Thursday, May 22, 2014

Why Slowing Population Growth is a Problem

Why is slowing population growth, which we so desperately need, a problem? It's entirely due to the way in which we've set up our economies. In a recent blog post, Paul Krugman summarized why this is the case in conventional economics. basically, we've structured our economies to require permanent growth:
When Alvin Hansen first proposed the concept of secular stagnation, he emphasized the role of slowing population growth in depressing investment demand (and his warnings were made moot by the postwar baby boom.) Modern discussions return to that emphasis: Japan’s shrinking working-age population looks like an important source of its problems, and slowing population growth in Europe and America are important reasons to believe that we may be entering a similar regime.

But whenever I raise these points, I get questions from people who ask why I don’t regard slowing population growth as a good thing. After all, it means less pressure on resources, less environmental damage, and so on.

What’s important to realize, then, is that slower population growth indeed could and should be a good thing — but that what passes for sound economic policy is all too likely to turn this potentially good development into a major problem. Why? Because under the current rules of the game, there’s a strong bicycle aspect to our economies: unless they’re moving forward sufficiently rapidly, they tend to fall over.

It’s a pretty straightforward point. To have more or less full employment, we need sufficient spending to make use of the economy’s potential. But one important component of spending, investment, is subject to the accelerator effect: the demand for new capital depends on the economy’s rate of growth, rather than the current level of output. So if growth slows due to a falloff in population growth, investment demand falls — potentially pushing the economy into a semi-permanent slump.

Now, you could say that this should be easy to deal with; just reduce the interest rate sufficiently to sustain investment demand despite population slowdown. The problem is that the required real interest rate on safe assets may end up being negative, and is therefore achievable only if we have sufficient inflation — which runs into an ideological commitment to price stability.

This is basically a technical problem, and in a better world we would simply deal with that problem while enjoying the benefits of a less crowded planet. In this world, however, technical problems — magneto trouble — can in fact do immense damage, because so few people are willing to think clearly about their nature. And that’s why we worry about slowing population growth.
Demography and the Bicycle Effect (Paul Krugman)

I'm glad Krugman finally addressed this point. Of course, economies that require growth are a recent phenomenon - they have not existed throughout most of human history. And it seems ridiculous for the alternative to growth to be poverty, misery and unemployment. But what force can make that change?

Reader Nathanael suggests an alternative in the comments:
You don't need low interest rates to cause investment. 
Direct government investment will do just fine. And it's tried and true, it's worked throughout history. 
So the solution is very clear. Lower populations; and a government which directly puts money into investment. For instance, a large national railroad program, or a national solar panel installation program, or a national insulation program, or a national housing program, or....
Having government spend money to build stuff solves the problem. 
So again our REAL problem is that we have ideological opposition to that. Opposition from rentiers.
But of course the government cannot invest if needs to get money from a shrinking private sector. However, if the government can spend money into the economy, it can take care of vital needs while dealing with a private sector shrinking due to lower investment demand and slower population growth.

The "handbag economics" model tells us that only the private sector is the breadwinner, and the government, like a non-working spouse, must go hat-in-hand for a small portion of that money to run its operations, whatever the "husband" of the private sector will decide to allow the "wife" of government to spend. This is how the rich want it, since they control the private sector. But it's not how it works in reality. We're not constrained on spending for public goods - we only need to worry about things like inflation (which will not happen if private investment is down) and resource constraints.

A lot of people have major objections when I bring up Modern Monetary theory. But now you can see why I think it is essential for a no-growth economy. I don't think it's important to restore the permanent growth consumerist model. Rather, it's important to create a no-growth economy that will not end in riots, debt and desperation for the vast majority of citizens, which is what will happen if we don't change our economic thinking. But as long as "debt" is used to destroy the social safety net, this is what we can expect, especially in the age of mass automation. Again, please note that "debt" is never a constraint on the military-industrial complex nor the national security state, only for spending on the public welfare. Again, that's just the way they want it.

Here are some other good comments:
stephen
Orlando Florida 2 days ago
The problem is political. Those who skim off the labor of workers in various ways have different short term interest than workers. One businessman over 40 years ago told me that everyone lives off of the working man. And for all to do well long term the working man needed to prosper. Capital is important. But capital ultimately comes from labor. Adam Smith wrote about how money which really is a abstraction representing labor went from capital to worker then back to capital although he used the word stock for capital. Like in a Ecosystem when energy gets hogged by one organism the Ecosystem dies, when money gets hogged by a few the economy dies. Logically as population goes down and productivity goes up there should be more leisure for all. Letting the masses become unemployed and starve while letting a few work producing all of society's goods and services will create political insatiability. That would be the downfall of capital owners. As I have said before Joe Martini can be as stupid as Joe Six Pack. It would be better to let all work less and have a fair share of their labor.
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Earl Killian
Los Altos, CA 2 days ago 
There are few things more important for the long-term prosperity of civilization than figuring an Economics of zero-growth, since the alternative is cycles of growth and collapse, since exponential growth in a finite world is impossible. And yet only a handful of economists seem to be working on the problem, and they don't seem to be coming up with much.
If someone counters that exponential growth is possible indefinitely, then they ha 
ve never really considered the exponential function. Wealth consists of control over matter, power (the flow of energy), and knowledge. The mass of the Earth bounds Earth's economic wealth based on matter, and the Sun's insolation bounds Earth's economic wealth based on energy, and the finite size of the human brain bounds wealth based on knowledge (machine intelligence bounds are based on matter and energy). If you guess these bounds are far off, then calculate rather than guess and you'll be surprised, and of course the true bounds are far closer than such hard limits.
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John Seager
Washington, D.C. Yesterday 
Many of the negative impacts of population growth are "off the books" - as they involve climate change, species extinction, and destruction of unique ecosystems. Part of the potential or perceived economic dilemma posed by slower population growth can be addressed by investing in people through better education and health care so they can be more productive. And part of it entails redefining growth. Once people have a reasonable standard of living, which billions lack today, personal enrichment does not necessarily correlate with or require piles of new "toys." As for that bicycle effect, we can help address it by building more bicycles and bike trails. Both we and our planet would become healthier. Healthy is indeed the new wealthy. 
John Seager
Population Connection
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Suzanne
San Francisco Yesterday 
Given the pressures on the planet from environmental degradation, climate change, and yes, over 7 billion people, it’s high time to rethink economic growth. We can start by using economic indicators other than GDP - tools that measure well-being, sustainability, satisfaction, etc. There are several out there; Mr. Krugman must be aware of them, as Joseph Stiglitz, Nicholas Sarkozy, David Cameron and others are working on this. 
I would also be curious if Mr. Krugman has read books like “Prosperity Without Growth” by economist Tim Jackson, or “Enough is Enough” by Rob Dietz and Dan O’Neill that analyze a different approach not steeped in the constant growth mantra.
And then there is consumption. The majority of people want to live like average Americans, who currently make up 5% of the world’s population but use 20% of the planet’s resources. The projection is for 8 to 10 billion people by 2050; it’s going to be difficult to keep that bicycle moving forward and still have a livable planet. 
http://6degreesofpopulation.org

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K K
London 12 hours ago 
Krugman's article indirectly acknowledges that population growth is a problem and not a blessing, then basically makes no conclusions other than it's difficult to keep the economy growing without population growth. That presuposes that continued economic growth is the ultimate goal of any human society, a great fallacy which has played a part in leading us to our overpopulated, degraded world. Economic growth brings no benefits if the population is growing too. What matters is each individual person's slice of the economic pie. A so-called economic slump is not a problem if the slow down or even shrinkage in the economy doesn't outpace the slowdown or shrinkage in population. Ultimately, we simply cannot keep growing our populations or our economies: this is a planet with finite resources. It doesn't matter what stories we tell ourselves stories about how economic growth will make everything better. Climate change-induced food and water scarcity, massive human displacement, collapsing economies and public finances, snowballing unemployment and civil unrest are becoming increasingly common place, and yet the mainstream of political and economic ideology (such as Mr Krugman) continue to speak as if we can continue doing things exactly as before.
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Kaleberg 
port angeles, wa Yesterday 
The 14th century offers an interesting counter-example. The Black Death introduced a negative demographic shock that drove up the cost of labor. The increased wages led to increased investment that we now refer to as the Renaissance. 
A slowly growing or even a shrinking population can lead to economic growth, as long as wages rise sufficiently. Right now, all productivity gains are captured by the owners of capital, not the workers. If workers were rewarded for some of their increased productivity, their increased demand could easily drive new investment.
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Matthew Saroff
Owings Mills, MD 2 days ago 
There is a rather more severe analogue to stagnation due to population drop, the Black Death (c. 1350). Something around 1/2 of the population of Europe died. 
Clearly, GDP dropped, but per capita GDP soared, because of things like marginal farmland being abandoned, and economic inequality fell, as evidenced by the many attempts by the authorities to regulate, and reduce wages for the ordinary people. (In fact we only know that the plague hit Poland because of the wage issue, there is no historical record there). 
The net result was a general improvement in living standards for the bulk of the population.
In fact James Burke argues that it led to an information revolution: Better off peasants wear underwear, underwear wears out, the supply of linen underwear supports the growth of a paper industry, which leads to Gutenberg less than 100 years later. 
The important thing to remember though is that the post Black Death boom occurred in the absence of central banks and central governments taking actions to depress wages for most of the population.

4 comments:

  1. The Govt can also spend buckets getting heavy industry off world into near-Earth space. That would take plenty of time, create all kinds of new tech, prove a steady source of jobs, and be good for the environment.

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  2. Better than allowing Earth to become a totally polluted shithole. Plus, there's all manner of technology that would developed and the vast resources of asteroid mining, the latter also having the benefit of preventing extinction level strikes. I'd say net energy gain near long term.

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    Replies
    1. I'm with Nebs on this one. Then again, if you have been following our comment history on your blog, you shouldn't be surprised. We agree on most things.

      On another note, I just read the blog entry of Krugman's quoted and was thinking of writing a very similar post with comments from his readers responding to him, much as I did with Blast from the past: Pathology on the Right, a commentary on Krugman's "Two speeches and an editorial" and A Day in Exquisite Insults of Objectivists . Now that you've done it for me, I don't have to. Now I can just direct my readers to you.

      Delete

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