Growth Tremors in Europe

Once more, in the news this morning, gloom and doom (as if we didn’t have enough of that already). The reason for this is that, in Europe, German (-0.6%), French (-0.1), and Italian (-0.8) Gross Domestic Product numbers came in negative for the second quarter compared with the first. The change in Europe’s total GDP was a positive 0.2 percent, but in our day and age positive growth at such low levels is viewed with alarm.

In our times nobody asks how much growth is necessary in our economies. In other words: What is the underlying measure? The underlying measure, it seems to me, is population growth. Whenever GDP growth exceeds population growth—and the more it does so the more true this is—we are engaged in unnecessary overconsumption.

Just to check this out, I looked to see where European population growth now stands. “Now” in this context is 2012, the last year for which UN statistics are available. That year the growth stood at roughly 0.18 or 0.19 (I’m taking data from a graph). Therefore the Q2 GDP growth in Europe is just a shade higher than actual population growth. The two, in other words, are in equilibrium. I am showing the population graphic below; I found it here; the data for it come from this UN report (link).

Sooner or later, and all over the world, we will have to adjust to GDP growth rates that match population growth rates pretty closely rather than diverging sharply—as in the graphic that I’m reproducing from a previous post:

Why? Because the Age of Oil is drawing to a close and we shall be obliged to adjust to the “new normal” eventually. This reasonable projection is simply never seriously pondered by our media which are still convinced that nothing is changing at the basic levels of the world economy. But things are changing. Europe may be ahead of its time and Angela Merkel wise rather than foolhardy in insisting on austerity.

Equilibrium and Growth

Our stumbling, tottering economy once more brought an old question to mind. Is our economic model sustainable in the long haul? And by long haul I mean centuries. Is the concept of sustained and, ideally, continuously increasing growth a fundamental mistake? To be sure, the current troubles may go away, the Dow shall rise again, and so on. Perhaps we haven’t as yet reached the breaking point when growth has finally piled enough straw on us so that the last one breaks the camel’s back. But eventually, as I keep harping here, oil will run out. One way or the other, our accustomed ways will come to an end. And in that context the “current troubles” may be a Godsend if we read the signals right.

Herewith I present a comparison of GDP and Population growth, side by side, each indexed at 100 for the year 1995—as if the modern age had just begun that year.

The GDP curve is based on chained-dollars, meaning constant dollars adjusted for inflation. The population data are from the U.S. Bureau of the Census. The uptick in population between 1999 and 2000 represents a correction, as it were, introduced by the full 2000 census. It suggests that annual intercensal estimates in the 1990s had been understating the actual population increase.

What this shows us is that GDP consistently grows at a rate well above that of the population. In this 15-year sampling, population increased at the rate of 1.08 and GDP at 2.46 percent a year. Population grew every year, as might be expected; the GDP dipped in 2008 and 2009—the Great Recession. The divergence of these curves really spell over-consumption, thus consumption significantly exceeding what we genuinely need. To be sure, today we need a great deal more than we needed in 1900. But if we just consumed, in 2010, what we did in 1995 (not exactly primitive times), the GDP growth rate would closely paralleling the population increase.

This sort of thing strikes the modern mind as naïve, at minimum, plain ignorant at max. After all our life style must improve, every year. Haven’t you heard? What doesn’t grow, declines. Equilibrium, however, is the real sign of sustainability. That also applies, to be sure, to population. And there we see the genuine paradox of growth. Our way of life is unsustainable even if our economy only grew at the population rate.

A good sci-fi novel comes to mind. It was Stand on Zanzibar, by John Brunner, 1968. Back then there was the tongue-in-cheek suggestion that all of the world’s population could fit on the Isle of Wight in England (147 square miles) if they were standing up. Brunner projected his tale to 2010 and figured that the then 7 billion, as he projected world population, would have to “stand on Zanzibar,” off Africa, 600 square miles. We’re getting there. We’re getting there…

Growth in Perspective

Arguably the first industry in the modern sense was textiles and dates to the eighteenth century. Sophisticated machinery appeared for spinning and for weaving; the manufacturing activity moved from homes and small shops into factories; then steam power came to be applied to move that machinery. Ever since waves of innovation have created new industries and transformed the old ones: iron and other metals, steam, canals, rails, electricity, oil, telegraph, lighting, telephone, radio, automobiles, petrochemicals, air travel, atomic power, television, plastics, computers, Internet, and now cybernetic miniaturization.

All depending on where we date things from—say the invention of the flying shuttle (1733) or of the spinning jenny (1765)—we’ve had either a 278- or a 246-year cycle of development.

This development has significantly depended on access to fossil fuels augmented by atomic power. They’ve represented “found wealth” in the sense that we did not have to produce, by human or animal labor, the energy in the coal, oil, gas, and uranium we’ve simply harvested. But while we admire human ingenuity and give it all the credit, the industrial age is unthinkable without found wealth—and has made the exploitation of our innovation possible in the first place. But this process has also distorted our sense of what an economy is. Our economies have developed a dynamic of their own. The growth that we’ve experienced has come to demand new waves of innovation, the creation of new markets. In part this has been necessary because our innovation, combined with our use of found wealth, has also reduced the need for people. We’ve replaced human labor with machines running on fuels. Therefore, to keep pace with the artificial growth to which we have become accustomed, we desperately need the new simply to maintain it. With an absolutely diminishing demand for labor, thanks to automation—but with a growing population—we need the waves to continue unabated in order to accommodate increasing numbers.

We need growth because, to maintain our style of life, we must all continue to consume—and all of the products and services that we’ve already created. Mature markets—thus those that have come to depend on the population’s growth rate, which is lower than that of our economies—don’t contribute to growth. But we must maintain them. Thus the base keeps growing while also shedding jobs. But our need for greater-than-population growth is still there.

Now it is interesting to contemplate that we’re now in an age of miniaturization—and that that miniaturization process is itself beginning to feed on older, mature industries—as e-books are feeding on books. Each recent wave of industrial development has had a similar character. Each has improved functionalities while requiring fewer and fewer people to produce—but the same and growing number of people to consume.

In a word, we’re beginning to run out of legitimate markets. Not surprisingly, our services sector has become the largest sector. It is still absorbing people, but artificial intelligence, perhaps the next wave, will get rid of those people too—but not as the greatly desired customers.

At the risk of beating a dead horse—but in this day and age it might be necessary—let me put all of the above into a simple slogan:

The economy needs customers but has no use for employees.

So what is next? Cybernetic devices implanted in the body to replace organs that will presumably work much better than those that nature has produced? I do not, folks, have my tongue in my cheek. But I have decent eyesight. The solution is coming at us. It is the fossil sunset.

But when I hear the wise men agonizing over the economy, and wanting it to kick into gear again, to resume that growth we desperately need, I wonder if they fail to see what seems patently clear to me. This can’t go on forever. We must return to a situation of equilibrium again—where, as in the hoary past, growth was dominated by population growth—and that growth was limited by the fertility of nature.

The Economy as a Bio-Phenomenon

Karl Smith on Modeled Behavior here comments on the long term growth trend of the economy and presents a graphic showing GDP since 1929. His comments, which note that GDP appears to ignore human fiddling, arose in reaction to some comments by columnist (and economist) Paul Krugman (link)—who emphasizes that long term trends are very hard to influence but short term interventions do have effects.

I thought I’d play with the same numbers. Smith’s graphic is in logarithmic form and delimits the maximum and minimum boundaries. His chart also shows the recessions beginning with the one that kicked in in January 1920—but without GDP data. These differences cause both the Depression and World War II to be more prominently visible than they are on mine—but he uses the same data; those Smith shows came from here; I used this table.  Here is my graphic:

To match Smith’s presentation, my graphic, in ordinary scale, features an exponential curve fit to the data, which is identical to a straight line on a log scale. On Smith’s graph, GDP does indeed form an almost straight line. The benefit of my approach is that divergences from trend are much easier to see.

In a word, GDP data closely match exponential growth—when rendered inflation-free by using BEA’s method of calculating constant dollars, the chained-dollar approach. In nature we see exponential growth in the biological sphere; it’s also called geometrical growth. Thus we might call economies bio-phenomena.

Over too many decades of working with data by now, I’ve discovered a truth. In collective matters, demography is fate. Time and time again I discovered that what I thought were new developments, divergences, or novelties in society or economics, these could all, with some work, be reduced to underlying changes in demography. The interventions by humanity’s organized bodies (read government) are almost always too feeble really to interfere with anything much. The interventions have to be major, as in great wars or falling prey to the temptations of huge bubbles. I remember laughing when, in the years leading up to the dot com bust people seriously proposed that fundamental economic laws were now being transcended…

Worth nothing in this version of the graphic (although also visible in Smith’s, but more difficult to see) is that the GDP traced its path above the exponential curve except for the Great Depression and the evidently harsh recession of 1981-1982—until, in the wake of the 1990-1991 recession, it has been consistently below that curve since and—beginning in 1999—diverging from it in a marked way.

The tail end of this graphic, its last decade or so, is food for thought, isn’t it? Is something unnatural happening out there? Our distance from the curve is growing, the finger is pointing in another direction. Has our economy detached itself from the biosphere somehow? And faltering because the sap no longer flows?