By Maggie Winslow
The financial crisis that began in 2008, and the efforts to remedy it, lay bare a troubling dichotomy. Our economy depends on increasing levels of consumption to maintain its health. However, the planet we live on is finite. Decreased consumption that has resulted from the crisis is a blessing for ecosystems and dwindling resources. However, it has also led to rising unemployment and all of the related negative social result of increased unemployment levels.
In the United States, 70% of GDP is made up of consumer spending, symbolized by C in the commonly used equation for GDP (GDP = C + I + G + X), as you may remember from a college macroeconomics class [the rest of the figures represent gross private domestic investment (I), government consumption (G) and net exports (X).] This has two important implications. One, when consumer confidence decreases and spending slows, the economy falters, unemployment increases, we move into a recession or worse, as we are now witnessing. This is why citizens have been exhorted to go shopping to help the economy. The steady consumption of goods and services keeps and creates jobs. A huge portion of the jobs in the US are based on providing such consumer goods and services.
The second implication is that we need to keep the economy strong by maintaining high consumption levels. Not all of C is made up of the consumption is of goods. Much of it is for services. Nonetheless, the portion of C that is composed of goods creates a conundrum: How can we have continued growth in material goods on a finite planet?
Thus we find our economic system in a bind. We need to keep buying new goods to keep employment levels high and the economy strong. But buying all of these goods is not sustainable and is actually harmful to the ecosystem upon which all life depends. We have reached a point where the importance of consumption is more for the sake of the economy than for the sake of the enjoyment of the goods. Politicians are not promising that if they get elected, they will provide more goods for people to buy. They promise more jobs, better education, security, and sometimes environmental protection. We are awash in consumer goods and many of these goods are not necessary.
Can we restructure our economy so that it is not so dependent on consumer goods? There are plenty of other forms of employment than the designing, manufacturing, transporting, and selling of physical goods.
The debate on jobs vs. the environment is over. Environmental protection is not antithetical to job creation but can be synonymous. We are seeing a current trend in job creation in renewable energy, energy conservation , green buildings, and climate protection. This is a small but growing sector of the economy.
We are seeing incremental changes to the economy which reflect new thinking about the importance of resource conservation, environmental protection, and, most of all, limiting the emissions of greenhouse gases (GHG). Some of these changes include aspects of the Obama administration stimulus package which support renewable energy, public transportation, and energy research, as well as efforts to preserve resources.
However, these marginal efforts are not enough. We need a full transformation in the way the market economy is structured to change incentives away from selling and buying more disposable goods to providing the services people need with the minimal impact on the viability of ecosystem services , including climate stability.
While increasing renewable energy use is essential, if people are heating larger homes and the population keeps growing, these efforts might only allow us to keep our fossil fuel use from growing. This isn’t enough.
It might seem difficult to imagine a different type of economy. Capitalism is the dominant paradigm in today’s world. It is an excellent method for stimulating production and allowing for an allocation of resources that is based on a citizen’s desires. But capitalism does not exist in a vacuum. It requires a variety of government institutions to allow it to function: rule of law, property rights, and cultural norms. Private prosperity is also facilitated through the provision of public goods such as transportation infrastructure, communication infrastructure, environmental regulations, and labor laws. Government revenue though taxation is essential for capitalism to flourish.
Most states tax income to provide this revenue. What would happen if instead of taxing income, land were taxed as Henry George suggested more than one hundred years ago? We would see a very different type of development.
What if carbon were taxed instead of labor? What would our society look like then?
Economists since Adam Smith have seen the deleterious effects of unbridled capitalism and have made recommendations for ways to curb such negative aspects. Many of these recommendations are still relevant today. They are just ideas that never received buy-in from the most powerful and wealthiest members of society so they were not implemented.
Again, while the financial crisis may be the crisis of the moment, it is nothing compared to the looming environmental crisis. It is time to envision a new type of economy and work towards this goal so that our grandchildren don’t look back at this time and ask us, “What on earth were you doing?”
Maggie Winslow, Professor of Economics, Presidio Graduate School