Saturday, February 6, 2010

Prosperity Without Growth Review

This book lays out the argument for a new macroeconomics model that does not depend on exponential GDP growth.

First, it explains the reasoning behind economic growth and why we depend on it right now. The motivation behind growth is that it has been a very effective way to raise the standard of living for everyone. However, in OECD countries, inequality has increased in the past 20 years, and the middle class has not seen an "income increase in real terms." (I would like to examine this claim further.) The report also makes the argument that continued increased incomes in developed nations has not increased living standards such as life expectancy, happiness, and education levels. In some ways, the argument is that this is about as good as it gets so further increased income only brings marginal gain.

Economic growth is needed because increased efficiency of labor in capital markets due to technological improvements implies that more things need to be made in order to maintain full employment. Labor is expensive and a rising cost because the point of growth is for incomes to grow. Thus, in order for more people to be making more money, more things have to be made and consumed.

In The New Paradigm for Financial Markets, George Soros traces the emergence of what he calls 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 securitization of debts through complex financial derivatives were also deliberate interventions...What emerges from all this is that the market was not undone by isolated practices carried out by rogue individuals. Or even through the turning of a blind eye by less than vigilant regulators. The very policies put in place to stimulate growth in the economy led eventually to its downfall. The market was undone by growth itself.

This reliance on economic and material growth is also not ecologically sustainable. Most economists argue that while economic growth is necessary, material growth can be decoupled from economic growth. This implies that technological improvements need to reduce carbon intensity (emissions/dollar) faster than GDP grows.

The Ehrlich equation is where I = impact, P is population, A is affluence or income level, and T is the technological intensity.

I = PxAxT

so total carbon emissions for 1 year is
C = P x $/person x gCO2/$

Therefore, total growth in emissions per year is population growth + income growth - technological improvements.

Carbon intensities have declined on average by 0.7%/year since 1990...Population has increased 1.3%/year and average per capita income has increased by 1.4%/year (in real terms) over the same period...Carbon dioxide emissions have grown on average by 1.3+1.4-.7 = 2%/year leading over 17 years to an almost 40% increase in emissions.
To achieve an average year-on-year reduction in emissions of 4.9% with 0.7% population growth and 1.4% income growth, T has to improve by approximately 4.9+0.7+1.4=7% each year. By 2050 the average carbon content of economic output would need to be less than 40gCO2/$, a 21 fold improvement on the current global average.
...Imagine a scenario in which incomes everywhere are commensurate with a 2% increase/year in the current EU average income...By 2050 the carbon content of each dollar has to be no more than 6gCO2/$. That's almost 130 times lower than the average carbon intensity today. Beyond 2050, of course, if growth is to continue, so must efficiency improvements. With growth at 2%/year from 2050 to the end of the century, the economy in 2100 is 40 times the size of today's economy. And to all intents and purposes, nothing less than a complete decarbonization of every single dollar will do to achieve carbon targets. Under some more stringent stabilization scenarios, by 2100 we will need to be taking carbon out of the atmosphere.

These goals for absolute decoupling are only about carbon intensity and the use of other resources such as water have their own constraints.

Finally, the other idea from this book that I really liked was the discussion on 'consumer culture.' The acquisition of material things, especially novel material things have become a part of communicating our social status and identity. "...we use a 'language of goods' to communicate with each other, not just about status, but also about identity, social affiliation, and even - through giving and receiving gifts for example - about our feelings for each other, our hopes for our family, and our dreams of the good life." This idea implies that while we have enough for our physical needs, people will never be able to have enough stuff, partly because as you acquire more income, you need to use more and more of it to participate in society.

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