03/01/2011 06:02 pm ET | Updated May 25, 2011

Bernanke and Limits to Growth

Bernanke's testimony before Congress today raises anew the old concerns about possible "limits to growth." In warning that rising oil prices could give a temporary boost to inflation and slacken economic growth, the Fed Chair was acknowledging that higher commodity prices could take a toll on the global recovery.

Analysts are already concerned that higher food prices are boosting inflationary pressures in China, India, and other emerging economies, and forcing their governments to raise interest rates and curtail projected growth. And it's not just oil and food prices that are climbing. Commodity prices for cotton, copper, and tin are also soaring. Even iron ore prices are rising sharply and could remain elevated for several more years. After decades of stable or even declining commodity prices, the world's resource capacity appears to be stretched to the limit.

Commodity prices are naturally volatile, but the current boom in commodity prices is part of a trend that is now about a decade long. It was just three years ago that soaring commodity prices, led by a dramatic surge in oil prices, helped to pierce the "housing bubble," and contributed to the Great Recession. Now, the world's economy is once again in mortal danger of another commodity-induced slump.

Bernanke won't put it this way, but what the markets appear to be telling us is that we live on a finite planet with finite resources. There's only so much oil, so much coal, and so much copper and tin in the world, and what's still left in the ground is getting increasingly more costly to extract. But that's only part of the problem. The larger problem, and it's growing larger every day, is that population growth and rising incomes are pushing up demand faster than supply. And if supplies can't keep pace, commodity prices will continue to rise until the next recession saps demand.

If we are encountering physical limits to growth and those limits are persistent, there are three very profound implications. The first is that the world's long-term economic growth path will trend downward. Global economic growth will be less robust than currently projected, while unemployment rates will be higher. For the emerging economies, like India and China, that may mean slower economic growth, but for other industrialized countries, like the U.S., it may mean little or no growth and rising unemployment. And economic stimulus, while it might provide some short-term relief, will come at a heavy and possibly unsustainable cost in terms of accumulating debt levels.

The second implication--and it's even more profound--is that the world's urban poor, those living on less than $2 a day, will be in desperate straits. During 'good' times, when the global economy is expanding, they will be hammered by higher prices for food and clothing. During the 'bad' times, when the global economy is retracting, they will be hit by falling incomes. The ranks of the chronically hungry will grow, as will the number of people living in severe poverty. In fact, that's already occurring.

The third implication--and it may already be evident--is that economic 'recoveries' will get shorter and shorter. Long, uninterrupted periods of economic growth will be a thing of the past, while recession and stagflation will become persistent dangers.

If we are experiencing "limits to growth," no one knows for sure how long they will persist. But to the extent that economic growth is dependent upon an ever-expanding supply of fossil fuels, minerals, arable land, and fresh water, we could be headed for a rude awakening. The old growth model--predicated on ever-rising population and ever-rising standards of living--may be a thing of the past, particularly if the effects of climate change continue to worsen.

The hope is, and it's a fragile one, is that whatever limits to growth we are now encountering will be relatively short-lived. Renewable sources of energy will be brought on line at a much faster rate. The severe weather will abate, and crop production will rebound. We will discover more reserves of minerals like copper and tin, and become more efficient in our use of scarce resources. And while world population may grow by another two billion by mid-century, we will muddle through with rising prosperity without doing too much harm to the environment.

The fear, and it's a legitimate one, is that what we are seeing in the world today--in the form of droughts, floods, rising commodity prices, increasing debt loads, expanding hunger, civil unrest, and persistently high unemployment--is the shape of things to come. Let's hope not.