With personal and national debt reaching record levels and unemployment at its most severe since the Great Depression, now may be the opportunity to abandon growth economics and come up with economic models for shrinking economies. Why not consider doing more with less and returning more to the environment than taking from it? Today, more energy is consumed on a daily basis in New York City alone than in the entire African continent. U.S. per capita energy consumption is multiples of that of India and China, and if we let those two countries catch up to our levels, the world will implode. We should remember that Easter Island has no inhabitants because its population used up the arable land and eventually resorted to cannibalism. Don't underestimate the craziness of humans in desperate situations.
Growth is determined by productivity, population, and debt in America. But starting in the 1980's, productivity was largely artificially driven by increasing debt. If debt were held constant, debt-adjusted productivity has actually declined. But once we reach maximum debt, what will the driver be?
To be sure, Americans have long been optimists in believing that human ingenuity - and in particular, American ingenuity - will come up with a solution that will enable the world to continue growing as we have been during this past century. After all, the Malthusian argument that the population's exponential growth will deplete the world's natural resources has not yet materialized.
However, invention is born out of necessity, not want. The U.S. could be at the end of its innovation cycle. Throughout history, the slow decline of a nation's dynamism happens when a nation becomes fat, dumb, and complacent, and wants are mired in frivolity. For instance, big screen TV's replace education as the discretionary purchase of choice. This pattern was evident with the Romans, the Chinese, and others. When working hard will not incrementally yield much more, the incentive to work disappears.
Furthermore, the higher taxes that will certainly come in the coming decades in order to pay for the enormous debt the U.S. has accumulated will further stifle the incentive to innovate. Higher income taxes artificially stratify the classes: the wealthy will stay wealthy, and the poor will not easily acquire wealth as their productive efforts will be taxed away. After all, how does one create innovation in a socialist country?
Capitalism, as practiced in the US in the year 2010, is showing signs of strain. For 100 years, the U.S. was the only place in the world that was truly the land of opportunity. It has stopped working because of the creation of an entitlement mentality that seems to pervade public sector and private sector workers and consumers. There are too many generational transfers of wealth, and the progeny of the wealthy typically have not been the best allocators of capital. The excess of the Hamptons is exhibit A. At the same time, taxation, and the burden on state governments imposed by public sector unions, has increased. In 70 years, the U.S. has gone from having no income tax to a 48% tax rate on the highest earners. The result is too much pork and inefficiency which all chokes out innovation. We have too much establishment protecting their own friends who run institutions that are complacent and have run its course. Directors of major corporations are re-elected, and chief executives are highly compensated, without regard to their company's performance. Innovation by definition upsets established institutions and plays a critical role in the reinvigoration of an economy. But the recent bailouts of all the large banks and auto companies are policies that kill innovation and cheat the younger generation from having a chance at wealth. The U.S. is reverting to employment by "who you know" as opposed to merit. Those who are most connected are not fired. The free market, as a result, is broken.
The U.S. needs to get religion in the form of a new economic ideology to realign our priorities. Instead of tracking growth statistics and other economic data, we can start by figuring out a way to measure and report such things as human dignity, creativity, and degrees of freedom, and reward behavior that enhances those values we cherish. It does not make sense that most artists, teachers, and doctors - those who deliver the greatest value to society - are the least paid individuals, while investment bankers and speculators who earn the most amount of money are adding minimal value to society at best, and at worst, destroying value. We ought to find the political will to start funding research in universities that support a new way of thinking about economics
In 1973, in the midst of the energy crisis, an economist named E.F. Schumacher published a book called Small Is Beautiful that challenged the conventional wisdom of growth economics and received widespread acclaim during a similar period of economic uncertainty. However, his theories and arguments have been all but forgotten in recent decades, as notions of greed and consumption have been promoted by big business, policymakers in government, and taste makers in the media. His ideas are certainly worth revisiting.
When I think of the word INNOVATION, I think of IN plus OVATION. To me it means that idea, method or thing which spontaneous causes the end user to inwardly feel a sense of wonder.
She is an economics professor.
Is not this just a plea that she wants to become part of the entitlement class????
Horse Feathers. How do you explain the phenomenal growth between 1950 and 1970 when taxes were quite a bit higher? The Tax cuts of the past 30 years have made the wealthy, wealthier and have made it almost impossible for the poor to be anything but poor. Innovation is alive and well throughout socialist Europe....they are eating our lunch in clean energy as one example.
Central planning always fails? Tell that to the Chinese...
The Mojitos have addled your brain.
Growth in the 1950s was lackluster. The biggest growth was from 1950-1953 because of the Korean war (cuz so many factories produced things for that war and so many citizens had jobs cuz they were drafted). Besides the war the huge growth drivers were autos and housing. Most people were getting autos for the first time and there had been very little home construction in the 1930s and 1940s so there was massive pent up demand.
About taxes, there already were high tax rates to begin the 1950s, so people had adjusted to it. Plus, real incomes rose all decade from the very low levels of 1950. If tax rates were increased in 2010, people would adjust by spending and investing less, which would be very negative for economic growth and employment in the short term. How long spending and investment remain weak would depend on the size of the tax increase and the expectations of further increases. As for real incomes, they are currently high, far above the low levels of the 1950s. Wage increases going forward will depend mostly on investment (as spending based on credit growth and increases in asset prices remain muted).
I don't know what planet you are circling, but it's not earth. The median income fell 4% between 2004 and 2008...during the Tax cuts years....
Businesses have not been INVESTING...they have been paying huge salaries to the CEOs and executives, and fat dividends to the investors....they have increased profits at the expense of the work force. Americans work more hours and have fewer vacation days than the rest of the industrialized world. Real incomes for the top 20% of earners are high...wages have been flat for the "working class" for over a decade...In fact they haven't kept up with inflation. Which answers the question....How did Americans get into so much debrt?
That is the control of this society's money/credit/debt.
Without which there is no exchange of goods and services for any class. The manner in which control of this medium of exchange is manifested defines the nature of the society.
Since our society's "money" is controlled by the private sector seeking to maximize marginal profits, then by definition, that exchange which does not contribute to that objective is eliminated from the production function. That's why we don't have 2% loans on "fiat" money created through fractional reserve policies. Instead this "fiat" money carries a "tax"... interest rate well above 2%. That usurious practice siphons socieities surplus into the coffers of owners.
We need, instead, an economic system fashioned along the lines of that managed by the state of N. Dakota. Where state control of credit terms through a state owned bank, generates interest income for the state because there are no owners to siphon off profits. It isn't perfect but it is the only state with anual budget surpluses, extremely low unemployment, and a 25% return on bank equity. The latter is just a dream for most banks throughout the U.S.
Think about it.
One of the critical components of the state bank movement is an aggressively pursued demand from farmers and entreprenuers for loan terms that are not usurious. These are the folks that keep the system fair over the long haul. Then, because there are no owners, the public will require 100% transparency.
Clearly nothing is perfect but since the Federal government is now in the banking business with student loans, it's just a next step for the States to do the same thing for mortgages, and main street lending.
It certainly beats the status quo. We've been slaves to the so called "free market" mantra for so long we can't think outside of the box.
Would you rather have a 2% loan from a state owned bank or a 4% loan from a commercial bank? Ask the same question to folks who have answered it since 1918 in N. Dakota.
I was especially impressed with your points about the growing sense of entitlement among some people, the destructive effect of high taxes, and the ill-advised and wasteful bank and auto bailouts. This one sentence was pure beauty:
"But the recent bailouts of all the large banks and auto companies are policies that kill innovation and cheat the younger generation from having a chance at wealth."
I also agree that good teachers, artists, and doctors should make more money than they do, and that many bankers should make a bit less, perhaps a lot less, if our society placed more value on the right things.
My only real bone of contention is your approach to energy consumption. Africa consumes little energy because Africa is mostly backward and undeveloped. There are plenty, more than enough, energy resources to go around, if we would just utilize them. It doesn't have to be a case of "either we have it and you don't or vice-versa."
Anyway, an excellent article overall.
Since when are doctors among the "least paid individuals"? How do artists deliver the "greatest value to society"? And that comment is from me, whose wife owns a store that sells art-work from two artists that make a lot of money. But they make a lot of money because people value the art and thus buy a lot of it and pay relatively high prices for it (5K-12K a piece). As for teachers, they are paid from local tax dollars. So communities need to decide how much taxes they wish to pay and how many services they wish to pay for. In many cases, however, the unions take control and push up benefits and bureaucrats salaries and benefits to the point that localities have become effectively bankrupt. There are hundreds of localities that are on the verge of bankruptcy right now because of high public union salaries and benefits, a lot of it from teachers.
2) Doctors are the or one of the best paid professions depending how the title is sliced and compared to others.....
Please just Google if you want to check what I have stated.
So I guess the argument is that we should not have starving artists and they contribute the most.
I think the factory worker who raises a decent family contributes as much as any artist.
(1) Farmers/hunters, who provide the next important item after air and water, i.e. food.
(2) People who make cloth and clothing follow next in importance.
(3) Teachers as an extension of parenting for larger groups of people
(4) Medicine men leading to doctors as those trying to make sense and cure of illness
(5) Labourers leading to engineers who through their work bring clean water to large groups of people and build homes, etc
Generally "artists" could only produce their work when there was a surplus of food, water and time. They may indeed fulfill a need for "feeding the soul" and I would definitely place artists higher than late arrival financial types (who don't add much real value). Whether Damien Hirst, who is reputed to be worth over a $1 billion, produces good art or not is for another discussion.
'We should remember that Easter Island has no inhabitants because its population used up the arable land and eventually resorted to cannibalism.'
I challenge that. I'm sure the last remaining cannibal died of starvation.
Most investment (what is normally needed to increase productivity) is done thru borrowing, so the comment is virtually useless. Corporate borrowing was extremely high in the late 90s when productivity growth was highest. I don't see how that was a bad thing. Second, most productivity growth this decade has been from increased outsourcing. Companies close domestic operations and open operations or import from abroad, then claim that the value add in the form of their increased corporate profits are actually "productivity". IMO in the productivity models are useless as they don't take this into account; they only subtract the cost of the imports or foreign operations, not the mark up.
"..big screen TV's replace education as the discretionary purchase of choice."
Investment in education has escalated substantially over the past two decades, so the comparison is weak.
"It has stopped working because of the creation of an entitlement mentality that seems to pervade public sector and private sector workers and consumers. There are too many generational transfers of wealth,"
The entitlement mentality is correct, but it has little to do with generational transfers of wealth. There is a huge feeling of entitlement, for example, among the urban poor.
I am sure you mean those urbanites who should be poor, i.e. the bankers.
one of the most perplexing problems in social science to how to intervene, assist to break this "cycle of poverty".
I suspect if I was born in that situation I would think the same way. So I am not dumping on them, just the reality is this is a difficult problem, not responsive to many of the 'great society' programs we have attempted.
America First! Let the Chinese, Koreans, Indians etc. consume what they manufacture and produce.
Fanned..
How do you then scale that stake back by the ways in which those productive ones damage the "success" of the country or hinder the productivity of another?
And just to be thorough, how do you define the success of the country?
Nice ideas but without defined terms, they could apply equally well to Joseph Stalin as to John Galt.
Our economics must find another basis before the addiction to growth kills us, first morally and then physically.
Who among economists realizes that the recent "oversights" of traditional economics are contributing to our lack of understanding of an Empire in decline?
Remedies from the past may not work in the future as our dependence on growth will not prepare us for the future that awaits us.
I can understand why politicians are afraid to address the issues of economic decent, but we need economists to be modeling economic decline and preparing students for their future in a world that IS constrained.
BTW, you might enjoy the writings of Micheal Greer at http://thearchdruidreport.blogspot.com/
who has used Schumacher for his examples in differentiating wealth from money in his recent posts.