Satyajit Das: The End of Growth, Part 1
Government intervention can cushion some of the costs of the crisis but cannot solve the fundamental problems.
Growth is a relatively recent phenomenon. In a deliberately provocative 2012 National Bureau of Economic Research paper entitled "Is US Economic Growth Over? Faltering Innovation Confronts The Six Headwinds," economist Robert Gordon found that prior to 1750 there was little or no economic growth (as measured by increases in gross domestic product per capita).
It took approximately five centuries (from 1300 to 1800) for the standard of living to double in terms of income per capita. Between 1800 and 1900, it doubled again. The twentieth century saw rapid improvements in living standards, which increased by between five or six times. Living standards doubled between 1929 and 1957 (28 years) and again between 1957 and 1988 (31 years).
Other measures show similar trends. Between 1500 and 1820, economic production increased by less than 2% per century. Between 1820 and 1900, economic production roughly doubled. Between 1901 and 2000, economic production increased by a factor of something like four times.
Gordon controversially questions whether economic growth is a continuous process that can persist forever. He argues that growth and improvements in living standards will slow significantly. For “shock value,” he speculates that future growth rates may be 0.2%, well below even the modest 1.8% between 1987 and 2007.
Low or no growth is not necessarily a problem. It may have positive effects, for example on the environment or conservation of scarce resources. But the current economic, political and social system is predicated on endless economic expansion and related improvements in living standards.
Over the last 30 years, a significant proportion of economic growth and the wealth created relied on borrowed money and speculation. Since 2001, borrowing against the rising value of houses contributed to around half the recorded economic growth in the US.
Global trade is built on a financial model. Sellers of goods and services, such as China, Japan, and Germany, indirectly finance purchases by lending foreign exchange reserves to countries like the US and the now deeply troubled “Club Med” economies of Southern Europe.
Financialization is borrowed money and speculation. Debt allows society to borrow from the future. It accelerates consumption, as debt is used to purchase something today against the promise of paying back the borrowing in the future. Spending that would have taken place normally over a period of years is squeezed into a relatively short period because of the availability of cheap money. Business over-invests misreading demand, assuming that the exaggerated growth will continue indefinitely, increasing real asset prices and building significant overcapacity.
Debt-driven consumption became the tool of generating economic growth. But this process requires ever increasing levels of debt. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth, an increase from around $1 to $2 of credit for every $1 of growth a decade ago.
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