Monday, September 26, 2011

Limits to Growth and the Coming Recession: Why Measuring Matters

“If it matters, measure it.” – Stephen Harper, speaking of the funding of maternal health projects announced on September 20, 2011, with regards to the need to implement international commitments.

“If it matters, measure it.” - motto of the Fraser Institute.

“It’s all in the mind, y’know?” – Ringo Starr, “Yellow Submarine” (the movie)

When it comes to our economic successes, or lack thereof, it matters that we measure where we are today, and where we’re likely to be heading in the future. While some say that past performance is the best indicator of future expectations, it isn’t. At least not when it comes to economics. Being able to figure out where we are today, what tomorrow’s needs are, and plotting a course on how we get there, that’s what really matters.

Yet, ask your average economist which road we need to find ourselves on, and you’ll get a clear answer: If the economy doesn’t grow, we’ll enter into a recessionary period, which leads to unemployment and economic contraction. And that’s bad, bad, bad.

The spectre of rising unemployment is certainly problematic, and it’s something that I’m very concerned about as I look around and witness stock markets beginning to bottom out around the globe. The question on the minds of economists now is whether to stimulate the economy further, as President Obama and some of the continental Europeans are advocating, or whether to implement austerity measures, as suggested by Republican Tea-Partiers, Canada’s Finance Minister Jim Flaherety, and UK Prime Minister David Cameron.

Of course, every-day average people are simply worried whether or not they’ll be able to hold onto their jobs if we experience another global slow down.

The Great Stimulus of ‘08

In the past, just recently in 2008, we managed to stave off the worst of the Great Recession through global stimulus programs which injected massive amounts of money into new projects, some of which even created jobs. Of course, in the United States, a lot of tax payers money went to bailing out banks, and ultimately to the salaries of high-paid banking executives. Where ever those dollars ended up, one thing can’t be denied: the global stimulus of taxpayer dollars pumped into private enterprise restored confidence to shaky markets, and the major doom and gloom scenarios being predicted by some did not occur.

I say that it was taxpayers dollars which funded the stimulus programs, but some further refinement is necessary to understand what really happened. It wasn’t really my tax dollars which funded those programs which saw government money flow to the private sector (whether to bail out banks, or to repair roads). No, it wasn’t my money. The taxpayer dollars which provided the stimulus weren’t taken out of my pocket: they were taken out of the thin air. They now exist as additional debt at the provincial and national levels of government, to be serviced by future taxpayers.

So it wasn’t that we were spending my money or your money, at least not at the time. It’s only now that the bills are starting to come due that you and I are going to have to pay. With interest. And we’ll continue to service this debt until our children start paying taxes in order to make their own contributions to the debt.

The Confidence Game

That we are living beyond on our means is very clear in economic terms. Yet so few economists appear to be concerned about the levels of debt that taxpayers are required to service. Well, at least they appear to be unconcerned publicly, despite the multi-billion dollar deficits accruing at the provincial and national levels of government in Canada. Not to mention the more than one trillion dollar deficit in the United States.

However, if economists were to express their sincere concerns regarding the economic health of the world, surely it would shake the public’s confidence in the entire economic system. And that system would collapse like the house of cards that it is. Our economic system is, of course, based on the idea of confidence more than on any other notion.

It wasn’t always like this, of course. The value of money used to be representative of the value of resource holdings, such as gold. There used to be a time that you could show up at your bank and redeem your paper money for gold. That system had been in place for hundreds of years, but that all went away in the last century. Now, your paper money is worth only what we, collectively, believe it to be worth. Our beliefs in the value of money are expressed in our confidence in the economic system. When market values go up, and we’re more confident, our general economic outlook is rosier. When markets go down, we’re a little more concerned about our economic health. When markets crash, wealth can be wiped out very quickly, and a nervousness about those markets remains. Confidence is lost, and won’t be rebuilt quickly.

How can it be that confidence is propping up our entire economic system? I’d not suggest running this experiment, but there’s a good chance that we’ll find ourselves in the midst of it sooner or later: take away confidence from the system, and see how quickly the entire system collapses. And then you’ll know what the secret behind the basis of our economic health is: as Ringo Starr said in “Yellow Submarine”, “It’s all in the mind, y’know?”

Physical Limits

Unfortunately, we can’t wish ourselves into prosperity with positive thinking in the same manner that we can find ourselves in a recession due to a loss of confidence. The reason for this is that continued economic growth has started to butt its head up against some significant and very real barriers. Rising resource prices might be in part due to speculation within the economic system, but with static agricultural output and more mouths to feed, the laws of supply and demand have clearly kicked in. Of course, it’s not that simple, even with food. For although the world as a whole is getting richer, the gap between the rich and the rest of us has grown wider, which means that (when coupled with population growth), there is actually less wealth available for a larger number of people today than there was 20 or 30 years ago.

And that’s important when it comes to food production and consumption. If less food is being produced, the price will be driven up. But rich countries have a lot more room to absorb rising prices than do poorer nations, so the rich countries will continue to take what they want, leaving behind a smaller share for the poorer countries needs. If you want a measurement that matters to be able to plan for the future, you’d think that having less food being available to an increasing number of people would be one we’d all want to pay attention to.

Of course, there’s another reason why food prices are climbing, and it has everything to do energy inputs into our agricultural system. Who knew that farming was an industrial activity?

Peak Oil

The production of oil has stagnated in the past several years, as a result of hitting its global production peak. “Peak oil” refers to the circumstance where overall production first stagnates, and then begins to decrease, as it can not be replaced with new production coming on line. This phenomenon isn’t unique to oil production; in fact, the production of any non-renewable resource will peak at some point. It’s just that we’ve started to talk about peak oil lately as oil has been the main fuel we’ve used to power the engines of our economy in the pursuit of ever more (and necessary) growth.

Right now, the global demand for oil has never been higher. In the past, where demand outpaced supply, new production was found, and eventually brought on line, adding to overall supply and, interestingly, lowering prices.

That scenario played back in the 1970s, after the OPEC countries threw the west into economic turmoil by demanding a higher price for their oil. Western countries reluctantly paid the higher price for gasoline, but to increase their oil security, turned to new areas for exploration. Not wanting to rely on a limited source under the thumb of governments they couldn’t control, new deposits of oil were exploited, such as the North Sea and Alberta’s Tar Sands. By the 1980s, the price of oil and gasoline had levelled out, and although the price didn’t return to what it had been pre-1973, the West experienced a massive increase in its economy throughout the 1980s. The increased demand for oil due to economic expansion meant that prices could only fall so low, but abundant oil and low energy prices fuelled the expansion. None of that would have happened unless new supplies were found to meet demand, and those supplies were exploited as quickly as possible to fuel the expansion.

Some believe that the same thing will happen again. And why wouldn’t it? If the economy remains healthy, we’ll continue to see a rise in demand, especially as nations like China continue their march towards industrialization. Exploration is now taking place deep in our oceans, and in the high Arctic. Exploration is even happening in the Antarctic, although only discretely and for the purposes of “science” as per the International Antarctic Treaty. There’s talk in the United States of opening up the Alaskan National Wildlife Reserve in that state’s remote north, to oil exploration and pipeline building. These new supplies, when brought online, are sure to meet growing demands, just as we’ve done in the past, right?

Well, no. Even should these hard-to-reach and expensive-to-pump supplies be brought online, we’ll still be in a situation where tomorrow’s production will not exceed global peak production, which was estimated to have occurred either in 2006 or 2007, according to the International Energy Agency’s annual 2010 bulletin (the text says 2007, but the graphic shows a peak in 2006; either way, the IEA hadn’t even acknowledged that peak oil was even a possibility until 2009, so to say, “Whoops, it’s peaked!” in 2010 was a pretty progressive step forward for that organization).

So, if global oil production can’t meet the global demand for oil, what’s going to fuel economic growth? Uhm….

A New Paradigm

And that’s why continued growth can’t be fuelled by wishful thinking. And that’s also why past behaviour isn’t the best predictor of future outcomes – because the future isn’t going to be like the past.

Simply put, we’ve entered into a new paradigm. And while I hate that word, “paradigm”, there is no better way to describe the current circumstance. Author and environmentalist Bill McKibben chose a different way of explaining this new paradigm in his book, “Eaarth”, in which he successfully managed to avoid ever using the term “paradigm” or “paradigm shift”. McKibben tried to explain it this way: we’re no longer living on the planet Earth that we thought we were living on. Because today’s circumstances (physical, economic, social and environmental) are so radically different from the way things were even back in the 1980s, we need to begin to start thinking that we’re actually inhabiting a completely different planet. This ain’t your father’s Earth.

In other words, we need to give our collective mindsets a shake. The lessons that we’ve learned in the past about good economic stewardship no longer apply to the present situation.

Yet, here we are in 2011, talking about how best to stave off a recession (stimulus vs. austerity) which, when put into the context of butting up against the limits of growth seems all but inevitable. If physically the coming recession is an inevitability, doesn’t it make more sense to actually admit that we’ve got a problem on our hands, and begin to make preparations to deal with it? We’ve got the measure of the matter, shouldn’t that guide our decision making?

Preparing for the Flood

I seem to recall that in Manitoba earlier this year, people knew that flooding was going to happen on the river in front of their homes, and they started sandbagging their property in order to protect it. And then they helped their neighbours do the same.

But we’re not doing that with the coming recession. Instead, we’re ignoring the warnings that the river is rising, and worse, we’re telling our neighbours who are seeing signs that the waters are starting to rise, not to worry. And worse than worse, we’re belittling our neighbour’s efforts when they start to fill those sandbags. Instead, we are revelling in our knowledge that we’ve at least not lost confidence that everything is going to be ok. There wasn’t a flood last year, and even back in 2008 and 2009, the predicted flood wasn’t as bad as everybody thought it would be. Why worry? Why help out with the neighbour foolishly filling sandbags? Invite him over for a beer instead and watch the football game. Those Bills are sure a surprise this year, huh?

The Dogma of Economic Growth: Why Our Leaders Aren’t Leading

Of course, if the experts admit that there’s going to be a recession, we’d expect that they’d begin to start talking about the best ways to mitigate against the impacts of the recession. The truth is that our experts aren’t able to have that kind of conversation with the public, because to do so would mean that they would have to admit that everything that they’ve believed in up until now was bunk, and will not be of assistance when the floodwaters rise. If our leaders wanted to get serious with voters about how best to insulate ourselves from the recession, they will have to admit that the investments which they have made with our taxpayers dollars were, in fact, generally very unwise to meet the challenges of tomorrow. Since voters don’t usually like hearing that kind of story, it won’t get told. At least not by our current crop of leaders. So I guess we need some new leaders, right?

The Dogma of Economic Growth: Why We Don’t Want Our Leaders to Lead

Of course we ourselves would be in for a very rude awakening too, if we were to admit to ourselves that our entire economic system isn’t working in our best interests, as it is predicated on the notion that not only is growth good, but growth is always required to avoid economic collapse. As we are now approaching physical limits to growth, we’ve kind of put ourselves behind the 8-ball. What were we thinking? Did we really need all of this crap to make us happy? Our real wealth hasn’t increased anyway. What the heck have we all been working our butts off for these past couple of decades? We’re not better off; we’ve not reaped the benefits of our tireless work. Only the richest amongst us have harvested the real wealth created through a growing global economy. Who profited from our work?

Never mind. Have a beer and watch the game while it’s still on.

Measurements that Matter

If it matters, however, we have to measure it. If the future matters to us, we have to take stock of where we are today. The measuring has been going on for some time now, but it seems that the results just aren’t sinking in. We know that the middle class is shrinking, that there are more poor people today than there were 20 years ago. We know that we’ve created an unprecedented amount of wealth since the 1980s, but the middle class is only marginally better off (and by some measurements, we’re not better off at all). What happened to all of that wealth? It went to the richest amongst us, who are paying even fewer taxes today than they were 30 and 40 years ago.

We know that we have run out of inexpensive energy. We know that we are in the process of altering our climate. We know that either one of these crises would be sure to lead to less food being produced, and less clean water being available for consumption. Together, it’s an absolute given that our industrial agricultural processes will not meet the needs of our growing population. It is clear that as energy and food prices rise, an increasing number of people will starve. Often, when people are starving, civil unrest, even war abounds, which creates security issues for neighbouring nations.

And while war may be good for economic growth, it’s generally not a good thing for the people who find themselves impacted by it. And the idea that war is good for the economy has even come under fire lately, for although wars in Afghanistan and Iraq contributed significantly to GDP growth in the United States (an economist will tell you that GDP growth is a “good thing”), these wars were financed by credit – public money created out of thin air, subject to interest payments. Americans will be paying the price for these wars when those bills come due. War’s contribution to America’s annual trillion dollar deficits can not be understated.

The measurements are all around us, yet we aren’t paying attention to them. We’d rather believe in the resiliency of human nature to overcome any challenges that we must face. We’d rather convince ourselves that we have confidence in the ability of our economic system to continue its upward expansion, and if we experience a few setbacks in terms of recessions every once in a while, well, ups and downs are normal. There’s nothing to see here, move along now. Have a beer and watch the game.

When the Flood Comes, Guess What? We’re All In This Together

Unfortunately, I’m your neighbour, and I can no longer live in denial that the water is rising. And every day, another neighbour’s eyes are opened to the measurements that tell us that the water is rising. We look to each other for assistance, to begin the process of building that community we need to move forward together. Yet our leaders tell us not to worry, that there is no flood headed our way. And we know that they’re lying to us because they’re too embarrassed, too entrenched with their dogmatic way of thinking to tell us the truth. You, however…you continue to believe those leaders. We, however, have the evidence that we’ve got to take action together.

Please. Put your beer down, and turn the game off, and come outside and see that the waters are rising. See that your neighbours are going to need your help to make it through this thing together (and understand too that you’re going to need our help as well). If you do nothing more than stop repeating the dogmatic mantra of the vested interests, that “Growth is Good, Everything is going to be all right”, even that would be a help to the rest of us who want to get on with the packing the sandbags.

Confidence in our current economic systems is all in the mind, y’know? If it matters, it must be measured. We need to use those measurements to find a way forward. Right now, our leaders are keen on burying the measurements and humming a happy song about how great it is to live in an imaginary world. With or without them (although preferably without), you and I need to work together to secure ourselves and our community from the coming flood. Can I count on you, neighbour?

(opinions expressed in this blog are my own, and should not be interpreted as being consistent with those of the Green Party of Canada)

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