Social welfare in an era without growth

11/04/2014 climate change , demographics , economic growth , Europe , Finance , governance , human well-being , limits , natural resources , risks , social welfare 0 Comments

We have known for a long time that there are physical limits to population and economic growth in terms of what the Biosphere can provide. The Limits to Growth (1972) “business-as-usual” (BAU) scenario produced about forty years ago now aligns well with historical data that has been updated (Figure 1, Turner, 2014). Showing that we are headed in the wrong direction, away from achieving sustainable development. The BAU scenario results in collapse of the global economy and environment, subsequently forcing population down. A collapse in this context simply refers to the fact that standard of living will fall at rates faster than they have historically risen, due to disruption of economic functions. According to the model, a fall in population only occurs after about 2030 but the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline (Turner, 2014). Given the imminent timing, we ought to raise the question whether the current economic difficulties are related to dwindling resources and an end to growth.

Most people assume that the major global difficulties will occur after the end to growth. According to Dennis Meadows, one of the original authors of the book limits to growth, this is not correct. Instead, the global population will experience the most stress prior to the peak, as pressures mount high enough to neutralize the enormous political, demographic, and economic forces that now sustains growth. Pressures building up can take many forms, for example, rising energy and resource costs (A), growing debt (B), climate change (C) and growing population dependency ratio (D).

The history of commodity prices has generally been one of steadily decline for most of the last century. However, the average price fall of some 1.2% a year (inflation adjusted) met it’s low point in 2002. Since 2002 we have seen a remarkable price rise in most commodities (Figure 2). Rising energy and food prices, for example, seems to be the new normal. Unless there is a global economic contraction, prices will likely continue to rise.

2. Commodity indices (1900-2010) - Paradigm shift Source: GMO (2011)

B) Growing Debt

3. Public debt in % of GDP in 2013 (left) 4. Private debt in % of GDP in 2012 (right). Source: Eurostat

C) Climate Change

The world is aging at a rapid rate and by 2030 there will be 34 nations where more than 20% of the population is over 65 (figure 6). This has broad implications for economic growth and immigration trends. While Sweden's dependency rate will rise we still have a rise in population both from births and from immigration (SCB, 2014). Given today's immigration policy the potential to meet the growing needs of an aging population is better than other countries such as Japan or Austria.

Most common solutions to increased welfare costs depend on growth. For example through encouraging higher birth rates, raising immigration rates, increasing labor productivity, raising the retirement age and increasing taxation. Effective responses, however, are different. Especially if one is serious about creating a more resilient society. There will probably have to be a restructuring of the economy, a reorienting of capital and labor structure of society, from production toward maintenance, to serve an aging population and lower resource consumption. Priority has to shift from GDP per person toward maximizing human welfare directly i.e. using different metrics for national targets. Expenditures have to be reduced by developing non-market methods of social support (e.g. volunteer work, time-banking). The benefit of an aging population is that construction rates goes down, so does the need for police, prisons and military, while the need for health care increases. Shorter work time can give more jobs while allowing more leisure time. Shifting taxes from labor towards heavy industries and resource extraction is another interesting idea.

Several stresses are converging, creating difficulties for the welfare state. Especially in countries with demographic trends of having to care for a larger number of pensioneers. Dependency ratio will increase at the same time as GNP declines. Resource prices have reverted from their long-term downward trend, to increasing prices, but falling again in times of economic contraction.We have unsustainable levels of debt, especially unproductive debt (consumption and speculation), putting downward pressure on the economy. No government has yet tried to increase taxes a lot on the financial sphere or other efforts to get debt levels down, this is mainly because much of our growth today depends on ever increasing debt. Climate change will have many impacts e.g. increasing yields in the north and lower yields in the south of Europe. Scandinavia is in a better position than southern Europe to handle coming heatwaves and floods since temperatures are lower from the beginning. There is plenty of human capital and much work needed to be done (e.g. elderly care) but misalignment of incentives has led to massive unemployment and a generation of lost youths who can't get a job, even with a university degree. Potential solutions should involve changed goals, redirected investment and initiatives to engage the neglected work force. Sweden is in a better position than most other countries to achieve a more resilient society but radical thinking and a clear vision is needed if we wish to maintain our social welfare.