The Economic Theory of No-Growth Prosperity
Editor’s Note: Population Media Center is pleased to re-publish the following essay, which is written by Dave Shreve, Vice-President & Treasurer for Advocates for a Sustainable Albemarle Population (ASAP). This is the second of three essays originally published by ASAP that we are re-publishing between September 24th and October 8th, 2020. Population Media Center has been interested in ASAP’s work for well over a decade, and is grateful for these important writings. ASAP was formed by residents of the Albemarle-Charlottesville community, and their goal is to gradually slow and ultimately stop growth before it consumes the local environment and further erodes their quality of life. They implement these goals through education, research, policy development, and advocacy.
In the PMC blog of September 24, Tom Olivier addressed many of the important questions derived from the limits of economic growth, their implications for current public policy, and the surprisingly lengthy and rich intellectual tradition that should compel us to bring these vital questions into much sharper focus.
Two questions are paramount: 1) can we continue to propel GDP growth, as an end in itself, in the face of clearer-than-ever environmental limits, and 2) if not, can we maintain and expand prosperity and a high quality of life in the absence of such growth?
The answer to the first question should be quite obvious and indisputable; our global ecological footprint has already vastly exceeded the capacity of our planet to provide sustainable subsistence resources and to absorb the wastes (pollution, poison, and fouled land, water, and air) associated with this resource use. We should hasten to note what the Global Footprint Network calls “Earth Overshoot Day,” the theoretical day on which our demand for ecological resources and waste absorption capacity exceeds that provided by the Earth in a year’s time. In 2019, it fell on July 29. In 2020, due to the Covid-19 pandemic (and associated declines in carbon footprint and forestry depletion in particular), it is expected to arrive on August 22. This recent “improvement,” of course, may only indicate how difficult it may be to sufficiently shrink our global footprint, without either reducing the pressure of population or accepting increased misery and deprivation. Imagining a similar reckoning in the world’s future around the time of our nation’s founding, Thomas Malthus urged solutions based on design, not disaster.
Yet, as the scale and composition of our “overshoot” should convince us, any promising “design” must include reduced population pressure. Personal behavioral changes (outside of decisions to procreate) and technological innovation simply cannot meet the challenge alone. Given the key factors that determine it, overshoot would prevail, for example, even if we were to transition rapidly and miraculously to a nearly complete renewable energy future, the most likely and promising kind of change we might reasonably expect among the most popular and ongoing environmental campaigns. As important as energy usage is, much of our ecological footprint includes major consumption and waste generation factors that would tax the earth significantly even in a cheaply generated, uniformly solar powered world. Moreover, while we have a fairly long history of ignoring the manifold importance of cheap energy in general, real breakthroughs on the renewable energy front are quite likely to introduce costs that cannot be offset or managed as easily as we like to imagine. Rebates to low-income persons, for example, would be difficult to manage fairly and uniformly, and would leave mostly untouched (or even unseen) the very significant costs to businesses passed on to their employees and customers. Less politically popular subsidies would work more efficiently and uniformly, but the American tradition of private power generation and transmission would clearly stymie their vertical and horizontal equity in that realm. And if we simply decide to swallow some or most of the increased costs to save the planet, we will accept not only a sacrifice that many will find difficult to bear directly, but also a factor likely to unsettle monetary policy, where it might well affect many more, negatively and indirectly.
Potentially more expensive energy is not just a cost to be managed or a way to influence energy usage, in other words, but also an important—if too often unacknowledged or hidden—component of a far more important economic policy imperative. As I will illustrate later, the kind of monetary policy we need to establish a sustainable and prosperous economy, often depends, ironically, upon the avoidance of increased energy costs. Last of all, we must also remember that we face this enormous challenge today having already chosen misery over design for many of the world’s citizens. The more we hope to reduce poverty, in the U.S. and especially abroad, the more we would have to recognize the additional overshoot such “progress” would imply. Insufficient in the face of current, unacceptable poverty levels, behavioral changes and technological fixes would offer less-than-zero progress if we really hope to reduce a significant amount of the world’s poverty and misery.
But the far more important and vexing question still remains: can we, in the absence of the population growth we can no longer countenance, still generate widespread prosperity and a high, if not increasing, quality of life?
The answer is a resounding “yes,” even if we limit the appraisal to a less-than-definitive GDP per capita measuring stick. To do so, however, we must puncture some very persistent myths about political economics and the economic history of the modern developed world. These myths are legion, but there are two that deserve a complete and early destruction.
Myth Number One: Stable and improving prosperity is dependent upon aggregate GDP growth.
Because the so-called “golden age of American capitalism,” running from roughly 1945 to 1970, arrived as we learned to manage output in a more effective way, during (and following) a period of rapid productivity advances, for a population approximately 42 percent of its current size, and at a time when income redistribution had been widely urged and accepted, economic growth was quickly embraced as an eminently useful and very easily wielded political device, likely to deliver decent, even unprecedented, social progress. Promising (and delivering) an answer to the productivity paradox of the previous age (the inability to consume the seemingly unbounded output of the early 20th century technological revolution), and helping to finesse the once much more fierce battle between workers and capitalists or managers over shares of this output, growth became a goal in itself. Having learned at the same time how to measure this growth much more precisely, this goal became further enshrined in the pantheon of important public policy priorities.
But there was never anything essential about constant GDP growth in a modern political economy, nor was the productivity miracle of the age a phenomenon that could be replicated endlessly or even counted upon—as we know now—for very long at all. The easy way out, in other words, was not likely to last very long. John Maynard Keynes spoke of “diminishing returns to capital” as an immutable trend, and he has been proven correct, again and again, despite recurring speculative booms or the noticeable resurgence of capital “power” that have obscured the phenomenon quite effectively. Indeed, the big splash made by Thomas Piketty’s magisterial work, Capital in the Twenty-First Century (2013), often obscured two of its more significant observations: that profit rates fall faster than wealth grows (in today’s political economy), and that capital should not be viewed as a stock of accumulated wealth but a speculative claim on future streams of income. As Robert Gordon has suggested in The Rise and Fall of American Growth, these observations underscore our inability to exploit new technologies for easy profit, as we once did so readily in the late nineteenth and early twentieth centuries. They also remind us of the pressure that such change has brought to bear on the American investing class, and they highlight the extent to which this investing class has rigged the game in the wake of such a transformation. Keynes’s notion of diminishing returns is as relevant as ever.
Though it could have been different and even more golden than it was, we should see now that the “golden age” was unique. Gordon included “Rise and Fall” in his title not to reflect on a tragedy or lost cause, but to hint at an irreversible change and diminution. This era was most decidedly one in which our political and business leaders did little more than pick the “low-hanging fruit” of the prevailing political economy, finding a temporarily comfortable path toward easy profitability and higher wages, the relatively loose organization of an increasingly technical and complex economy, and a relatively peaceful political (and workplace) consensus.
Writing in 1930 and 1936, Keynes illustrated how the unique productivity burst of the era was, nonetheless, “enough” to last for ages, especially if, as he explained in his General Theory of Employment, Interest, and Money (1936), we recognized that investment (and capitalist prosperity) did not depend upon the hoarding of savings. Counting instead upon a well-managed banking system (with promises of cheap, fractional reserve financing) and upon the legislated redistribution of income and leisure (by purchasing desirable public goods and services with graduated income taxes), robust investment and full employment need not depend on prospects for a bigger economy but only a more equitable and responsive one. Yet, when wartime exigencies faded from view, and American economic growth exploded, it became possible to ignore these Keynesian imperatives, never wholly absorbed in the first place. It became too easy once again to imagine that we no longer needed such a broad, progressive tax structure, or that important prospective investments depended only on the accumulation of savings. It also became too easy, in a period of burgeoning GDP, revenue, and savings growth, to cure persistent recessions with deficit spending, recommended by Keynes as a stopgap, special policy and not a general one. Keynes believed, in other words, that nations could usefully deploy deficit spending when politics or other factors prevented the right kind of banking or extensive and progressive enough taxing and spending. Such deficits would offset these shortfalls then simply by extending or amplifying the reach of these otherwise sub-par taxing and spending systems. Imagine instead, as most Americans have, that the productivity miracle of the previous age could be repeated ad infinitum, and that the exploitation of resources in a relatively young modern economy could be continued for at least as long as anyone could see, and it’s easy to see how growth came to serve as a substitute for a more genuine Keynesian revolution, shunting aside also concomitant demands for political tenacity, smart capitalism, and, eventually, ecological realism.
Myth Number Two: The redistribution of income and wealth, from the richer to the poorer, is a necessary part of a modern capitalist economy only to the extent that we must use it to soften the blows of the system’s “destructive innovation.”
The principal reason most interested and educated observers think that we must continue to grow to remain prosperous is that they misapprehend the fundamental role of redistribution in any modern capitalist economy. In concert with a stable and cheap money supply—the aforementioned “well-managed banking system”—it is the regular redistribution of income that provides the life blood of any advanced capitalist economy. Redistribution is not just a useful addition to the modern economy, nor merely a civilizing luxury; it is an essential component. As Keynes described it, alluding to the way in which the propensity to consume changed fundamentally as one’s income rose or fell, regular and robust redistribution instituted by a nation’s governments serves as the only mechanism capable of steering sufficient national income away from hoarded savings and to the consumer demand for goods and services. Put another way, because the rich save more, and the poor spend most, all, or even more than they earn, a tax-and-spend mechanism that is large and which redistributes significant sums of income otherwise hoarded (or tossed into untenable or unsustainable speculative “investments”), will steer more demand to necessities and away from luxuries, will broaden opportunities for leisure, and will enliven economic activity in general, sustaining it with as little waste, resource depletion, and unemployment as possible.
In turn, as long as the interest rate barrier is kept low enough, this broad redistribution is always the key factor driving decisions to invest and to hire workers to deliver the product of such investment. That this is done (and should be done) in a modern economy by taxing and spending (on the basis of ability to pay, and directed toward public services that enhance physical and human capital), only further enhances the overall stimulative and stabilizing effect. But if we ignore this imperative, or simply do it unevenly and insufficiently, then we must seek other decidedly inferior ways to compensate for this failure. Indeed, a key factor in the propagation of the debilitating myth connected to capitalism and redistribution is our widespread ignorance of actual tax incidence. Few of us really know who pays what, and we imagine instead that our tax codes are already very broad and progressive. To the surprise of most who bother to look, however, there is no composite state and local government with a progressive tax structure. And if we consider all federal levies beyond the individual income tax (payroll taxes, and excises, for example), even the federal code is only modestly graduated. Our overall tax code (local, state, and federal) does some redistribution, but far less than most imagine, or, in keeping with Keynes’s formula for a successful capitalist economy, far less than it should. When the status quo appears much closer to the ideal than it is, the temptation to resist the ideal becomes almost irresistible.
In this vein, and as I hinted above, population growth and physical economic growth, indicated by traditional GDP measures, represent one very compelling way to compensate for lousy macroeconomic policy, generated by insufficiently progressive or broad tax policy or misguided banking and monetary policy. That it comports with many of the “Ponzi” schemes we often embrace to keep investment bubbles coming our way only makes it that much more enticing. “Please, Lord, give me one more oil boom,” read one popular bumper sticker in Texas in the 1980s, “and I won’t piss it away this time.” Proponents of growth make a startlingly similar plea, invoking GDP advances or “healthy” population increases in what really amounts to a concerted effort at prolonging a bubble (or an attempt to stave off any serious consideration of intelligent and necessary economic policy reform). Yet, as Keynes reminded us in his 1936 magnum opus, while speculation—of Ponzi proportions or not—need not be banished entirely, it should most certainly not become a fundamental characteristic of the system. “Speculators may do no harm,” he wrote, “as bubbles on the steady stream of enterprise. But that position is serious when enterprise becomes the bubble on a whirlpool of speculation.” (emphasis added) Our fairly recent and historically unique reliance on growth, as a way to paper over debilitating compromises, is much more like the whirlpool than the stream, especially in the much more crowded world we now inhabit.
As noted above, we also learned to ignore or deflect the general Keynesian imperatives by resorting successfully to Keynes’s stopgap solution—government-led deficit financing. Such a governmental budget practice (not exclusive to the national government as is so often assumed), can serve two very useful purposes in this regard: 1) it can provide institutional support and confidence for the private lenders who are counted on for a smooth flow of funds and cheap borrowing capacity; and 2) it can amplify the salutary effects of the redistribution connected to progressive taxing and spending (simply by enlarging its reach, however less-than-ideal its prevailing configuration might be). Nobel laureate William Vickery used to describe this second function as one in which government debt instruments soak up private investment capital that otherwise cannot be put to work at an expected profit, all the while buttressing the consumer demand that also induced other private investment alternatives.
Indeed, it was just such a stabilizing phenomenon that the visionary founding father Alexander Hamilton recognized and touted in the early days of the new republic, to the great benefit of the young nation. Promoting the national debt as a “national blessing,” working to establish a stable and strong national bank, and recommending a tax policy (in Federalist No. 36) that made it “a fixed point of policy…to go as far as may be practicable in making the luxury of the rich tributary to the public treasury…”, Hamilton urged what was essentially a proto-Keynesian approach, over a century before Keynes’s theoretical revolution.
Yet we must still remember that while neither Hamilton nor Keynes ever believed that we’d be able to perfect our policies well enough to avoid sub-par fiscal or monetary policies for any great length of time—preserving a permanent place, then, for a deficit spending program of some consequence—such fiscal therapy necessarily represents a special, rather than a general, exercise, and a compensatory rather than a fundamental precept. Proponents of the increasingly salient Modern Monetary Theory (MMT), for example, seem to overlook this, ignoring both the genuine limits and the diminishing returns of our increasingly normal and popular (and practically very useful) deficit spending medicine. As long as confidence is sustained in the ultimate ability to repay the accumulating debt (with new revenue or with new debt), there appears to be no limit to the amount of deficit spending a nation may undertake. MMT proponents generally suggest that only inflation can disrupt this process. But it is important to recognize that what gums up the works is a bond market reaction—anticipating inflation—that forces interest rates higher and restricts one of the two key factors, therefore, in the general Keynesian formula: the low long-term interest rates necessary to accommodate an investment climate of ever-diminishing profit opportunity. Once this kind of reaction sets in, it’s quite easy to see how rising public interest expenses, stifled private investment (due to higher real interest rates), and inflationary expectations can combine to both short-circuit and dilute the deficit spending stimulus. Like Lewis Carroll’s Red Queen, fiscal policy authorities must then run faster just to stay in place, readily sacrificing at least some political credibility and some policy effectiveness. It also matters a great deal, of course, how this anticipated inflation is generated. The customary but almost always incorrect assumption is that any sign of incipient inflation is a sign of excessive demand sparked by too much public spending and the harbinger, therefore, of the ultimate limit or ceiling. In reality, these inflationary movements and forecasts are almost always the product of two other factors, which often lay well beyond the control of any fiscal or monetary authorities—supply shocks connected to resource hoarding or scarcity, and/or the always impetuous price pressures connected to the private capitalized expectations for future profits, however implausible these expectations may be. Much more loosely connected to any simple and direct governmental policies, these factors can unsettle or topple a political economy with astonishing alacrity.
This is where energy prices play a critical role, for example, for they can and often do represent the kind of supply shock that spooks the world’s bond traders, even if their reaction reflects nothing more than a fairy-tale allegiance to the ever-increasing returns we now recognize as implausible or impossible. If we view increased energy prices then as little more than a conservation incentive on the path to a renewable energy future, we’ll find ourselves potentially facing a macroeconomic policy structure less capable of countenancing anything but the misguided emphasis on growth, making it less possible than before to restrain environmental degradation while maintaining (or increasing) prosperity. A growth-first approach, therefore, still able to compensate somewhat for the defects of sub-par fiscal and monetary policy—often in concert with a deficit-spending approach carrying similar liabilities and limits—ought to be regarded as an avoidable third-best alternative. Poor nations and peoples can and should grow, as an unavoidable and salutary product of poverty eradication, but rich nations and peoples should have no compunction against discarding a growth-first political economy. No important economic policy goal depends upon it.
The upshot of our persistent embrace of these myths, and our resultant ignorance of the power of progressive redistribution in a modern capitalist economy, in particular, is that we are too easily convinced that constant growth—the biggest and most persistent Ponzi scheme in the modern world—is, seemingly, our only alternative. When the United States instituted its first mass income tax with graduated rates, via the Revenue Act of 1942, and embraced occasional deficit spending when this system fell short of or drifted away from the ideal, or when monetary authorities made borrowing too difficult or too dear, it paved the way for the biggest advance in widespread prosperity the world has ever witnessed. Summing up the era’s cautious embrace of redistribution and assertive organization of the same, Franklin Roosevelt urged Americans to honor the change that was beginning to prevail, however too long delayed it had been. “We have always known that heedless self-interest was bad morals;” FDR asserted, “we now know that it is bad economics.” What we should recognize now is that the American golden age ended precisely when we began to repudiate this sentiment, and that our recurring ups and downs since that time stem largely from the pale substitutes we’ve often embraced. The “growth is essential” claim gains credence only in service to such retrogression and to the deficient economic theories and policies that have reinforced it.
But this relinquished commitment to better economics can certainly be reversed, when we vanquish the critical myths that have led us astray for nearly half a century. “The first problem for all of us, men and women,” Gloria Steinem once declared, “is not to learn, but to unlearn.” Or as Samuel Clemens noted long before Steinem, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” And when we recognize the real import of this, the stabilization and eventual reduction of population can not only happen without compromising prosperity or the quality of our collective lives, but can be used as a critical means toward these ends. Achieved with arrangements readily available to rich and poor alike—as long as we secure education, civil rights, and access to family planning for all—and corresponding to no sacrifice of anything already possessed or needed, population reduction—locally or globally—should generate great hopefulness and reward, not hand-wringing or fear. And when we see it in this light, we should also recognize that it does not require the coercive structures with which it is often mistakenly identified. Because growth and population growth together have been carried aloft, however, on the economic policy myths we should now regard as debilitating and destructive, a significant challenge today and tomorrow may be to learn to accept population stabilization and reduction when it happens. “The pace at which we reach our destination of economic bliss,” Keynes predicted in 1930, “will be governed by four things—our power to control population, our determination to avoid wars and civil dissensions, our willingness to entrust to science the direction of those matters which are properly the concern of science, and the rate of accumulation as fixed between our production and our consumption; of which the last will easily look after itself, given the first three.” There’s nothing to suggest that this forecast shouldn’t still apply, nearly a century later.
 Were all of the world’s people to consume and generate waste on par with a U.S. middle class citizen, most estimates of the resulting ecological footprint suggest that it would require the resources and waste absorption capacity of approximately six to seven Earths.