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Musings of an Energy Nerd

Reinventing the U.S. Economy

Getting from “growth is good” to a sustainable economy

The S&P 500 stock index is looking tired these days.
Image Credit: Yahoo.com

The U.S. economy has run out of steam. Many Americans have concluded that the time has come for economic models based on never-ending growth to be replaced by an economy based on sustainability.

Although it’s easy to describe the promised land — a nation that spends within its means, does a better job of meeting human needs, protects the environment, provides adequate systems for mass transit, and eschews fossil fuels for renewable sources of energy — it’s hard to imagine a smooth transition between our existing “growth is good” economy and a sustainable future.

It may be useful to summarize how we arrived at our current crisis. Our nation’s trade balance has been out of whack for years. While many nations (especially China and Saudi Arabia) produce things we want, the U.S. hasn’t been very successful at convincing overseas customers to buy what we produce, so our exports have a much lower value than our imports. We’ve “handled” the problem by borrowing billions of dollars from the governments of China and Japan.

At the same time, the indebtedness of the average American family has been growing at a rapid clip, due in part to the easy availability of credit cards. More and more Americans have been acquiring things they haven’t paid for yet — things we hope to pay for with money we’ll earn next year.

During the housing bubble, many of us, encouraged by profit-hungry bankers, decided to take out a second mortgage and use the cash to buy even more stuff. These loans were a new twist on run-of-the-mill indebtedness: they were backed by fictitious collateral.

The strong growth rates experienced by the U.S. economy during the 1990s and early years of this century turned out to be an unsustainable smoke-and-mirrors game. To a large extent, we were spending money we hadn’t earned. Much of the apparent wealth generated during the 1990s — money that didn’t really exist — has simply evaporated. The rest of it is heavily concentrated in the pockets of the demographic group that benefits most from the existing economic system: the richest 1% of Americans.

Keynes to the Rescue?

So, what to we do now? The classic Keynesian solution to an economic slump is for the government to lower taxes while simultaneously borrowing and spending a huge sum of money (presumably, money borrowed from the Chinese). Even those of us who support President Obama’s stimulus bill can’t quite shake a nagging worry that the solution sounds like the classic hangover cure — a little hair of the dog that bit you.

One thing’s for sure: when our economy eventually gets back on its feet, it’s unlikely to resemble the U.S. economy of the 1990s. The ultimate cap on growth is the carrying capacity of the planet — an unknown value that we approach at our peril. Over the long term, it’s clearly unsustainable for every American manufacturer, retailer, and home builder to hope for continuing growth, year after year. At some point, any economy based on unending growth will hit a brick wall.

Fortunately, more and more Americans are making necessary mental adjustments as they envision a transition to a more frugal and responsible future — one in which houses and cars are smaller and vacations are fewer and closer to home.

It’s fair to say that the goal is desirable. But the transition is likely to be a very bumpy ride.

3 Comments

  1. User avater GBA Editor
    Martin Holladay | | #1

    Does Thomas Friedman read GBA blogs?
    Two and a half weeks after this blog was posted, columnist Thomas Friedman wrote a strikingly similar piece for the New York Times. Friedman wrote, "What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it's telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said, 'No more.' ... For starters, economies need to transition to the concept of net-zero, whereby buildings, cars, factories and homes are designed not only to generate as much energy as they use but to be infinitely recyclable in as many parts as possible."

  2. User avater GBA Editor
    Martin Holladay | | #2

    Interesting article
    Richard Heinberg has written a fascinating article on this topic, "Temporary Recession or the End of Growth?". Check it out.

  3. User avater GBA Editor
    Martin Holladay | | #3

    Another report
    A recent New York Times article discusses a report by two Nobel prize-winning economists, Joseph E. Stiglitz and Amartya Sen. According to the Times article, "The ... report amounts to a treatise on the inadequacy of G.D.P. growth as an indication of overall economic health. It cites the example of increased driving, which weighs in as a positive within the framework of economic growth, as it requires greater production of gasoline and cars, yet fails to account for the hours of leisure and work time squandered in traffic jams, and the environmental costs of pollutants unleashed on the atmosphere.

    "During the real estate bubble that preceded the financial crisis, the focus on economic growth helped encourage overbuilding and investment in real estate. Mr. Stiglitz argues that the single-minded focus on growth gave American policy makers a false sense of assurance that their policies were virtuous, as they allowed financial institutions to direct virtually unlimited sums of money into real estate and as consumer debt levels built with unrestrained momentum.

    "Credit enabled spending, and spending translated into faster growth — an outcome that was intrinsically good, and never mind how long it might last or the convulsions that would accompany the end of easy money.

    "A growth-oriented policy encouraged homeowners to borrow as if money need never be repaid, and industry to produce products as if the real cost of pollution were zero, Mr. Stiglitz added.

    " 'We looked to G.D.P. as a measure of how well we were doing, and that doesn’t tell us whether it’s sustainable,” he said at the briefing. 'Your measure of output is grossly distorted by the failure of our accounting system.' "

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