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The question that people are now asking themselves is whether this economic crisis just a downturn in the market or it’s shed light on some flaws in the model of economic growth which led us here?
It sounds a bit radical to suggest that there is something wrong with our economic model, un-American maybe. But it’s not.
As painful as the current economic situation is, this is the perfect time to take a look at our economy to see what we’ve been doing wrong and what we can do better.
Specifically, what aspects of our economic growth were/are unsustainable? How can we progress towards a model that provides sustainability—both economically and environmentally?
Let’s start with a recent history of how we got here.
The internet/tech boom of the 1990s represented a spurt of growth in the real economy—i.e. productivity. Businesses and individuals could do far more work in the same amount of time thanks to revolutionary new technologies.
After the “internet bubble”—inflated stock prices for tech companies based more on speculation than actual cash-flows—burst, interest rates were lowered to make credit cheap—to inject liquidity into a falling economy.
This is exactly what a central bank is supposed to do in an economic downturn, but cheap credit combined with lax regulation has also led to ridiculous excesses of indebtedness which played a part in causing the current economic crisis.
The revolutionary new technologies of the 1990s gave way to incremental increases and this decade’s economic growth in the United States has been driven largely by consumption.
It’s no secret that much of the American economy runs on cheap imports from China and other countries, and that the entire economy relies on oil imports. Thomas Friedman includes a pretty animated sentence on this arrangement in his Sunday March 8th op-ed for the New York Times:
“We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change, but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese…”
Friedman describes consumerism at its best (or worst). Attacking consumerism used to come across to some as nothing more than anti-modernist yearning for a long-ago time, but excessive consumption has proven unsustainable (along with the level of debt which fueled it).
In 1980 Americans saved about 9% of their incomes, by 2007 the average American saved 0.5% (one half of one percent) of their income. (Some data has the figure back up to 5% now.) Too much savings—a problem many credit with some of Japan’s economic woes in recent years—can be a bad thing, but 0.5%… It’s important to remember that savings don’t just evaporate out of the economy, in fact, savings lead to investment.
At the same time as our current model of economic growth is not economically sustainable, the environment also cannot sustain continued growth without changes.
With hundreds of millions of relatively rich people living unprecedentedly plush lifestyles and hundreds of millions more climbing out of poverty and increasing their consumption, resources are being used, destroyed, and emitted at levels that can only be sustained for so long.
The answer is clearly neither to accept a lower quality of life or to do nothing; innovative new ways of making and doing things must transform the economy towards environmental sustainability.
In the end it is largely unnecessary to distinguish between environmentally sustainable growth and economically sustainable growth.
In order to last, growth must be sustainable in both senses. The term “sustainable growth” implies both economic and environmental sustainability. The current economic crisis is evidence that we want, need even, economic growth, but also that it must be sustainable. (That’s not to say that any solution will lead to uninterrupted, recession-proof growth, at least not for the foreseeable future.)
So how do we get to a model of sustainable economic growth? Many people, unfortunately, perceive a direct trade-off between living standards and sustainability: either we get rich and destroy the planet, or we get poor and save the planet.
Political issues have long been grouped into those which are good for the economy and those which are good for the environment, leaving no intersection between the two where a decision might be good for both the economy and the environment.
To pull ourselves out of this recession we’re going to, first, have to pay for our excesses and wait to hit a bottom and, second, recover through sustainable growth in the real economy: productivity growth.
There is no precise formula to inspire innovation or work force productivity, but there are some good bets. Education and training are needed to build a competitive, productive workforce.
Increasing investment in research has a good chance of increasing breakthroughs, while investing in infrastructure increases efficiency throughout the economy. Perhaps not as obvious as the previous examples, but strong public health is essential to workforce productivity while poor public health is a drain on the entire economy.
Perhaps not so coincidentally, these are the areas the federal government has been targeting under the leadership of President Barack Obama. The same “wasteful” spending measures that Obama is getting ripped for.
No one wants the government to take complete control of the economy, but as long as the government collects taxes it might as well spend them wisely. From a political standpoint, sustainable growth is going to require government making long-term investments and creating the proper incentives for market participants.
These steps will help to ensure that when we emerge from this mess, we’ll emerge stronger than when we got into it.
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what do you mean when you say that we need a new model of economic growth? are you saying the free market has proven itself unsustainable?
Great post. gotta llove this: “as long as the government collects taxes it might as well spend them wisely.” so true.
I am adopting the analogy of “from the building to the more chinese being emplyed” I like it. Very well put.
It is not getting pooer and save the planet. It is having a diferent set of values and save the planet.
Raul Oliveros