Brits in EU

How not to run an economy:
Debt and Growth

To cover our huge debts we have to grow our economies, but for how long will that be physically possible?

We need to grow our economy. If we don't grow our economy the situation will get worse - people will lose their jobs and then their houses, public services will have to go, eventually there will be queues around the block for soup kitchens. To keep the wolf from the door we need is a return to growth as fast as possible. Of that there is no discussion - growth is the only way. If you listen to our politicians or pundits, they will generally argue for either increased spending to tidy over the country before the good times return, or for reducing public spending by making cuts to social security, healthcare etc. Either way, the assumption is that this crisis can be fixed one way or the other, despite all the evidence that the resources for this growth simply don't exist on the planet.

Economists argue that it is possible to de-couple GDP growth from resource use. That means that we can grow our economies while using fewer and fewer resources. And they have a point - wealthier economies are able to grow their GDP while extracting less from the Earth. It makes sense all of this. China has had to build new roads, ports, factories and all sorts of infrastructure to keep their economy growing. In Europe most of that infrastructure was already there and we just have to use it now. What's more, because our goods are no longer made at home, we can claim to be cutting emissions, while in reality we've just moved them to somewhere else. However, even in the rich west we can't escape resource use completely - the roads need repairing, new fibre-optic cables are required for faster internet, global trade means our ports and airports constantly need to adapt.

Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.

There is no example in history of an economy which has grown its GDP while using no resources. Not a single one. What our political debates overlook is a deep contradiction in the growth argument - that the earth is not an infinite resource. In fact, the Earth is a mere speck of dust in the Universe, and we're approaching the limits of the amount of stuff left inside the planet which we are able to extract. It's almost certain that we've passed the era of cheap, easily accessible oil, for instance. Although there is still oil in the ground, it is becoming more and more difficult and expensive to extract it. This is why everyone's so interested in drilling for oil in the Arctic sea, or from the tar sands of Canada. Which country is the largest single provider of US oil today? Not Saudi Arabia, nor Iraq, but Canada. And this oil doesn't come from wells underground but from the destruction and removal of billions of tons of earth from pristine forests and ecosystems. This is not just hugely polluting, it is also much more expensive than traditional extraction methods, and as we become ever more reliant on these sources the price of petrol which we all have to pay at the pump will continue to rise until at some point in the not-to-distant future it will become uneconomical to use your car.

We have built our modern world on cheap and plentiful energy, and when that energy becomes more expensive there is no plan B. However, it is not just oil that's running out. Production of Copper, a vital metal for all kinds of electronic and other applications, is most likely already in decline. Estimates suggest that global reserves of indium, the metal that makes your touchscreen on your iPhone work, will last about 10 more years. My own study from earlier this year showed that even iron ore, the most abundant metal on the planet, used as steel in cars, buildings, bridges, basically anything, could start to decline in production within 30 years.

So there's a huge contradiction. We need to grow our economies but the Earth doesn't have enough of the stuff we need in order to provide that growth. So, we need to take another look at how things work. Let's go back to the basics - why exactly do we need to grow our economies again?

At this point it is usual that politicians will use a circular argument of the necessity of growth to create jobs. Indeed, in a world of growing populations we will need to increase our agricultural production just to feed these new people. Except that in Europe the population growth is due almost exclusively to immigration. And immigration continues - providing cheap sources of labour to companies which already make record profits. Incidentally it is always the individual immigrant who is seen as the bad guy in this story, while their employers usually get off scott-free.

This political argument, played upon by so many, is not the reason we need to continue growing. You see, there is something else which continues to grow, which we are now becoming aware of. Western governments have never been in so much debt. A common misnomer is to imagine that the money we've borrowed came from somewhere else, whereas in reality the money is effectively created out of nothing (there are a plethora of documentaries about this. For a small snapshot see this video on how banks create money). Therefore those that our nations owe money to are less interested in receiving all that money back - rather they lend money to countries in order to claim the interest payments. The problem with compound interest is that it will increase indefinitely, in an exponential manner, so the amount of money our governments have to pay in interest is constantly growing. If the economy stops growing at the same pace as interest requirements then governments are left with a choice - to cut the money going as interest repayments or to cut spending on public services. Except that it's not really a choice because they cannot stop paying the interest, otherwise the cost of their loans will increase and they (we) will be left with more to pay!

Understanding this makes a mockery of the spend or save arguments. The 'spend more' argument is based purely on the idea that future generations will be able to afford it when growth returns. But as we've already discussed, endless growth is an impossibility. So we should stop spending on public services instead? Well this is a no-brainer - as people become impoverished they do not just sit by and let it happen. This state of affairs is deeply destabilising because an idle, educated workforce is a militant one. Of course, one area of spending that hasn't been cut is defence, and those citizens on the street fighting for better conditions have already felt the force of state security from Athens to Madrid to New York and Los Angeles (not to mention from Tunis to Damascus).

So, if spend or save is not the argument then what is? We could simply default, but then would most likely feel the full wrath of international investors and their well-armed backers. It would be almost impossible to borrow any more money, and being completely dependent on oil we wouldn't be able to afford to import any of it and the whole shebang would grind to a halt.

Adam R. Mathews, Utrecht 12 October 2012

This article is part of the series How not to run an Economy.

How not to run an Economy

"What choice do we have?" It's a common refrain these days; while the economic cracks in the system have been proliferating and widening, the explanations are generally seen as incomplete, and the solutions as little more than useless. In order to build a better economy and reform the system, we need a better understanding of the fundamental causes of the pickle we find ourselves in. This series addresses a number of such topics, including governments' favouring of big over small enterprises and the increased financialisation, largely through debt, of our world. The aim is to create an awareness whereby precise solutions can be proposed and worked upon, because answering the question 'what can we do?' cannot be done in a single two line soundbite.

The third article in this series looks at the reasons the reasons we need to grow our economies and the impossibility of achieving endless growth.


Also in the series

Part 5: Industrial Rise and Decline
The Black Country led the world into industrial prowess and then economic decline - what does it tell us about today's world?

Part 4: Utilities and Resources
Rising dependence on gas and ballooning prices are not a path towards a sustainable energy policy

Part 2: Government as a Corporation
When financial markets become a measure of the well-being of an economy, what are the consequences in the real world?

Part 1: Ownership
How does the ownership of our most powerful companies affect our communities and our economy as a whole?


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