Sunday, September 27, 2009

Scorched-Earth Economics

As the week comes to an end, we witnessed what Globe and Mail columnist Jeffery Simpson referred to as tired rhetoric in that both the Liberals and Conservatives were spouting the importance of the return to economic growth as the means from which Canadians are going to collectively dig our way out of the huge financial hole that we have made for ourselves.

Nothing new here except, given the possibility of global climate change of catastrophic proportions, there is something that is pernicious. Indeed, vaunting economic growth in the face of the disconcerted efforts to limit global warming to only two degrees Celsius by the end of the century is tantamount to advocating a scorched-earth policy.

As a defence strategy, rendering a terrain inhospitable in order to limit the advance of hostile armies proved to be effective, most notably by the Russians in the face of Napoleon’s armies and then again when confronted by the Germans during the Second World War. Today, however, such tactics contravene the Geneva Convention:

It is prohibited to attack, destroy, remove or render useless objects indispensable to the survival of the civilian population, such as foodstuffs, agricultural areas for the production of foodstuffs, crops, livestock, drinking water installations and supplies and irrigation works, for the specific purpose of denying them for their sustenance value to the civilian population or to the adverse Party, whatever the motive.

Yet, from an intergenerational perspective, the effects of continued global economic growth is to render useless the indispensable components of human survival (air, water, topsoil, ambient temperature) for future generations. A quick glance of the global inventory of the basic natural necessities reveals rapid depletion of water tables and the depth of topsoil, while at the same time the level of green house gases and the acidity of the oceans rise at an alarming rate. The motive for implementing a scorched-earth policy is clear, the insatiable greed of those living in the present, and the means is the ever-increasing levels of production and material throughput that goes by a rather innocuous term, economic growth, most often measured by a nation’s gross domestic product.

Clearly, a drop in economic activity brings about some positive results for the biosphere. For example, during the global recession we have witnessed a significant drop in the production of green house gases. In a report due to be released this November, the International Energy Agency projects a drop in global carbon emissions by 2.6% this year. Closer examination reveals that in the United States carbon emissions dropped by 3.8% in 2008 as compared to 2007 and are projected to drop another 6.0% in 2009.

Faced with significant deficits and mountains of accumulated debt, politicians throughout the G-8 are reluctant to make tough choices such as reducing expenditures or raising taxes and are opting to finesse their way through current economic difficulties by monetizing the debt and planning for a return to economic growth, albeit with a greater risk of runaway inflation.

It should now be recognized that the risk of allowing the externalities of increased production to negate efforts to reduce green house gases renders this economic strategy worse than useless. It is as though present generations refuse to accept the folly of their ways and either refuse to recognize that continued growth models have the effect of scorching the earth for future generations or opt to delay the inevitable downshifting of material production as long as possible.

The substitution of the reduction of energy intensity in economic production (less units of energy used for each unit of GDP produced) instead of the absolute reduction of carbon emissions hides a malicious intent. Although greater energy efficiency is devoutly to be wished, in the absence of absolute caps placed on economic activity increased energy efficiency has the perverse effect of increasing energy consumption and consequently increasing carbon emissions. For example, the increased efficiency of steam engines during the Industrial Revolution brought about an increase in coal consumption, and the increased fuel efficiency of automobiles during the first oil crisis, led to an increase of the total number of kilometers driven, which caused an actual increase in overall gasoline consumption. The tendency for increased efficiency to lead to greater rates of consumption is know as the Jevons paradox.

A second counter-intuitive phenomenon known as the Easterlin paradox should also call into question the desirability of continued economic growth. In short, there is a large body of evidence that indicates that as a society develops rising material wealth stops making the population any happier. Looking at quality-of-life indicators for OECD countries, it appears that the importance of relative wealth, in other words, how the wealth is distributed, is more important than the absolute wealth of the nation. Moreover, the documented increase in unequal wealth distribution that has accompanied the last 25 years of economic growth has not brought about an increase in the well-being of the populations of developed nations where income disparities are large. On the contrary, there is evidence to show that this type of economic growth that has characterized the end of the 20th and beginning of the 21st century has actually led to a decrease of the quality-of-life indicators for the vast majority of the populations.

Faced with the urgency of curbing green house gas emissions and the dubious utility of continuing to use an increase in economic production as a means to increase the well-being of the population of a developed country, it is time that we abandon the economic growth at all costs paradigm in favor of steady state economy.

Keeping the economy at a steady state has the advantage of placing an absolute cap on economic activity so that increased efficiency in energy use actually brings about significant reduction in green house gases. Second, the acceptance of curtailing economic growth in the developed world would bring about a marked change in attitude from the developing world with regard to their growing economies.

Overall reductions in carbon emissions require that those who are largely responsible for the problem to assume a leadership role in bringing about the solution. It is folly to believe that the developing world will accept diminished growth of its material well-being while the developed world continues to deplete the world’s dwindling natural resources at an unsustainable rate.

To avoid the global tragedy of the commons situation, it is imperative that some of the nations of the developed world abandon their scorch-the-earth economic policies disguised in the pursuit of ever increasing production levels for an approach that can sustain life as we know it and carries the possibility of actually increasing the well-being of the majority of the population.

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