The COVID-19 crisis has highlighted the relevance of reviewing our economic system and how dependent our societies are on economic growth. What will we do if we suddenly find ourselves in a situation where economic growth is simply not possible – or perhaps even desirable – anymore? How can our societies remain functional if we experience low or negative growth for years to come? What happens if economic growth and greenhouse gas emissions cannot decouple fast enough?
The most renowned monetary measure reflecting living standards, growth, and wellbeing is gross domestic product (GDP), which measures the production of economic value of a given state or area in a specific period of time.
In connection with the corona virus crisis, economists all over the world raced to announce their estimates on the timeline of economic growth getting back on its track and on the potential length of the economic crisis. Are we facing a recession or a depression, and will it be L, V, or U-shaped?
The crisis has made our societies’ dependency on economic growth very visible; still, only few see the situation as an opportunity to reimagine our social order to be less dependent on growth. What if life could be fulfilling and our societies remain functional even with low, or even negative, growth? Regardless of COVID-19, we would have still eventually faced the debate on letting go of our addiction to growth.
The most opportune approach to this topic is to look at the contradiction between the need to infinitely increase our GDPs and, on the other hand, to solve the climate crisis. Before COVID-19, carbon emissions were globally still on the rise, and, even among the European top performers trying to tackle the issue, the results for a swift and absolute decoupling of economic growth and greenhouse gas emissions were poor. According to some estimates, this decoupling should happen ten times faster in order for the so-called green growth to be a credible solution to the climate crisis.
However, we need to face the facts: GDP is central in measuring the economy precisely because of the structures of our society being heavily tied to increasing economic value.
It would be too simplistic to claim that replacing GDP with other indicators would magically fix our society: GDP is an important measure because it indirectly illustrates several issues that are closely related to everyday life, such as jobs, public services, and the influence of individual states in international negotiations.
On the other hand, if we are to claim that the growth of our GDPs would automatically result in increased levels of happiness or a better society, we are cutting corners. After a specific economic per capita level has been reached (ca. 20-30,000 euros annually), the connection between economic growth and individuals’ experience of wellbeing becomes weak: for instance, levels of inequality actually have a greater impact on peoples’ happiness and wellbeing.
Why we are dependent on growth
GDP is integral in measuring value especially because the pillars of our society are so heavily leaning on it – and not, for instance, because we would regard it as a perfect indicator for measuring the success of our societies. Here are a few examples:
1️⃣If the economy were not to grow, people would need to be ready to accept lower levels of pay and smaller profits on investments (also e.g. pension funds).
2️⃣If the public sector wants to increase its spending, either the economy ( taxable income) should grow or the tax percentage should be raised. The third option would be to increase public debt. Raising taxes is often politically challenging, and increasing debt has its own issues (we’ll get back to this later in this text).
3️⃣People’s income is still mostly based on wage and salary earnings, which means that the society can only function well if the employment rate is high. If the productivity of labour increases, for instance, due to technological developments, the economy needs to follow in order for enough people to have earnings-based work – unless we are ready to reduce work hours.
Thus, if we experience no economic growth, we either face making cuts – on public spending, pensions, wages and salaries – or increasing public debt. Typically, it’s much easier to share the profits than to negotiate on who is ready to forgo and what.
The abovementioned root causes are a reminder of why we are dependent on growth. People need to work, businesses and pension funds rely on their profits, and no one is happy if the public sector runs out of money.
The fact that our current social model is dependent on growth does not mean that it cannot or should not be criticised: we should be ready to reimagine our social model.
The majority of proof available indicates that combining economic growth with fighting climate change is challenging. There is not much evidence yet to back up ‘green growth,’ the decoupling of economic growth and the ecological burden caused by it. At the same time, no one has succeeded in presenting a credible option for an alternative social model that would not be based on economic growth. Additionally, we are running out of time to stop climate change.
As a result, we are faced with quite the dilemma. How could we begin to solve it?
How to get past our addiction to growth
1. Solutions for root causes.
The root causes making us dependent on GDP were introduced earlier, such as salaries and wages (we do not want to be paid less), taxation (we do not want to pay more taxes), and unearned income (we do not want to lose our wealth or pensions). However, if we want to imagine a system without growth, we should be able to reimagine other central institutions of our society, for example, sources of income, work, taxation, wealth, and pensions, to name a few. For example, initiatives like universal basic income and common assets strive to create a premise for redefining work and sources of income. As a result of the current corona crisis, universal basic income and the so-called helicopter money have become mainstream and they are regarded as a solution to both alleviating the financial crisis as well as a permanent part of future societies: for instance, Spain was the first EU country to recently announce that it would establish no-strings-attached permanent basic income, and the Financial Times, among others, has been a vocal proponent of helicopter money as a solution for the crisis. Reducing work hours and, as a result, an increase in free time could be a solution for ensuring that more people would have something meaningful to do even though the demand for labour would decrease due to the growth in productivity. Similarly, the emphasis of taxation could be on, for example, harmful consumerism, land, properties, or other forms of wealth taxation, proposed for example by economist Thomas Piketty, instead of on salaries and wages. In addition, an increase in free time would likely improve the quality of life for many.
2. New indicators.
In the future, GDP is likely to remain as our chosen measure for the economy, but other, at least equally important indicators need to be established alongside it. We must understand that environmental collapse is much more serious than, for instance, growing national debts. Thus, the reduction of absolute greenhouse gas emissions should have at least an equally high political priority as economic growth and public debt. During Finland’s EU presidency, one of the main themes for the term was the ‘economy of wellbeing’ where the basis of economic policy planning is the wellbeing of both the people and the environment. Instead of economic growth, one of the new central societal indicators could be, for instance, the Genuine Progress Indicator (GPI) whose components better consider e.g. the externalities of production (for example, environmental and social impact) as well as forms of labour taking place outside of the markets (for example, domestic work). Demos Helsinki partnered up with the Ministry of Social Affairs and Health, Finland, to draft a suggestion for the EU on a European Economy of Wellbeing, which highlights the connection between peoples’ wellbeing, ecological sustainability, and economic growth.
3. Towards global economic governance.
Towards global economic governance. The trade war between China and the United States has not gone unnoticed: we are currently living in a world where nation states compete with each other for power and unlimited growth – we should be rid of this. The more global the governance of the economy is, the less pressure there is on growth for individual countries. As long as states strive for optimisation and competing with one another, it is difficult to imagine a model where growth would not be necessary for securing one’s own economic and political relevance on a global scale. Indeed, for this reason, many of the above mentioned solutions would require substantial international legislation.
4. The EU to set the course for a new economic order.
Even though the EU is also competing for growth with China and the United States, it is vast enough as a unit to be extremely interesting when it comes to setting up a new economic system. For individual states (excluding China and the U.S.), it is difficult to opt out of the economic mainstream without running into difficulties in the future, whereas large economic areas have room for manoeuvre. For example, relative public debt is a more serious issue for Finland than it is for the U.S., China, or the EU as a whole. In the end, an appropriate amount of growth or debt is a contract between people – not the laws of physics – as recently exemplified in statements regarding the EU’s decision to relax budgetary rules concerning public debt during the COVID-19 crisis. As an economic area, the EU is so vast that, by prioritising so-called green values and a broader definition of wellbeing as something beyond economic growth alone, it could change the rules of the game, starting with its own Single Market, thereby also influencing international standards. The EU could also take advantage of different measures with its trade policies in order to change the course of the global economy’s standards.
It is possible to reimagine the economy
There are no easy solutions to replacing GDP or decoupling from growth, but talking about them cannot be taboo in our society.
We may end up in a situation where economic growth cannot simply become decoupled from environmental degradation fast enough or where infinite growth is impossible for other reasons. In this case, we need to be prepared to discuss how the pillars of our society – work, taxation, pensions, debt, and so forth – can adjust to or transform in different scenarios.
A society of consumerism and economic growth is still regarded holy and questioning them is taboo. For example, the CEO of the clothing giant H&M recently stated that flight shaming and criticising the consumption of fast fashion can cause “terrible social consequences”. In Finland, Riikka Suominen, the former chief editor of Vihreä lanka (a political magazine representing the views of the Green League) caused a social media storm by tweeting that the western countries no longer need economic growth.
Regardless of COVID-19, we would have still eventually faced the debate on letting go of our addiction to growth.
It may very well be that we will never find a credible alternative to an economic model that is based on growth. However, this does not mean that we cannot admit to the dilemma of economic growth and environmental degradation and openly discuss what kind of an economic model we want to build our future on. Some of these proposed measures may still seem impossible, but, as the COVID-19 crisis has shown us, in reality, even the most essential societal institutions can rapidly and radically transform if necessary. Thus, we should be open to reimagining an economy that also serves future generations.
Hopefully, this blog will inspire others interested in these topics to share their thoughts on growth, GDP, and everything else surrounding them.
Henrik Suikkanen (M.Sc., Economics) is responsible for leading Demos Helsinki’s consultative sales. You can follow him on Twitter: @SuikkanenHenrik
Our experts publish weekly letters to imagine progressive, fair and sustainable societies after the coronavirus crisis. Follow Demos Helsinki also on Facebook, Twitter and LinkedIn.
- Letter: The Three Horizons of Economic Stimulus
- Letter: After the crisis, let’s not bounce back. Let’s leap into the future.