Only a Recession Can Save Us


Before the Bali Conference last year, the world’s early warning system on climate change, the Intergovernmental Panel on Climate Change (IPCC), released their latest report. It was their most alarming yet. They then proceeded to criticise themselves for being too optimistic. Constrained by the requirements of scientific rigour and broad consensus, their data was up to five years old, and their conclusions already made redundant by a frightening reality.

One important reason is that they did not predict the explosive growth in China and India. The unprecedented expansion of these economies, which has thankful economists on their knees and praying for more, is deeply disturbing for climate scientists. Other reasons include a surprising inefficiency in the use of fossil fuels and the failure of the climate scientists’ models to follow the rapidly changing dynamics of the global climate system.

The problems are building too fast and we need to buy some time. A key measure of our efforts to mitigate climate change is called carbon intensity – the amount of carbon released per unit of GDP. It needs to go down, but at the moment, it’s stalling.

Only a recession can save us now.

Before you dismiss this suggestion, let me explain. Australia would not suffer greatly from a recession. We are nearly fully employed, and working longer hours than ever before. The resources industry is stretching to the limits of its capacity, straining infrastructure and desperately soaking up skilled and unskilled labour. The pressure has been building for years, and demand growth is not letting up. Inflation is an inevitable by-product.

In this context, we should be looking at the easing of global demand with relief, not with dread. As well as buying us some time to deal with climate change, a global slow-down would ease the pressure on inflation, ease the housing affordability crisis, and give us time to ease the skills deficit. In the long run, we would not be missing out on any opportunities in the resources sector. One of the advantages of relying on non-renewable resources is that anything we leave in the ground today, we are bequeathing to the next generation.

But that is not the way conventional wisdom sees it. The view is that Growth is unambiguously Good. The ‘growth religion’ pervades every aspect of today’s society, from the neoclassical economist’s pulpit to the faithful masses. Politicians argue over whose policies will lead to the most growth, like different denominations bickering over whose doctrine is the most holy. Economists who challenge this dogma – such as ecological economists – are cast aside as heretics.

The main problem with growthism is that it denies the physical dimensions of the economy. This abstract, ephemeral thing we call an economy actually, at some level, represents real stuff – real minerals that we dig out of the ground to make real buildings, real corn that we package into real aluminium cans, real oil that we pump, refine and burn in real cars.

Real things originally come from nature, and nature has limits on the things it can provide for us, and the rate at which it can adsorb our waste. We have known about these physical limits for many years, but have largely hoped that if we ignore them, they will go away. The science of economics studies the circular flow of money but ignores the flow of real stuff from and into our environment. As the economist Herman Daly points out, this is equivalent to a biologist studying an animal’s circulatory system but ignoring the digestive tract.

Economists hope to ignore these limits through the magic of price signals and resource substitution. Adam Smith‘s ageing but ever-present "invisible hand" is still providing for us, through that most wondrous of institutions: the market. Whatever we are running out of, it will provide a substitute. Running out of tuna? Use salmon. Running out of pine? Use redwood. Running out of the atmosphere’s ability to adsorb carbon dioxide without leading to catastrophic climate change? Just use … oh wait, there’s no substitute for that.

In fact there are many things for which markets alone cannot provide an adequate substitute: sources of fresh water, fish stocks, rainforests, soil nutrients, and perhaps even the lifeblood of modern civilisation: oil (to name just a few). Markets are good at economic efficiency but poor at resource efficiency.

Part of the problem with growth is actually one of semantics. What do we mean when we say growth? The technical definition is usually an increase in GDP, but by itself, this may not be a good thing. As ecological economists would point out, growth in GDP could mean growth in welfare, or it could mean growth in resource and energy consumption. While it seems reasonable to hope for continuous improvements in our welfare, we cannot have continual growth in consumption and waste without reaching limits.

If we want to improve our human condition without reaching environmental limits, such as catastrophic climate change, we have to find a way to decouple these two concepts. In fact, we already know how to do this, by radically improving our resource efficiency and increasing our use of renewable resources. But we can’t simply replace the physical components of our economy overnight – it will take innovation, political will, and time.

Senator Penny Wong’s assurance yesterday that the Government would not rely soley on the Garnaut report to shape climate change policy, but would also "be looking at other inputs such as modelling from the Australian Treasury", shows that growthism as a political doctrine is not about to end any time soon.

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