Economics may be bad for your health! - Part 2
11/08/08 13:51
Benefits of economic growth
Economic growth has long been the goal of conventional economics and politics. It is both the prize and the credo that governs our daily lives. I am unsure as to whether infinite growth is either achievable, sustainable, or for that matter desirable or beneficial to society as a whole.
The arguments in its favour go something like this:
1. Increased consumption is good for you! Greater consumption equals greater prosperity. The economic assumption is that consumption is related to utility, where utility is a measure of the relative satisfaction from or desirability of the consumption of goods. Put very crudely, greater consumption is a measure of success, wealth and good fortune.
2. Increased earnings means increased taxation that in turn creates better healthcare, education and welfare services (or some cynics might say, more money to spend on wars!).
3. Economic growth creates jobs. Higher employment means less poverty. This is something of a fallacy. In some parts of Europe, including where I live in France, there is something called “structural unemployment” that is brought about by structural changes in the underlying needs of the local economy and the geographical distribution and concentrations of the population. In short, there is a mismatch between people living in a place and the employment opportunities available to them there, that is only capable of remedy over time, usually long periods of time.
That’s the theory, at least!
So what’s the problem?
1. Is infinite economic growth sustainable or desirable?
I read a report last year by an economist who predicted that very soon the world's manufacturing capacity will outstrip its ability of consumption. Simply put that means soon we will be able to make more than we need or can ever hope to use. So what happens then?
If you have a house, two cars and all the other things you need, why would you want to own more houses, or three cars, or even two washing machines? Infinite growth in consumption makes no sense. Does increased ownership lead to greater utility or satisfaction? Of course, it does not and there is a law of diminishing returns when people have more money than things to spend it on. That is to say, the utility of ownership diminishes, and when that happens so does the value of goods, which in turn creates more economic pressures.
For sections of the population who experience dire poverty and unemployment, economic growth may provide a remedy, but the evidence is that high economic growth can cause greater inequality and a real increase in relative poverty (Brookings Institution 2007), since it is the better educated and already wealthy that tend to benefit from economic growth rather than the less well off.
2. Damage to the environment through increased pollution that is a consequence of economic growth is becoming a real problem for the entire world. Of course, a benefit of growth might be the investment in technologies that create less pollution. To-date this appears to have been viewed as a lower priority than the pursuit of wealth for its own sake.
3. Increased inequality gives rise to more crimes and social problems. Between 1960 and 1990 the US crime rate went up by some 300%. While crime rates in the USA may have peaked out now, there is nevertheless a strong correlation between economic growth and increasing crime rates.
4. High economic growth is a slave-driver and has led to longer hours worked with a commensurate increase in personal and social anxiety. An economist might argue that this reflects the fact that people value money more than leisure or quality of life. How would they know when they have no leisure? That takes me to my next point…
5. The American Medical Association maintains that stress is a significant determinant in 80% of all our illnesses (that is not to say it’s the only cause). It could be argued that heart disease, obesity and stress related illnesses are a direct consequence of economic growth.
So what of increased prosperity? What of economic growth?
They have created as many new problems as they have solved.
It may be time to look for a better way.
I do not believe that politics holds all the answers either. Left-wing, right-wing or centrist mass politics have all shown themselves to be deeply flawed.
It is not something that the cult of the presidential individual can possibly apprehend. Barrack Obama or John McCain will make no difference, nor will Gordon Brown or Nicholas Sarkozy. I am unsure as to how well the ideology of nation states will serve the world in the long-term either.
One thing is for sure, if we want a better world, then we will all have to take responsibility for its wellbeing, all of us, without exception. That is the underlying principal of true democracy that we claim to hold so dear. It is not enough, as we have in the past, to argue for political freedom alone; there is social, personal and psychological freedom to consider too.
Economic growth is not the Holy Grail.
So what next?
Economic growth has long been the goal of conventional economics and politics. It is both the prize and the credo that governs our daily lives. I am unsure as to whether infinite growth is either achievable, sustainable, or for that matter desirable or beneficial to society as a whole.
The arguments in its favour go something like this:
1. Increased consumption is good for you! Greater consumption equals greater prosperity. The economic assumption is that consumption is related to utility, where utility is a measure of the relative satisfaction from or desirability of the consumption of goods. Put very crudely, greater consumption is a measure of success, wealth and good fortune.
2. Increased earnings means increased taxation that in turn creates better healthcare, education and welfare services (or some cynics might say, more money to spend on wars!).
3. Economic growth creates jobs. Higher employment means less poverty. This is something of a fallacy. In some parts of Europe, including where I live in France, there is something called “structural unemployment” that is brought about by structural changes in the underlying needs of the local economy and the geographical distribution and concentrations of the population. In short, there is a mismatch between people living in a place and the employment opportunities available to them there, that is only capable of remedy over time, usually long periods of time.
That’s the theory, at least!
So what’s the problem?
1. Is infinite economic growth sustainable or desirable?
I read a report last year by an economist who predicted that very soon the world's manufacturing capacity will outstrip its ability of consumption. Simply put that means soon we will be able to make more than we need or can ever hope to use. So what happens then?
If you have a house, two cars and all the other things you need, why would you want to own more houses, or three cars, or even two washing machines? Infinite growth in consumption makes no sense. Does increased ownership lead to greater utility or satisfaction? Of course, it does not and there is a law of diminishing returns when people have more money than things to spend it on. That is to say, the utility of ownership diminishes, and when that happens so does the value of goods, which in turn creates more economic pressures.
For sections of the population who experience dire poverty and unemployment, economic growth may provide a remedy, but the evidence is that high economic growth can cause greater inequality and a real increase in relative poverty (Brookings Institution 2007), since it is the better educated and already wealthy that tend to benefit from economic growth rather than the less well off.
2. Damage to the environment through increased pollution that is a consequence of economic growth is becoming a real problem for the entire world. Of course, a benefit of growth might be the investment in technologies that create less pollution. To-date this appears to have been viewed as a lower priority than the pursuit of wealth for its own sake.
3. Increased inequality gives rise to more crimes and social problems. Between 1960 and 1990 the US crime rate went up by some 300%. While crime rates in the USA may have peaked out now, there is nevertheless a strong correlation between economic growth and increasing crime rates.
4. High economic growth is a slave-driver and has led to longer hours worked with a commensurate increase in personal and social anxiety. An economist might argue that this reflects the fact that people value money more than leisure or quality of life. How would they know when they have no leisure? That takes me to my next point…
5. The American Medical Association maintains that stress is a significant determinant in 80% of all our illnesses (that is not to say it’s the only cause). It could be argued that heart disease, obesity and stress related illnesses are a direct consequence of economic growth.
So what of increased prosperity? What of economic growth?
They have created as many new problems as they have solved.
It may be time to look for a better way.
I do not believe that politics holds all the answers either. Left-wing, right-wing or centrist mass politics have all shown themselves to be deeply flawed.
It is not something that the cult of the presidential individual can possibly apprehend. Barrack Obama or John McCain will make no difference, nor will Gordon Brown or Nicholas Sarkozy. I am unsure as to how well the ideology of nation states will serve the world in the long-term either.
One thing is for sure, if we want a better world, then we will all have to take responsibility for its wellbeing, all of us, without exception. That is the underlying principal of true democracy that we claim to hold so dear. It is not enough, as we have in the past, to argue for political freedom alone; there is social, personal and psychological freedom to consider too.
Economic growth is not the Holy Grail.
So what next?
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Economics may be bad for your health! - Part 1
11/08/08 11:45
Recession! What recession?
So what is this new economic crisis? Are we moving towards the Armageddon of western economics? What does and will recession mean?
Economists define recession as a decline in the production of gross domestic product for six-months based on measures taken in two three month periods.
Neither the USA nor the UK are experiencing what is described as “negative growth” currently, although there is a widely held belief that we may be heading towards recession.
A lot of factors are being cited as the cause of our current economic difficulties, among which are:
1. The crash in the housing market.
The boom in the housing market was an absurd phenomenon.
House prices in the UK were rising at rates of more than six times the rate of inflation in some years.
Suddenly the world was awash with property millionaires. Someone who had bought a London house for £72,000 ($144,000) in 1983 and stayed put, woke up to find their property is worth £1.6 million in 2007! ($3.2 million). A new two bedroom apartment on the outskirts of Oxford, close to a railway line came onto the market last year at around £500,000 ($1 million). Think about it, one million dollars for a small apartment in a small city outside London!
The average age of a first time house buyer is currently somewhere in the mid-thirties age range. So where do the rest live? How do teachers, nurses, doctors, police and essential service staff ever afford these prices? The answer is they don’t.
It had to stop, and stop it did. House prices are going down in the UK. Economic reports from the USA say that house prices there are over-valued by at least 40%, although by UK standards house prices in the USA look dirt-cheap! Prices have fallen by up to 25% in the past year in (some parts of) the USA.
House price equity in an overblown, pumped-up market is fool’s gold. It is wealth created by a market without any corresponding new value. It has provided a mirage of prosperity by fuelling consumer spending and debt.
To put all this in perspective, the average house price in the UK (across all regions) is about £220k ($440k), the average salary is somewhere in the region of £22k - £26k ($44k - $52$k).
So people have taken risks with borrowing, sometimes taking out loans of between 8 and 10 times their annual salaries in order to own a home. It should come as no surprise therefore that the housing market is in deep trouble.
2. So-called high-risk lending, the “sub-prime” market is collapsing. Sub-prime lending involves lending money for greater returns to poorer people who would not otherwise be able to afford conventional home loans. It’s an economic contradiction that sustains poverty. If one is poor access to money comes at a higher price than if one is rich.
Falling house prices in the USA and to some extent, the UK, means a risk of negative home equity at a very high price. Home repossessions are increasing fast. There is an increasing rate of defaults that means that banks lose money and so do the mortgage companies.
3. So we have:
• Shortage of mortgage funding and banks teetering on the edge of solvency
• Decline in market confidence that affects all sectors of the economy
• Property prices that became vastly overvalued
• Increase in supply accompanying falling demand, with housing costs still running at levels in the UK that are inaccessible to average wage earners, young people and essential service providers
4. Next! There’s the ever-increasing oil price pushing up costs. There is the rising cost of food too that is not necessarily all tied to the cost of oil.
5. One more…the booming house price mirage fuelled consumer borrowing. A falling house market and lowered confidence in the rest of the economy means that people are taking on less debt and looking to save. This in turn means lower consumer spending. Lower consumer spending means lower production that increases the chance of a recession. It is interesting to me that that financial prudence, as I might see it, and a move away from consumption for consumption’s sake has an adverse economic consequence. I’ll come back to that in part 2.
Summary
There are a number of factors involved in our current economic difficulties, but the two main issues as I see them are the decline of an over-heated housing market and a decrease in consumer spending.
Part 2 will be about whether economic growth is beneficial to us all. My feelings are that it is not such a good thing after all. We may need to change the way we view our economic lives.
So what is this new economic crisis? Are we moving towards the Armageddon of western economics? What does and will recession mean?
Economists define recession as a decline in the production of gross domestic product for six-months based on measures taken in two three month periods.
Neither the USA nor the UK are experiencing what is described as “negative growth” currently, although there is a widely held belief that we may be heading towards recession.
A lot of factors are being cited as the cause of our current economic difficulties, among which are:
1. The crash in the housing market.
The boom in the housing market was an absurd phenomenon.
House prices in the UK were rising at rates of more than six times the rate of inflation in some years.
Suddenly the world was awash with property millionaires. Someone who had bought a London house for £72,000 ($144,000) in 1983 and stayed put, woke up to find their property is worth £1.6 million in 2007! ($3.2 million). A new two bedroom apartment on the outskirts of Oxford, close to a railway line came onto the market last year at around £500,000 ($1 million). Think about it, one million dollars for a small apartment in a small city outside London!
The average age of a first time house buyer is currently somewhere in the mid-thirties age range. So where do the rest live? How do teachers, nurses, doctors, police and essential service staff ever afford these prices? The answer is they don’t.
It had to stop, and stop it did. House prices are going down in the UK. Economic reports from the USA say that house prices there are over-valued by at least 40%, although by UK standards house prices in the USA look dirt-cheap! Prices have fallen by up to 25% in the past year in (some parts of) the USA.
House price equity in an overblown, pumped-up market is fool’s gold. It is wealth created by a market without any corresponding new value. It has provided a mirage of prosperity by fuelling consumer spending and debt.
To put all this in perspective, the average house price in the UK (across all regions) is about £220k ($440k), the average salary is somewhere in the region of £22k - £26k ($44k - $52$k).
So people have taken risks with borrowing, sometimes taking out loans of between 8 and 10 times their annual salaries in order to own a home. It should come as no surprise therefore that the housing market is in deep trouble.
2. So-called high-risk lending, the “sub-prime” market is collapsing. Sub-prime lending involves lending money for greater returns to poorer people who would not otherwise be able to afford conventional home loans. It’s an economic contradiction that sustains poverty. If one is poor access to money comes at a higher price than if one is rich.
Falling house prices in the USA and to some extent, the UK, means a risk of negative home equity at a very high price. Home repossessions are increasing fast. There is an increasing rate of defaults that means that banks lose money and so do the mortgage companies.
3. So we have:
• Shortage of mortgage funding and banks teetering on the edge of solvency
• Decline in market confidence that affects all sectors of the economy
• Property prices that became vastly overvalued
• Increase in supply accompanying falling demand, with housing costs still running at levels in the UK that are inaccessible to average wage earners, young people and essential service providers
4. Next! There’s the ever-increasing oil price pushing up costs. There is the rising cost of food too that is not necessarily all tied to the cost of oil.
5. One more…the booming house price mirage fuelled consumer borrowing. A falling house market and lowered confidence in the rest of the economy means that people are taking on less debt and looking to save. This in turn means lower consumer spending. Lower consumer spending means lower production that increases the chance of a recession. It is interesting to me that that financial prudence, as I might see it, and a move away from consumption for consumption’s sake has an adverse economic consequence. I’ll come back to that in part 2.
Summary
There are a number of factors involved in our current economic difficulties, but the two main issues as I see them are the decline of an over-heated housing market and a decrease in consumer spending.
Part 2 will be about whether economic growth is beneficial to us all. My feelings are that it is not such a good thing after all. We may need to change the way we view our economic lives.