An economic grand strategy based on permanent growth is defective. At some point you overinflate & have to correct, & then your paradigm is useless.
A well-designed economic grand strategy will have a way to manage contraction without seeing it as a horrible evil & cause for panic.
Growth is predicated on technological advancement, which actually does increase the wealth of the world. So since sustainable, continuing growth of wealth can be assumed since technological advancement has always occured, making the money supply grow with it is a pretty easy way to deal with it. Whether the money tracks with the wealth is somewhat immaterial. Actually measuring the value of all goods currently in existence is pretty well impossible. But presuming that the innovations to make those goods required capital and the end innovation will return a profit, makes probably the best measurement there can ever be.
Now certainly it’s a bit hairy to base money on something as invisible as “expected advances in human ability”, but people seem to be willing to assume the reality of the money so there really doesn’t seem to be much of a problem.
And more importantly, economic crises are not new under the sun. It’s not like returning to the gold standard is going to stabilize things.
It’s the monetary system that’s dependent on growth. The underlying economic activity could (theoretically) exist without endless chasing of the elusive growth target.
However, even setting aside money/currency issues … people have come to expect rising standards of living. Better cars, better TVs, better health care, new-&-improved shampoo, etc. It’s easier to forego growth if people can be reconditioned to be happy with the stuff they already have. Good luck with that.
It doesn’t sound so easy to get the country to switch from a paradigm of “growth.”
Well the premise of the OP is seriously flawed. There is absolutely no reason why an economy can’t grow indefinitely at its sustainable rate indefinitely without creative excessive inflation (beyond the 2-3% which is the inflation target for most major central banks). As a practical matter most major economies have managed a lowish inflation rate for the last 25 years without too much difficulty. Even in the current crisis inflation isn’t exactly a major threat.
I do wish that people would take the trouble to read some basic economics ,say at the level of an Economics 101 textbook, before making grand pronouncements about “economic grand strategy”. Of course the economics profession may be mistaken but it helps to at least know what economists are saying before proposing to build alternative systems.
The world population is growing at about 1% a year. I wonder how much economic growth is contingent upon those 70 million new producers and consumers added to the world economy every year. When the world reaches its carrying capacity and the population levels off or begins to decline, I suspect that economic growth will become a lot more difficult to sustain than it is now.
Economics 101? Yes, I remember that class. A lot of abstraction, theory, & blithe oversimplification.
My point is, that sometimes economies go through bubbles, & are forced to correct. The problem here is not in building a system to be slightly inflationary overall, but in assuming that at any given time the economy will be expanding. That assumption is untrue, perhaps unless you always screw down on the rate of growth hard to prevent overexpansion. Of course, this is annoying to investors, & pretty hard to maintain. If at any point you lose that discipline & end up with a bubble, then you’re set up for the almost inevitable contraction, when your tools designed to work in expansion suddenly don’t, & you just have to ride it out.
We’ve managed a long time keeping contractions to recessions & slowdowns in the rate of growth, but we’ve finally gotten to a point where things are so overpriced that we have to actually contract. And no one knows what to do, because they don’t just expect to grow on average, but to be growing constantly, every quarter, & they have no tools for this present situation.
So we get to see the Secretary of the Treasury go on TV & cry because previous out-of-control prices are rationalizing & somehow this means the economy will grind to a halt. It’s embarrassing.
Well if you are saying that the Fed should do more to stop asset bubbles before they burst I agree with you. How to best do this is going to be a matter of debate in the next few years.
Otherwise I don’t agree that the economy is incapable of handling contractions like this. There is a lot of expertise on how to get out of recesssions using a fiscal and monetary stimulus and it is being applied in the current situation even though it is more challenging than usual.
Similarly the private sector has seen recessions before ; a 50 year old will have seen 4 or more recessions in his adult life. In many ways the 82 recession was worse than today’s. Things look grim today but the economy will recover in a year or two and start growing again. There are some important lessons to be learnt which will reduce the chances of a repeat but really there is no need for some kind of massive systemic upheaval. Broadly speaking the mixed economic system of the rich countries works pretty well.
I’m not an expert on economics (just on everything else), so I have a question. In our current setup - Federal Reserve, US Treasury, banks, etc., let’s say that at some future date the population stabilizes and we’re living sustainably, with economic turnover but no GDP growth, is there any reason to think that our current financial system couldn’t work for that day? I picture people living their lives, working, saving for retirement, spending that in retirement or passing it on to the next generation, some businesses starting up, some failing, all of that, but with no growth. What’s wrong with that scenario?
Nothing. Obviously this situation would be less desirable than one with positive growth and rising standards of living but there is no reason why it wouldn’t be sustainable indefinitely. There would certainly be no economic collapse and if the standard of living before zero growth was high it would remain at that same level.
Not at all like the OP.
Bottom line is if you want to increase the standard of living, the economy has to grow at least as fast as the population. I’m talking real growth in terms of creating real wealth. Not simply creating imaginary wealth out of hype and moving numbers around an Excel spreadsheet. That’s what causes speculative bubbles and their eventual collapse.
You also need to make sure growth is across the board and not specific to a small segment of the population.
The alternative is that you convince people to make do with less - less home, less travel, less energy, less everything. Not exactly a popular option.
What on earth are you talking about?
I mean, what is this system in which, say, people would think it is a good idea to buy bonds at negative interest rates?
Assuming the population stays constant, does everyone enjoy a decent standard of living?