We’ve all seen the doom-laden newspaper articles and TV talking heads warning of the prospect of economic recession. But can anyone explain to me exactly why it is such a a terrible thing?
Why is growth of 2% a year fine but a shrinkage of even 0.5% the cause of wailing and gnashing of teeth? If the economy shrinks by 1%, well so what? If it’s been growing every year for x number of years then all that’s done is put us back to where we were, say, a year ago. And we managed fine then! 10 years ago the economy seemed to be doing ok, but if there was a drop in output this year that would take us back to 2001 levels, you’d think the world had ended.
Clearly the economy can’t keep on growing year after year, as that would be exponential growth (and so would trend to infinity, impossible on a finite planet), and yet economists seem to panic if they see anything other than unsustainable exponential growth. What am I missing here?
For one, growth needs to at least keep up with population growth. In 2001 there were about 10% less people in the US, so the same GDP split amongst 10% more people means everyone’s 10% worse off than they were back then.
One part of it: the size of the economy dictates how many jobs are available (subject to wage deflation, which is rare and tricky).
Population sizes usually tend to increase. With a smaller economy, even -0.5% smaller, fewer people can work, which increases the burden on the remaining taxpayers to support the unemployed, and on governments to borrow money to make up the shortfall, since tax revenues are necessarily decreased.
In turn, everyone has less money to spend, so the basis for economic growth shrinks too, which exacerbates the slowdown. Revenues shrink, so companies can’t sustain their normal sized workforce, so they lay more people off, more become unemployed, homes are foreclosed, people’s wealth is reduced as their investments and pensions and ISAs (401Ks) shrink in the stock market and their house’s worth is cut. Banks become scared, it becomes more difficult to borrow money, so fewer people can buy houses and cars and fewer businesses can invest in innovation and R&D and therefore expand and employ people.
It’s pretty scary stuff. Of course one may argue that there should be a way to be happy with zero per cent growth, but nobody’s figured it out yet.
But this all seems to assume that growth can continue indefinitely, when basic mathematics says it can’t. Do economists actually have a long-term plan, or is it just a case of “We want the economy to keep growing at x% a year and Malthus can go and play with the traffic”?
Were things so great a year ago you want to return to them?
1% shrinking means:
Million more people are unemployed
Many of them go hungry, become homeless or turn to crime
People who do have jobs don’t get raises or promotions
Everything is more expensive
Some products become harder to find
The value of your home decreases
The real purchasing power of your bank account decreases
Services like health care, education, roads and police are reduced
Do any of these sound like good things to you?
In the long run everyone is dead anyway.
I don’t know what you mean “basic mathmatics says growth can’t continue indefinitely.” It certainly CAN continue for any reasonable forseeable future. Which is not to say that overpopulation or resource depletion isn’t a concern. But part of economic growth is creating technology that helps us do more with less.
But the fact is there are 7 billion people on the planet. Those people need to be fed, housed and clothed. Some of them also want iPods and cars and other stuff. In order for that to happen, the economy has to grow.
How far can you foresee? Three percent a year growth for 100 years means the economy would have to be almost 20 times bigger in 2111 than now. Feasible? Maybe. How about 500 years’ time? Over 2.6 million times bigger than today. 1,000 years’ time? Nearly seven trillion times.
You might be able to wring 20 times as much productivity out of our little planet as we currently manage (although you’d have to destroy pretty much anything that isn’t actively productive and just happens to, I don’t know, look nice?), but millions? Trillions?
And yet if at any time we deviate from the exponential curve something has to be done. It doesn’t strike me as sustainable in the real world. Surely zero growth would be better than boom and bust?
As Grumman pointed out, GDP has to grow as fast as population just to stay even. (Many agree that “exponential” population growth is “unsustainable,” but that is a separate debate.)
Increasing expectations is part of it. Health care capabilities are continually increasing, but so is the cost. “A better life than one’s parents had” was part of the American dream, a dream in decline and now almost shattered.
Problems occur at the “margins.” If population grows 1% while GDP stays constant, there might seem to be little trouble if everyone just took a 1% cut in pay, but that’s not what happens. Instead unemployment hits hardest at certain groups, especially the young.
Perhaps most importantly, recession can lead to vicious cycles, e.g. companies laying off their own workers as customers become non-customers due to lack of income. This is one reason why policy makers take recession so seriously – they want to respond before recession becomes severe. And this is largely successful, as seen by comparison with the severe business cycles in the 19th century.
What’s unusual? You have a horseless chariot (if not laid off) better than anything any monarch had 1000 years ago; you have a computer a thousand times faster than what cost a million dollars 40 years ago. You can buy your own copy of a movie for $5 from the bargain bin; it would have cost you thousands 50 years ago, assuming you could afford a projector too. You pay less today for a colour TV with four times the screen area and 10 times the resolution of 1970. A flight halfway around the world today costs less than a ticket across the country used to cost; vacations now are in the Carribean, Thailand and Europe, not a short train ride to Atlantic City. And so on…
Yes, there’s a limit somewhere. Are we there yet? Your imagination is the limit. Every new product, new technology, expands the economy in new ways, and gives us new toys. It sure beats being unemployed…
Increases in GDP don’t always translate directly to resources because not all activities get measured and because the cash-per-resource value isn’t the same for all activities. For example, if a housewife gets a job and hires a maid, GDP has increased twice - the former housewife’s salary and the maid’s salary. From the perspective of resource consumption, though, the former housewife and the maid aren’t consuming anything more than they used to.
If population goes down, a decreasing GDP might be tolerable as long as it decreases more slowly than the population. 0% GDP growth with a population that declines 1% would be kind of like 1% growth, though not exactly the same.
Recessions are not entirely bad from a long-term economic point of view. They shake things up and drive companies to maximize efficiency and explore new niches in a way that they might not during the good times. Still, they’re pretty unpleasant when you’re inside of one.
How big is the economy compared to 100 years ago? 1000?
The key is to manage population growth. If economic growth doesn’t keep up or exceed population growth, you end up with billions of people living in squalor, which is a recipe for disaster.
Creative destruction is always important so that resources can be allocated to better uses and inefficient and obsolete businesses can be replaced.
A “downturn” is when you read in the newspaper about people losing their jobs.
A “recession” is when your neighbor loses his/her job.
A “depression” is when you lose your job.
Although it sounds obvious that perpetual growth will bring disaster in the far distant future two things work against that. One is that people have been saying this since the beginning of the Industrial Revolution. Instead of things getting worse, the average human lives a far better, longer, healthier, wealthier, and longer-lived life than at any time in history despite the tremendous increase in population. The other is that we don’t live in the far future; we live in the present. It is not a moral failure to want the best possible life today.
It’s true that some global shifts would seem to be sensible. Recycling. Energy conservation. Reduced reliance on petroleum products. Diminished water use. Healthier food consumption. And all those things are being advocated and even adopted. What they all have in common, though, is that they bring benefits to people today in their current lives. People will not make sacrifices for imagined far future peoples, and rightly so. All calls to do that in the past have failed and have only hurt people rather than helped them or anyone in the future.
You may imagine that you know what the future will look like and what the world should do to achieve the world in your mind. Most people have such visions in their head. Maybe they’re the right visions, with the right actions. But you don’t know. Nobody does. And it’s not everybody else’s failure to live up to your future.
There is a school of thought that our short-term aversion to minor recessions is what has led to the build-up of the level of credit that we are now in the process of unwinding. Politicians naturally hate recessions, since they happen over a timescale that is comparable to their terms of office. They therefore put a lot of pressure on central banks to alleviate the effects of recessions, even minor ones. But central bank intervention just “kicks the can down the road”, as the current saying goes. Eventually, you end up with a bigger crisis. In the medium-to-long term, perhaps it would be better to just let minor recessions happen.
Economic growth has to continue if the population growth continues, but the continued population growth is not a given. Germany, Japan, Italy, Austria, Greece and others have a negative population growth right now.
I wouldn’t call that a great group for economic growth, or a model for any other countries.
If you want a prediction about the future, though, here’s mine: all western countries will have to allow much higher rates of immigration for the next several decades. The U.S. is as healthy as it is because it is the target for immigrants worldwide and our economy depends on both the high quality of legal immigrants and the cheap wages of illegal immigrants. Europe and Japan are entering into the bad period that the U.S. went through starting in the 1950s: when blacks become too sizable a minority to be suppressed any longer. Tough. We’re a much better country for integrating blacks, and it led to the increased integration of Hispanics and Asians. Other countries will find this out, whether by invitation or force of overwhelming pressure.
Falling population is death. Ask the inhabitants of Detroit, and Cleveland, and Buffalo, and Rochester, and St. Louis, and Gary, and so many other rust belt cities. Prosperity follows population growth. Decline follows decline.
The OP might be interested in theories of a steady state economy. But at the moment that is a niche academic pursuit, not part of the mainstream, since our current systems pretty much requires growth (for all of the reasons mentioned previously). Even the most tightly centrally-planned economies, this past century, required constant growth.