In The Guardian’s “Comment is free” section, Charles Eisenstein writes about a number of “big ticket” items, including economic growth, the use of monetary policy to solve the current economic crisis and fractional reserve banking. I think it’s worth going through the piece bit by bit, to parse the good ideas from the less well thought out ones. He starts:
Federal Reserve chairman Ben Bernanke’s pledge at Jackson Hole last Friday to “promote a stronger economic recovery” through “additional policy accommodation” has drawn criticism from economists, liberal and conservative, who question whether the Fed has the wherewithal to stimulate economic growth. What we actually need is more spending, say the liberals. No, less spending, say the conservatives. But underneath these disagreements lies an unexamined agreement, a common assumption that no mainstream economist or policy-maker ever questions: that the purpose of economic policy is to stimulate growth.
So far, so good – since probably the 1700s and certainly the 1800s, people have come to expect progress, i.e. that the quality of life that their children enjoy is better than theirs. Economic policy is all about growth because no-one has ever won an election telling the voters he would actively prevent their children from having a better standard of living.
So ubiquitous is the equation of growth with prosperity that few people ever pause to consider it. What does economic growth actually mean? It means more consumption – and consumption of a specific kind: more consumption of goods and services that are exchanged for money. That means that if people stop caring for their own children and instead pay for childcare, the economy grows. The same if people stop cooking for themselves and purchase restaurant takeaways instead.
These are not insights. This is, to put it mildly, very basic economics – a discussion of what GDP does and does not include constituted a good chunk of the very first topic for my first-year undergraduates this year. There is general unease among economists about using GDP per capita to measure the true level of welfare. Including the value of the various “imputed services” we get, from looking after our own children to walking in the park, is very important, especially for the allocation of public resources. Having said that, economists probably also acknowledge implicitly that the main impact of such an inclusion would be a one-off shift in the calculation of welfare. The level may be off but the trend is probably not.
Economists say this is a good thing. After all, you wouldn’t pay for childcare or takeaway food if it weren’t of benefit to you, right? So, the more things people are paying for, the more benefits are being had. Besides, it is more efficient for one daycare centre to handle 30 children than for each family to do it themselves. That’s why we are all so much richer, happier and less busy than we were a generation ago. Right?
No modern economist would argue that richer axiomatically means happier, although I’m open to correction. What economists, politicians and voters do seem to agree on, however, is that greater material prosperity is associated with greater life satisfaction. From freedom from an ever greater array of diseases and medical conditions to the capacity to fulfil one’s potential in jobs that didn’t exist 10 or 100 years ago, voters want growth.
Obviously, it isn’t true that the more we buy, the happier we are. Endless growth means endlessly increasing production and endlessly increasing consumption. Social critics have for a long time pointed out the resulting hollowness carried by that thesis. Furthermore, it is becoming increasingly apparent that infinite growth is impossible on a finite planet. Why, then, are liberals and conservatives alike so fervent in their pursuit of growth?
To the question at the end of the paragraph first, it’s because that’s what people (i.e. voters) want! The key point in this paragraph, however, is the point about infinite growth on a finite planet. Almost all those making this point currently are right but for the wrong reasons. That is because they talk in terms of consuming resources without understanding the huge economic transformation that has occurred in the last fifty years. They are wrong because increasingly our standard of living is determined by services, which are experiential , and not merchandise, which are resource-intensive. Services now account for four-fifths of all economic activity and this share is growing decade after decade.
Because experiences do not need resources per se, it’s certainly possible to consider a world economy two or three centuries from now where the standard of living is a multiple of ours today. It is estimated that, accounting for inflation, per-capita income has increased ten-fold in the last two centuries. This could easily happen again over the next two centuries. But it can’t go on for ever. At some point, maybe in the year 3,000 A.D., or 30,000 A.D., or 300,000 A.D., the trend is going to slow to zero, as the standard of living is high enough to be, from this distance, close enough to infinity.
The reason is that our present money system can only function in a growing economy. Money is created as interest-bearing debt: it only comes into being when someone promises to pay back even more of it. Therefore, there is always more debt than there is money. In a growth economy that is not a problem, because new money (and new debt) is constantly lent into existence so that existing debt can be repaid. But when growth slows, good lending opportunities become scarce. Indebtedness rises faster than income, debt service becomes more difficult, bankruptcies and layoffs rise.
I’m not sure if anyone truly understands the money system but it seems clear to me that Charles definitely doesn’t. Money is a form of wealth, in particular it is wealth turned liquid, so that it can be used as a medium of exchange. It does not exist separate to wealth. People lend because they have excess resources, based on what they consume today versus in the future. Others borrow because they need to invest to create more income and wealth for themselves in the future. The arguments about debt and money made above seem, to me, to be effectively saying that there is a limit to the wealth we can create. Which takes us back to the experience-economy and the year 30,000 A.D.!
Central banks used to have a solution for that. When growth slowed, they would simply buy securities (usually government bonds) on the open market, driving down interest rates. Investors who wouldn’t lend into the economy if they could get 8% on a risk-free bond might change their minds if the rate were only 5%, or 2%. Rates that low would stimulate a flood of credit, jumpstarting the economy. Today that tool isn’t working, but central banks are still trying it nonetheless. With risk-free interest rates near zero, they continue creating money through the same means as before, now calling it “quantitative easing”. The thinking seems to be: “If you have more money than you know what to do with and are afraid to lend it, how about giving you even more money?” It is like giving a miser an extra bag of gold in hopes that he’ll start sharing it.
Most commentators interpret Bernanke’s remarks as signalling the possibility of a new round of quantitative easing. If so, the results will likely be the same as before – a brief churning of equities and commodities markets, but little leakage of the new money into the real economy. In all fairness, we cannot blame the banks for their reluctance to lend. Why would they lend to maxed-out borrowers in the face of economic stagnation? It would be convenient to blame banker greed; unfortunately, the problem goes much deeper than that.
There is the nub of a point here, but again one that is well-known to economists and to policymakers, i.e. the liquidity trap. This comes back to what money is. What I taught my first-year undergrads was that money was effectively the currency of confidence. Generally, some want to save while others want to borrow. If times get bad, though, and confidence is low, everyone wants to save while no-one wants to borrow. Not only that, there may be a few out there who do want to borrow but confidence is low enough that banks don’t think they’ll get their money back. The reason this is a trap is because you can’t manufacture confidence. You can use your standard toolkit but ultimately it may not work.
The problem that we are seemingly unable to countenance is the end of growth. Today’s system is predicated on the progressive conversion of nature into products, people into consumers, cultures into markets and time into money. We could perhaps extend that growth for a few more years by fracking, deep-sea oil drilling, deforestation, land grabs from indigenous people and so on, but only at a higher and higher cost to future generations. Sooner or later – hopefully sooner – we will have to transition towards a steady-state or degrowth economy.
There is a massive leap of logic here (the term logic used loosely): “Monetary policy is currently ineffectual because confidence is low… thus economic growth will have to stop.” The only connection between the two is the rather flimsy argument that money and debt are out of sync. Throwing in emotive terms like fracking, deforestation and land grabs from indigenous people is not only a cheap rhetorical device – it also shows Eisenstein’s equation of prosperity with resources. This is increasingly not the case. (Compare the natural resources Zuckerburg has bespoiled with those of his 19th century equivalents.)
Does that sound scary? Today it is: degrowth means recession, with its unemployment, inequality and desperation. But it need not be that way. Unemployment could translate into greater leisure for all. Lower consumption could translate into reclaiming life from money, reskilling, reconnecting, sharing.
This is unbelievably naïve. Unemployment is probably the single biggest destroyer of personal life satisfaction there is (maybe some behavioural economists can back me up here). The reason that a society like France looks like it’s creaking under the strain is not because everyone is working too much – it is because the young do not have enough work. I do believe personally that the US has got the balance between work and leisure wrong. I value my leisure time quite highly as ultimately time is our true finite currency (not money). But that is not for a minute to say that I think we could somehow cut the standard of living and divvy up the jobs so that everyone works 25 hours a week.
Central banks could play a role in this transition. For example, what if quantitative easing were combined with debt forgiveness? The banks get bailout after bailout – what about the rest of us? The Fed could purchase student loans, mortgages or consumer debt and, by fiat, reduce interest rates on those loans to zero, or even reduce principal. That would liberate millions from the debt chase, while freeing up purchasing power for those who are truly underconsuming.
Again, this seems to miss a key point: banks are not massive cash hoarders in and of themselves. They are intermediaries between savers and borrowers. “The banks get bailout after bailout” is not accurate: it is savers that are getting the bailouts (bailouts here meaning they get paid back in full). Debt forgiveness is not some low-hanging fruit out there, pleading to be plucked. It is a transfer from savers (typically the old) to borrowers (typically the young). We can certainly do this if we want but we should be under no illusions that this represents some sort of painless victory.
More radically, central banks should be allowed to breach the “zero lower bound” that has rendered monetary policy impotent today. If investors are unwilling to lend even when risk-free return on investment is 0%, why not reduce that to -2%, even -5%? Implemented as a liquidity tax on bank reserves, it would allow credit to circulate in the absence of economic growth, forming the monetary foundation of a steady-state economy where leisure and ecological health grow instead of consumption.
Some central banks have done this but it is likely that any concerted effort by major central banks to introduce negative interest rates would see a flood of money to other financial institutions, even if they were just offering zero. “Under the mattress” is one such institution.
One thing is clear: we are at the end of an era. No one seriously believes that we will grow ourselves out of debt again. There is an alternative. It is time to begin the transition to a steady-state economy.
This appear to be either taken from a different article completely or else meant to blind the reader with statements so big they’ll overlook the relatively ordinary analysis that preceded them!
There are plenty of problems with modern economic policy that Charles could have chosen to focus on. It is certainly possible that the days of 2% trend growth are over. But we’ll need far better analysis than this to show us the way!