It’s January, which means that hot on the heels of the end of year lists and reviews, tis the season of predictions. One of the more notable ones is the Financial Times survey of economists, which asks leading economists about the state of the economic recovery, inflation, housing prices, etc.
This is the third time the survey has run in this form, and it’s interesting to go back and look at previous years. Looking at 2011, I can’t help but notice how optimistic many people were about the state of the economy. There’s a general feeling that the recovery won’t be fast, but that it’s definitely underway. Growth was likely to slow, but a slip back into recession was deemed unlikely. “Chances of a true double dip remain low” says one. “The recovery does seem to have some reasonable momentum behind it and a double dip looks a remote possibility” says another. Others thought recession was a 50/50, but only one economist out of 78 doubted the recovery entirely.
As it happens, the economy see-sawed through 2011, growing one quarter and declining the next, and finally succumbed to the infamous ‘double dip’ in 2012. By then the economists had changed their tune, and ‘deterioration’ is a word that features repeatedly throughout the 2012 survey results. “Households borrowed too much and banks lent too much” said Nicholas Barr of LSE, “both sectors will continue to retrench. Deterioration is more likely than improvement.”
What of 2013 then? It’s somewhere in the middle. There are hopes that the economy will recover, but nobody expects it to be anything other than slow. Many suggest we’re on something of a plateau: “we will be bumping uncomfortably along the bottom” says one, another says the economy will “plod along near zero”. Vicky Redwood of Capital Economics says “we simply do not see where meaningful growth will come from next year.”
Perhaps there’s a consensus forming that this is not a simple recession, that something is different this time round. Some might want to call it a depression – there are certainly some similarities between our current situation and the Great Depression of the 1930s. The economy dropped lower then, but recovered faster. Five years on from the 1930 crash, the economy had made up all the losses and more. We’re nowhere near that.
Others have declared an end to the era of growth altogether, and that we should get used to a flat economy as the new normal. Richard Heinberg went ahead and called it in his book The End of Growth.
Being an optimist, I’d like to believe that there’s a slow evolution going on in our economics. The first hurdle was to accept that the economy wasn’t going to bounce back to growth any time soon. We may have cleared that one. The second hurdle is to ask how much that matters.
That’s where we need to go next, asking some new questions, looking again at our assumptions. We might find that growth isn’t as essential as we thought, or not in the ways that we expected. For example, GDP growth doesn’t always deliver rising incomes. Neither does it necessarily raise people out of poverty. It might not be necessary for job creation either, given that unemployment figures in Britain improved this year while the economy stalled. We know from Japan’s example that an economy can continue to function on a plateau for decades without catastrophic losses in quality of life.
There are two ways to see this waning of economic growth. We can see it as ‘falling behind’ in the mythical global race that David Cameron referred to again in his New Year’s message. Or we can take a broader view of it – perhaps it isn’t stagnation or collapse, but maturity, an economy coming of age. Nothing in nature grows forever, after all. We reach adulthood and stop growing. Is the economy, which can only exist within the bounds of the biosphere, outside the rules that govern life on this planet?
As I’ve written about before, that doesn’t mean we can be complacent about the economy. But we need to start asking some bigger questions about what the economy is for and what we want it to do for us. Those questions have been unwelcome in economics circles for some time, but I think we’re creeping closer all the time.
The Earthbound Report 
The major problem with a very slow growing economy is debt. Growth erodes the relative size of debt, making it more manageable, low growth means it remains a burden for longer. The build up of government debt is a major problem in these circumstances. If that debt is internally financed it is slightly more bearable (Japan at 200% government debt to GDP has an easier time financing it than Spain at 90%) but still an issue, especially given the demographic time-bomb rushing towards us, regardless of our current economic difficulties.
So for the UK the policy prescription tends to major additional cuts to spending to reduce the deficit. As a percentage of GDP current UK tax take isn’t very far from its high point in the early 1980s so there isn’t huge scope for tax rises.
(Note that if relative poverty is your yardstick recessions are good for poverty, since while the poor get poorer, the average lose more)
Yes, debt is the most important reason for keeping the growth machine going. Moving to a low growth model of the economy is a process and it has to be designed for low growth, not just switched off. One of the key elements to that design would be a mechanism to deal with debt, and the most obvious is to write it off, at least in part. Sounds a bit crazy, but it’s what Iceland did after their financial collapse.
Most Icelandic debt was held by foreigners, which meant that while Iceland couldn’t get credit after their default, they didn’t suffer those loses to their assets. In the case of the UK much more of our debt is held internally, especially by pension funds. So you would be robbing pensioners and savers to pay off free spending. Big moral hazard as well as storing up trouble in the future.
I don’t have a plan for a debt write down, but it’s something we need to be considering. And since our growth economy is also storing up trouble for the future, it may be worth the disruption in order to put the economy on a stable long term footing.
The debt burden of the US govenment, then 5 trillion dollars, was one of the first points raised in the core argument of our 1996 paper on a alternative, people centered model of economics leading us on to becooming a poverty relief through targetted economic development organisation. First action was in Russia in the wake of their 1998 economic crisis which turned out to be a early sign of the global crisis a decade later.
When active in Ukraine several years ago, I remember that the World Bank removed that country from those identified as being in poverry bacause there were none with incomes less than 2 dollars a day. Many were going hungry nevertheless.
Looking back at 2004, when warning of the risk of civil unrest in the UK, it was the failure of wealth distribution which was identified to be the problem which hadn’t been resolved, what was proposed at the time semms now to have been rebranded as “predistribution”
http://economics4humanity.wordpress.com/2012/11/21/predistribution-and-living-wages/
From a UK perspective the difference between the ‘Living Wage’ and the minimum wage is tax and NI. The annual gross wage for a 40 hour week on the minimum wage is within £200 to the national net Living wage. So if the could pull the tax threshold up so no one on minimum wage paid tax we would have the living wage.
This is close to current coalition policy. Hurrah for Nick Clegg and George Osborne!
I’m with you on that one. There’s a big campaign for a living wage at the moment, but the simpler solution is the one you suggest here.
Our campaigning is founded on ICESCR which we use to justify the case for economic development:
http://economics4humanity.wordpress.com/2012/12/16/social-enterprise-economic-social-and-cultural-rights/
Disagree I think there is plenty of scope for tax rises….
Presumably on people other than freelance journalists who grow vegetables.
I think we’ll have to call you ‘Cheeky DevonChap’! But, Neil deserved it for not backing up his comment with examples.
Mr. DevonChap you evidently have quite a bit of knowledge unlike myself, so would you be so kind as to explain 2 of your comments for this ignoramous? I have an inkling but would love to hear your brief explanation of the ‘demographic time-bomb’ that we’re heading for.
The second is that EVEN speaking relatively, I do not see how the poor getting poorer can in ANY way be good for them?
I’d be grateful for your time please.
The demographic time-bomb refers to the impending retirement of the baby boomer generation who, because there are proportionately more of them to the younger working age people will mean that health care and pension costs will rise and there will be fewer taxpayers to pay for them. This has been obvious for the last 25 years and so governments should have been balancing budgets and lowering debts to prepare for it since then. Sadly short term political expediency (and in the case of the UK Gordon Brown’s ego) meant we have increased government debt before the Great Recession so are very unprepared for it. This is why pension ages are rising rapidly.
I’m not suggesting that the poor getting poorer is in anyway a good thing, just making a counterpoint to Jeremy who is wedded to relative poverty as his definition of poverty. Using relative poverty as your measure means the poor getting richer at a slower rate than everyone else when incomes rise is a worse thing than the poor getting poorer slower than everyone else’s incomes fall.
When I write about poverty in Britain, or government policy that will affect the poor, I use the British government’s definition of poverty. That’s a relative measure. But since it’s the official one, you might as well stop nagging me about it and go and complain to your MP.
So if the government do as they suggest and redefine poverty you would use that happily? Or would you be the one complaining to your MP?
As I said, one of the odd consequences of the downturn is that relative poverty is reduced, even when those with the least have less.
DevonChap, I see you’ve had this out with Jeremy but I don’t get it, and of course you’re not obliged to help me. But, surely, one can define poverty as relative if you are generalising and making laws applicable for that general aspect (which governments do), but you can’t call it relative poverty for those who die of fuel poverty or those in other dire conditions. Isn’t it a question of degree and therefore applicable at times but not for all? If I’m a bother, please don’t worry, I’d understand. Thanks for your other help.
There are many different definitions of poverty from absolute poverty where you can’t clothe or feed yourself, the UN $1.25 dollar a day poverty level through to fuel poverty and relative poverty. So if someone just says ‘poverty’ you always need to ask which type they are referring to.
In an affluent country relative poverty (in the UK 60% of median wages) gives a standard of living that 100 years ago would be considered luxury. At its abstraction in a society of billionaires a millionaire would be in relative poverty. Does that make it less valid than absolute poverty? That is for you to decide.
I think you need other measures as well such an the government are proposing to introduce.
Thanks DevonChap. Is relative poverty less valid than absolute poverty? I should certainly say so, unless I again have a limited understanding of the question. You’ve left me on a bit of a cliff hanger – Is it too much to ask you what the government are proposing to introduce or can you give me a link to something on it? Then, I’ll try to get out of your hair (on this one anyway!).
No problem. Basically the government want to include some societal factors in their poverty definition – Family breakdown, joblessness, drug addiction and so on. The things that can have a very big impact on your quality of life and your family’s regardless of whether your income is 55% or 120% of the median average wage.
Here is a link http://www.bbc.co.uk/news/uk-20334619
I always think that a good example of absolute vs relative poverty is China. Under Mao pretty much everyone was equally poor (very low relative poverty excepting Communist party grandees) but hundreds of millions didn’t have enough to eat. Since the reforms in the 1980s there is now massive income inequality (high relative poverty) with hundreds of billionaires but over 600,000,000 people have been lifted out of absolute poverty.
Now in the developed world we have pretty much conquered absolute poverty it is not wrong to look at other poverties but we should always be careful not to act as if they are the same. Not all ‘poverty’ is equal.
Yes, the default strategy has been to charge in with cuts, but there is more scope for tax rises on undertaxed things such as aviation or financial speculation. The hysterical screaming from the sectors in question tends to deter the government from doing it, unfortunately.
Personally, I’m in favour of pigovian taxation on energy intensive products and services, and land value taxation (rather than income tax) as the main form of tax.
No DevonChap, I wouldn’t want to change the definition of poverty because the government happens to be right. But we’ve been over this before and I don’t see the point of repeating it.
**Peeking my head in to bookmark it for myself..Great topic that many seem to be afraid to talk much on anymore..I’ve got quite a bit to add/say N will stop back by when I’ve more time this weekend. Read/write ya’ll then..
It was a project in Russia in the wake of their 1998 economic crisis, which is now recognised as the early signs of our own, that delivered proof of concept for a localised bottom up approach to economic development where preceding attempts to implement a top down approach had led to disappearance of billions in development aid funding.
Shiftting from a 20th century approach focissed on production and profit maxiimsation to local and people-centered economies means that we produce what people need.
http://economics4humanity.wordpress.com/2012/06/22/post-growth-people-centered-local-economies/‘
Interestingly what’s now being described as a Transition Enterprise seems to be leaning toward this model.
Devonchap and Dichasium, I should point out that both definitions of poverty are important. Absolute poverty is the more serious one, because that’s life or death. If you ignore relative poverty however, you end up with vast inequality and a society that the poorest can’t participate in. It’s something of a luxury for a government to be able to work with the relative definition, but it still matters.
Incidentally, increase in GDP doesn’t necessarily mean raising people out of absolute poverty either. The link I put in refers to the UK, but I could have linked to a previous post about Egypt, and how the number of people living in absolute poverty increased even as the economy boomed.
http://makewealthhistory.org/2011/01/31/is-egypt-a-victim-of-its-economic-policy/
As someone pointed out in the comments there, there are other issues other than just economic growth at work in Egypt. Egypt has many bad economic policies. For example they subsidize bread, petrol and electricity, supposedly to help the poor but these actually benefit the wealthier. Change those policies and you would get improvements in outcomes.
Another point is how much worse would the poverty rate be without that economic growth? Economic growth may not be certain to reduce absolute poverty, but without it you are certain not to be able to reduce poverty in developing countries.
My point is very simple: rising GDP figures do not necessarily mean that people are being lifted out of poverty. Egypt’s case demonstrates that very well, but I’m not suggesting that its problems begin and end with economic growth.
Yes, economic growth can lift people out of poverty – but you can improve people’s lives without growth, and you can grow and fail to improve. All I’m suggesting is that we look a little closer.
Yes, badly run countries don’t raise their people’s living standards, even if they have economic growth, that doesn’t mean growth is unnecessary. Quite a few countries have corrupt ruling elites that steal the proceeds of economic activity. Angola pumping more oil will increase its GDP numbers but the only Angolans who benefit are the former Marxists ruling it. However, this blog does not put good governance at its masthead.
On the case of Egypt, the figures you are quoting don’t seem to be unchallenged. The World Bank says over the past 2 decades there has been “marked improvements in a number of social indices” and ” The economy and the living standards for the vast majority of the population improved, although in an uneven manner.” It has the current poverty rate at 25%, not 44% and extreme poverty is seen as falling.
http://www.worldbank.org/en/country/egypt/overview
So you can’t use Egypt to prove your case here. I’m hopeful with Egypt moving towards representative democracy, and tied to a market economy, that there will be more even improvements in future.
Badly ruled countries do not mean growth is unnecessary. For sustained improvements to people’s lives economic growth is required, utterly essential for undeveloped countries. On its own GDP growth doesn’t mean rising living standards for all. However, without growth you can only improve via redistribution and that will never be enough, unless there is a major fall in population. You must have economic growth. I know of no example of a country that has seen a sustained raise in general living standards while the economy has stagnated. If you have examples I’d be very interested to see them.
Sure, there are some examples here: http://makewealthhistory.org/2010/11/08/un-development-is-possible-without-growth/
Jeremy and DevonChap, I had been trying to figure out where the fundamental issue is between you both as it is not plainly evident. I felt is must be coming from a difference of opinion on the question of growth. Jeremy now says ‘All I’m suggesting is that we look a little further’. Presumably, DC wants us to do just that and feels he can help in that direction. Whether you’d both agree on that, I do not know? It is interesting to read you both and to receive the help you both offer. Thanks.
I think that Jeremy is coming at this topic from the a priori view that growth is, if not bad, unnecessary. Therefore he seems to discount the largest rise in living standards in human history that has occurred in the last 25 years in China. They have followed a broadly liberal capitalist market methodology, which the last 2 centuries has shown itself to be the only one capable of improving peoples living standards, which is done through growing economic activity and efficiency. However it does cause economic inequality which creates a desire for those who feel that to be bad to seek alternative systems which they hope will meet their ideas of fairness. I think it is fair to say that Jeremy would put economic equality higher in his list of priorities than I would. I would say raising living standards for the poorest is higher, and I believe that pursuing economic equality would harm that, especially if trying to do so whilst also limiting growth. So that probably is the root of our disagreements.
Rarely do I agree with Communist Party leaders but as Deng Xiaoping said, ‘It doesn’t matter if a cat is black or white, as long as it catches mice.
Whether Jeremy would agree or not, it is great to receive such a plain and helpful reply. Thank you. I daresay there are many ingredients to consider when taking one view or the other, which is why opinions often vary, and why I could not speak on any specific point with any confidence. Generally though, I do think a bottom up approach is our only real hope ( for starters), but I think it is idealisitc of me.
I’m all in favour of growth in poor countries, and good governance. I grew up in a poor and corrupt country and don’t need to be convinced of that. I’m talking about the British economy here, which is what the Financial Times survey is referring to.
Thanks. It’s getting clearer! Now it seems to me that basically, you both agree in the case of poor countries, but DevonChap votes for growth to sustain us too, whereas you are looking at other options? I think it will be interesting when and if you Jeremy, do a blog, attempting to any degree, to answer those difficult questions – what is the economy for and what do we want it to do for us? Forgive me, if you plan to, or already have.
Exactly, it’s all about what growth is for. In Britain, we’re pursuing growth for the sake of growth, an endless ‘more’ with no purpose in mind.
In poorer countries, growth means education, healthcare, infrastructure, pensions, etc. Once you’ve got all those things, what’s the growth for? And if we’re wrecking the environment and undermining future prosperity for no good reason, shouldn’t we stop?
Instead of growth or no growth, we should be thinking about ‘enough’. What do we need to live good lives?
Incidentally, I believe a low-growth economy isn’t a choice for Britain and most other advanced economies. It’s pretty much inevitable, for a whole variety of reasons, including oil depletion, aging populations, and the debt burden. It’s something we need to face, and knee-jerk defences of the idea of economic growth aren’t going to get us anywhere.
Earlier (07 Jan 4.05pm), DevonChap provided a reason why he was not in favour of limiting growth (pursuing economic equality especially whilst limiting growth being detrimental to raising living standards for the poorest). Hence, unless he replies, I can only assume that he would not agree with your statement that here, we pursue growth for no other purpose than ‘more’.
I can’t help wondering if I’m digging into deeper differences that are either not being acknowledged, or, not known. I’d love to get to the bottom of it as it is so informative. But not at the cost of irritating either of you.
Raising people out of poverty is the most cited aim of economic growth, and you’ll hear our politicians justify it that way. It’s just that in Britain, that’s no longer true. We don’t have absolute poverty, so that work is finished there. And it’s not fixing relative poverty either. The vast majority of our economic growth just goes to the top few percent of earners.
You can argue that Britain needs growth to pay back our debts – that’s a much more legitimate argument. And it’s up to us postgrowthers to show how we deal with that debt, something the movement hasn’t cracked yet to be honest.
As I’ve said before, I’m not against growth as a matter of course. I just want growth in the right places, and serving the right people
It isn’t true to say that “the vast majority of our economic growth just goes to the top few percent of earners”. In 1997 the richest 10% had about 27% of net income. In 2010 they had 31%, and that is 31% of an economy that is 50% larger. So while there share has grown it is a) still far less than 50% and b) of a far larger pie.
This growth has largely gone to average people. This has been used to improve people’s lives in all sorts of ways. Our environment is cleaner and safer than it has been for 100 years. Our lifespans are longer and healthier. We are better dressed and fed than ever (no just burgers, the whole UK food revolution with organics and excellent restaurants rests on our increased wealth). Life is still improving because we have growth.
I don’t buy the idea that we have enough, that we don’t need anything more. We don’t know what the future holds in terms of innovations and developments. Where do we draw a line? If we had listened to the first advocates of a steady sate economy in the 1970s we now would few anti cancer drugs, shorter lifespans, no mobile telephones, no internet. These are great things which we undervalue through the fact they are now commonplace. Innovation in more expensive now, each generation of electrical item does more, but is far more complex so costly to develop, so we need growth to pay for those new things that may give us wonderful advances.
It is also false to suggest that we can just stay as we are. The world moves on. Productivity enhancements (such as new machines or better ways of working) are reducing the workforce required to produce the same level of economic output by about 2% per year. Unless we do extra new things (this is what growth is) then unemployment will grow. If we decide to not use those productivity enhancements then other countries will and we will lose markets. Then our existing companies will have to shrink (more unemployment). This is similar to UK industry’s decline in the 1950s-1970s, they didn’t improve productivity or innovate products and competitors who did took their markets. So it is like we are on a running machine, unless we keep walking forward we will go back. And a shrinking UK economy doesn’t just mean lower living standards for us, it means developing countries grow more slowly as we can’t afford to import so much from them. Hence they remain in poverty longer too.
Then there is the global warming issue. It costs a lot to move to a low carbon economy. We will probably have to pay for adaptation to the changed climate whatever (more flood defences etc). Unless we wish to lower our current standard of living (fewer hospitals, lower social protection) then we need to grow the economy to pay for it.
Now I don’t judge what people do with their money. Who am I to say the pleasure gained from a new iphone is more or less than that from looking at a daisy. I know my feelings but I don’t seek to judge others or impose my views on them.
Lastly as I previously said we need to grow to make it easier to pay off our debts. I do think that given our demographic challenges, debt burdens and increasing complexity of technological advancement, that the rate of growth we are likely to see in future is less than we saw in the Brown bubble, but it is like the running machine has been sped up; if we have to run for 1% growth now when it was stroll before then if we stop we will get flung off the back all the faster.
Not so. Between 1975 and 2010, the average year on year change in income for the top 1% was 2.5% a year. For the bottom 10% it was just 0.2%. See the recent work on this by the Resolution Foundation: http://www.livingstandards.org/features/pay/
You’ve raised a number of common objections to the idea of low growth economies there. I’ve addressed many of them in the past, some collected here:
http://makewealthhistory.org/2010/09/20/a-post-growth-economy-faq/
100% – 31% is 69%. A majority for the rest by my sums.
I like the way you compare a post growth economy to riding a bicycle. I’ve only ever managed a track stand on my bike for a minute and even then it took my full concentration. The thing about bikes if you need to go forward or you fall off. Its an image that fits my views better than yours. Ho ho!
DevonChap, This should, no doubt, be my last question on the matter. Do you hope to change Jeremy’s views or those of his readers?
A question worth asking, but for my part, I’m not going to be that easily convinced. I know what mainstream economists believe and I know that I’m in the minority, but I got here by thinking and reading about it, so these are not views that I hold in ignorance. I’m also aware of the holes in the postgrowth argument, and the things that we need to work on.
The whole idea of the postgrowth economy is a work in progress, and it’s a growing movement that is slowly gaining acceptance – which was the point of this particular post in the first place. I’ll continue to write about it as it evolves, because as I’ve said before, we’re probably going to end up with a post growth economy whether we like it or not.
Jeremy, If DC was prepared to give any answer, I would have liked to have seen what it might have been, before your defence! But, now that you have got in first, I may as well add that I also believe it is inevitable to some degree, (at least for the majority of us), whether we work towards it or not (let alone like the idea or not). Actively working towards it may soften some of the bruises and worse effects along the way, but I think there will an unfortunate number of casualties, either way.
Ps. I used to ride a uni-cycle for a bit of fun in dear old lovely and missed Bushy Park (near Hampton Court, Surrey), so, can I be included in your balancing competition with DC? And stopped dead still on my motorbike for some while before moving again during the test!
Dichasium, I don’t think I’ll change Jeremy’s views much but by providing a counter point I will hopefully make him a little more rigorous in his thinking (and I in mine) and perhaps give readers a more balanced view (balanced is of course a relative term).
Jeremy, I’ve looked at the Resolutions graph and it doesn’t have the pay growth for the all deciles. So it doesn’t evidence your contention the top few percent of earners took the majority of growth. If it went to the top 50% then that is not ‘top few’. Pedantic point you might feel but changes the tone and accuracy never hurt anyone.
Well DevonChap, I may not get into your cycle balancing fun with Jeremy, but I enjoy your interaction with him and the explanations you’ve given me. So, from my view, keep up the challenging work!
No, a growth economy is like a bike that needs to keep moving, a postgrowth economy is not. I just bought an old BMX from a guy down the road. I’ll have to see if I can beat your one minute.
Did you look at the link to the Resolution Foundation? I’m guessing not, since you just repeated your previous statement, but don’t confuse share of income with share of growth. If the share of income of the top decile increased, then 100% being 100%, the share of the lower deciles decreased. And that means that the growth went to the top.
Here’s the link again:
http://www.livingstandards.org/features/pay/