

    By definition a maintained growth of X% per fixed time interval is exponential.

    Unless I am mistaken, the Earth's size, land area and its natural resources are finite.

    Perhaps somebody, or anybody might explain precisely and clearly how the planet's size and its resources are increasing to accommodate this sustained exponential growth?
    I fully expect that nobody will provide a credible explanation.

  2. Even if we could develop a science-fictionesque instantaneous mass transport to the stars, we would only postpone the evil day for an amazingly short time [it's that devilish exponential again]. The universe is finite too and we could fill it if we had the technology. So 'growth' in the setting of finite resources is the enemy. So we'd better sort out the growth, before it sort us out with the inevitable crunch.

  3. There's a fourth thing you didn't mention - in the past our growth was largely fuelled by a combination of taw materials and commodities bought cheaply from the "third world" and lack of competition from said 3rd world for our manufactured goods. We have now lost both ina "paradigm shift". From now on commodities like copper are going to be a lot more expensive due to the demand from major emerging economies such as India, China, Brazil. China in particular has been "investing" in mineral-rich or agriculturally promising African states to corner their supplies of raw materials and food commodities. Meanwhile those same countries can now make what we can make, only cheaper. Our entirely undeserved advantages in this area have therefore been lost, forever.

    On the other hand, growth doesn't have to be about more cars or more oil or more iphones. We could be the leader in renewable energy with massive offshore windfarms or tidal/wave generation schemes. As I poersonally know, you can put £20k into the economy buying a solar water heating array to heat a swimming pool - it comes with an output meter where you can see the KwH of energy it produces in real time, and the read-out is seriously impressive. It already saves several £hundreds a year and if energy prices rise by 10% pa (an otherwise optimistic view) will pay for itself in 7 years.

    And yes, we could start building bicycles again, if only we could get away from our national fixation with the notion that a bike should cost no more than £100 so only Taiwan can build them.