lundi 25 avril 2011

A Big Lie: Sustainable Economic Growth

What is "sustainable economic growth"? It is a theoretical concept which suggests that the economy can grow indefinitely.

But first, let's explore what economic growth is: it's when the formal economic activity (the exchange of goods and services through money) increase.

Remember that economic growth is not automatic, but rather has causes behind it.

How does it happen? First, it can happen through an increase in available services and goods; for example, following the availability of electricity, home appliances became widely available.

It can also happen through the formalization of activities traditionally done outside of the formal economy; one can think of buying lunch instead of making it at home, or using daycare instead of having a parent stay at home for the first few years of the children's lives.

Thirdly, an economy can count on the increase in the "consumer" population as a way to increase "consumption". Traditionally, this was done by opening an export market by colonizing. These days, one can only count on an increase in population. If the natural population increase is insufficient to ensure "adequate" economic growth (adequate according to shareholders who often demand 10% year-over-year increase in their dividends), there is always immigration as an alternative measure.

When these options reach a limit in their effectiveness, more consumption can be encouraged through reduced interest rate to push for the spending of savings and encouraging buying on credit.

Recent recessions occurred especially because of excessive debt. The typical solution has been to reduce interest rates, and by extension the cost of borrowing, which only postpones the inevitable (recognizing that many debts will never be repaid), while waiting hopefully that economic growth will enable to carry on a bit longer.

The ultimate problem is simply that Earth is of a finite size, and therefore the availability of natural resources will not allow an infinite economic and consumption growth. Especially since the worldwide peak of oil production occurred in July 2008, one can see that the world economy is struggling to recover. This is only the first visible impact of constraints in availability of natural resources.

All major federal political parties, except the Green Party, have long trumpeted the need for "sustainable economic growth". Though the NDP has recently avoided using the term above, the Green Party is the only party which explicitly accepts that the economy will not grow forever.

When one accepts that sustainable economic growth is a joke and a lie, one easily sees that the traditional "solutions" of government bailouts for auto builders and banks, special purchase and resale agreements of central banks, as well as unusual government measures such as the purchase of NHA mortgage backed securities by CMHC, only prevent the resolution of the true problem: excessive debt. The government should let all bad investments and bankrupt companies fail quickly so as to limit the damage on the real economy, while taking the opportunity to invest in socially important emerging sectors, such as renewable energy with its related green collar jobs.

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