The One Big Problem With A Zero-Growth Economy

Intentionally or not, climate activist Greta Thunberg started a debate this week about the wisdom, or lack thereof, of a perpetually growing economy.

“People are suffering. People are dying. Entire ecosystems are collapsing,” the fiery speaker told an audience at the UN in her typical, unmollified style. “We are at the beginning of a mass extinction and all you can talk about is money and fairytales of eternal economic growth … How dare you!”

That comment about “fairytales of eternal economic growth” triggered a number of opinion columns about the benefits of shifting to a zero-growth economy. The theory is if we could stop our economy from growing endlessly, we could stop endless increases in our consumption of resources, and we could take some of the pressure off the environment.

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It’s an idea that is heresy among conventional economists, where endless economic growth is seen as the only way to improve people’s material lives. But this week, swept up in the fervour of Thunberg’s moment, some pundits went out on a limb and said that not only is a zero-growth economy desirable from an ecological standpoint, it’s also possible.

In a column at the CBC, Ian Pittis extolled the virtues of “sustainable prosperity,” but warned that “getting from here to there may be difficult.” Citing Canadian economist and author Peter Victor, a leading proponent of shifting to a zero-growth economy, he said the transition “will be complex and demanding, but there will be many compensations, such as not destroying the planet and not driving the rest of the world’s plants and animals into extinction.”

But would it actually be complex and demanding? I would suggest that, for the typical person out there in the developed (or much of the underdeveloped) world, we are already living in a zero-growth economy.

To understand this, first we have to distinguish between two different measures of the economy that people often confuse: GDP and per capita GDP.

GDP is a measure of an economy’s total output, essentially the market value of everything produced in an economy. Per capita GDP is the value of that economic output per person.

Why is this important? Because GDP on its own tells us nothing about how well people are doing in an economy, but per capita GDP is closely linked to earnings, and by extension, to improvements in the standard of living. It’s changes to per capita GDP that we actually experience indirectly, that we perceive as an increase (or a decline) in our material standard of living.

If you look at Canada’s economic growth over the past decade, since the global financial crisis, it’s clear that GDP has grown steadily, if not quickly, but per capita GDP has been stagnant over that time. To the average person on the street, the economy hasn’t grown. And so what? Has it stopped you from living your life?

Canada’s GDP has grown largely thanks to population growth, which has increased the demand for everything ― schools, supermarkets, condos, shopping malls ― but has done little to improve the economic situation for Canadians themselves.

For the better part of three decades now, much of the GDP growth in developed economies, including in Canada, has been captured by capital owners. In other words, all those extra supermarkets and cellphone contracts have made businesses richer, but not necessarily Canadian households.

Yet changes in technology mean we live very different (and in some ways improved) material lives today than our parents and grandparents did at only slightly lower income levels, decades ago.

Now imagine this extended to business: A business environment where total output doesn’t grow, but where change still happens: Innovations that replace old technologies and processes, making business more efficient and improving the bottom line even despite the fact that business’s markets aren’t growing.

Target: zero

To be clear, a no-growth economy doesn’t necessarily mean a command economy where the government forbids businesses from growing ― there are those out there who would advocate for that, but such policies could be disastrous. 

Instead, it could actually look very much like what we have today, but with slightly altered goals.

For instance, today we have tax policies, fiscal policies (government spending) and monetary policies (interest rates) all targeted to result in a certain level of GDP growth. We would simply tweak these policies to target zero GDP growth.

That doesn’t mean we would always achieve that. A sudden burst of innovation could lead to economic growth one year (oops), but the Bank of Canada would respond by raising interest rates until the economy returns to flat. Or if the economy sinks, the BoC would lower rates until it returns to flat.

This, of course, would meet resistance from the investor class, that group of people who have long demanded higher profits every quarter, immediately dumping the stock of any company that didn’t deliver. And yet, convincing investors that “earning the same profit this quarter as last quarter is actually OK” might be the easy part.

The debt monster

And that’s because of debt, specifically government debt. GDP growth (and not per capita GDP growth) has made governments richer. The more supermarkets and cellphone contracts there are, the more tax revenue a government collects. Today, Canadian governments ― like those in many other countries ― rely on “growing out” of the debt they take on.

In the 1990s, Canada’s federal debt was so large and crippling the Wall Street Journal shamed the country by calling it an “honourary member of the third world.” 

Today, we have one of the best balance sheets of any developed country. But the truth is, Canada never repaid most of that debt. It’s just that, two decades later, the economy is so much larger that what was a crippling burden in the 1990s is easily manageable now. And we have plenty of room to borrow more without harming our creditworthiness much.

In a zero growth economy, this would have to end. Deficit spending would become more difficult, because there would be no growing out of debt ― it would all actually accumulate and become increasingly harder to pay off over time. Inevitably, governments would have to spend less on social programs, or tax more to maintain the current ones.

‘Personal GDP growth’

Canadian households have also taken on enormous amounts of debt, but a zero growth economy doesn’t necessarily threaten households to the same extent. That’s because even in a zero-growth economy, people will still experience their own “personal GDP growth.”

In your youth, your skills and experience are limited so you land lower-paying jobs. As your skills and experience grow, you land better jobs. That pattern would still maintain in a world where profits are stable, rather than growing.

Which is why the likeliest opponent to moving to a zero-growth economy may be the government itself, including governments that are otherwise serious about halting climate change.

In the coming years, as the world’s resources are strained by a rapidly growing population and even more rapidly growing resource consumption, the need to halt the perpetual growth cycle will become more obvious. We have to ensure that our debt-addicted governments don’t stand in the way of solutions to the problem.

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