Trapped by Economic Growth

While necessary, degrowth is both damaging and politically unpalatable.

Trapped by Economic Growth
Photo by Alice Pasqual / Unsplash

If you've been following me for a while, you'll know that I believe the only antidote to the current poly-crisis is "degrowth".

It sounds benign, right?

Simply consume a little less. Have fewer babies. Halt the relentless pursuit of economic growth. Glide into utopia.

Unfortunately, despite its necessity, deliberate degrowth would be excruciating and will never happen.

This article isn't about what we should do. It's about why we won't do what is necessary.

When it comes to downsizing our impact to the environment, over the short term, the cure is worse than the disease. Any meaningful attempt to slow the economy to reduce environmental pillaging would create immediate pain. In response, degrowth policies would be quickly reversed by those who are measured quarter to quarter, election to election. As is painfully obvious by now, humans prioritize immediate stimuli over future costs.

How bad could it be? Couldn't we manage our way through collective degrowth?

Probably not. Let me explain from an economist's point of view.

The existing economic system, deeply rooted in growth-oriented principles, would likely collapse under a degrowth scenario. This is because inherent in degrowth is deflation. Irving Fisher, an influential American economist, introduced the concept of debt deflation in the early 20th century. Fisher's theory is particularly relevant in understanding how degrowth could cause economic collapse.

Fisher outlined nine steps in the process of debt deflation, which he described as a vicious cycle that can cause economic downturns to spiral out of control:

1. Debt Liquidation and Distress Selling: When economic downturns begin, heavily indebted entities must liquidate assets to pay off debt, leading to distress sales and plummeting asset prices.

2. Contraction of the Money Supply: As assets are sold and loans are paid off, the money supply contracts, exacerbating deflationary pressures.

3. Falling Asset Prices: The sale of assets at distressed prices leads to a further decline in asset values.

4. Bankruptcy of Businesses and Households: Falling asset prices and reduced incomes increase the real burden of debt, leading to bankruptcies.

5. Declining Profits: As businesses face declining asset values and increasing debt burdens, profits fall, leading to further economic contraction.

6. Reduction in Output, Trade, and Employment: Declining profits force businesses to reduce output, trade, and employment, deepening the economic downturn.

7. Pessimism and Loss of Confidence: The worsening economic situation leads to widespread pessimism and a loss of confidence in the financial system.

8. Hoarding of Money: As confidence declines, businesses and households hoard money, reducing spending and investment.

9. Deflation: The combined effect of these factors leads to deflation, which increases the real value of debt, perpetuating the cycle.

The cycle repeats, feeding on itself. The severity of deflation could vary, but is unpredictable and not easily controlled, thereby risking economic collapse if allowed to spiral.

Ben Bernanke, former Chairman of the Federal Reserve, expanded on Fisher's debt deflation theory in his analysis of the Great Depression. Bernanke emphasized the role of financial intermediaries, such as banks, in exacerbating economic downturns. He argued that the collapse of the banking system during the Great Depression amplified the effects of debt deflation by disrupting the credit mechanism, leading to a deeper and more prolonged economic contraction.

Bernanke's work highlighted the importance of maintaining a stable financial system to prevent the amplification of economic downturns. During the Global Financial Crisis of 2008, Bernanke and other policymakers applied these lessons by implementing aggressive monetary and fiscal policies to stabilize the financial system and stimulate economic growth. These measures included lowering interest rates to near zero, implementing quantitative easing, and providing significant fiscal stimulus.

However, in a deliberate degrowth scenario, such growth-stimulating policies would be counterproductive. In a degrowth scenario, to avoid uncontrolled economic collapse, the financial system may be provided life support at the expense of a shrinking tax base and depleting pool of capital. Sooner or later, something would have to break.

Post-Keynesian economists, including Hyman Minsky, have provided further insights into the dynamics of financial instability and economic crises. Minsky's Financial Instability Hypothesis suggests that financial markets are inherently unstable due to the cyclical nature of borrowing and lending.

According to Minsky, periods of economic stability and growth lead to increasing financial speculation and risk-taking. Eventually, this speculative behavior results in financial bubbles that burst, leading to economic downturns and crises.

Minsky's insights are particularly relevant in the context of a debt-based economy. In periods of economic growth, increasing debt levels can fuel economic expansion. However, as debt levels rise, the economy becomes increasingly vulnerable to shocks. When these shocks occur, the high levels of debt can lead to a rapid and severe economic contraction, as seen during the Global Financial Crisis.

In a degrowth scenario, the intentional reduction in economic activity would likely trigger Minsky's instability mechanism. The high levels of debt accumulated during periods of growth would become unsustainable, leading to financial instability, asset price collapses and economic crises.

This highlights the inherent fragility of debt-based economies and how they are trapped by economic growth.

Widespread Suffering

The cynicism that grew out of the Global Financial Crisis might lead some to ask why any of this matters. Let it burn! The trouble is economic collapse has real effects on the citizenry.

The Great Depression of the 1930s serves as a stark example of the personal hardships caused by severe economic downturns. Unemployment soared to 25%, as millions of people lost their jobs, homes, and savings, leading to widespread poverty and suffering.

The Great Depression also had significant social and psychological impacts. The loss of livelihoods and economic security led to increased rates of mental health issues, including depression and anxiety. Families struggled to afford basic necessities, leading to malnutrition and poor health outcomes. The societal fabric was strained as communities faced increased crime rates, social unrest, and a general sense of despair.

Similarly, the Global Financial Crisis of 2008 had severe personal and social consequences. The collapse of the housing market led to widespread foreclosures, with millions of people losing their homes. Unemployment rates spiked, and many individuals faced long-term joblessness. The financial strain on households led to increased stress and mental health issues. The crisis also highlighted significant inequalities, as lower-income and minority communities were disproportionately affected by the economic downturn.

To counter my pessimistic view on the outcome and likelihood of degrowth, I'm sharing a presentation by Erin Remblance below. She has a more positive opinion and proposes ways to achieve degrowth.

The Growth Trap in Debt-Based Economies

At the heart of the incompatibility between degrowth and our current economic system is the nature of debt-based economies. Modern economies rely heavily on debt to finance consumption, investment, and government spending. This reliance on debt necessitates continuous economic growth to ensure that debt obligations can be met.

When the economy grows, incomes rise, and inflation helps erode the real value of debt. This makes it easier for borrowers to manage and repay their debts. Conversely, in a degrowth scenario, where economic activity contracts and deflation takes hold, the real value of debt increases. This places an unsustainable burden on borrowers, leading to defaults, financial instability, and economic collapse.

Furthermore, the financial system itself is structured around the assumption of perpetual growth. Banks and financial institutions lend money with the expectation that the economy will continue to expand, generating returns on investments and ensuring the solvency of borrowers. Without growth, this entire system becomes precarious, as the ability to repay debts diminishes, leading to a cascade of financial failures.

Voluntary Degrowth is Unlikely

Despite the environmental necessity of degrowth to mitigate climate change and prevent biosphere collapse, the economic system's dependency on growth makes voluntary degrowth highly improbable.

The political and economic costs of pursuing a degrowth strategy would be enormous, with widespread financial instability, unemployment, and social unrest likely outcomes.

Governments and policymakers are acutely aware of the risks associated with economic contraction. The responses to the Great Depression and the Global Financial Crisis illustrate a deep-seated commitment to maintaining economic growth at almost any cost. In the face of potential economic collapse, the political will to pursue degrowth is likely to falter, as the immediate human and economic costs would outweigh the perceived long-term environmental benefits.

Without a major restructuring of the global economy and debt obligations, it's unlikely voluntary degrowth is possible. And without a crisis, it's unlikely policy-makers would pursue economic reform.

While deliberate degrowth risks economic collapse, if managed carefully and implemented gradually the economic consequences could be mitigated. Unfortunately, the time to start this process was decades ago. Humans are reactionary and policy won't shift from "business as usual" until we run headfirst into a sharp object.

Foresight isn't the issue. Plenty knew the Global Financial Crisis was coming. We know the poly-crisis is upon us. Rather, humans are programmed to keep dancing while the music plays.