July 30, 2010
-- by Dave Johnson
Our current economic model depends on ever-increasing consumption. This model worked during the early industrial revolution worked because it filled existing needs: Farmers depending on horses needed tractors. Kitchens needed gas stoves and refrigerators, etc. Eventually the majority of needs were filled, and we invented demand creation: marketing and advertising made us want to buy things we don't really need. All the while population growth helped push demand along at a steady pace.
When the limits of demand creation joined up with declines in population growth consumption would slow, the economies would stagnate, and governments would prime the pump. This ended up creating bigger and bigger bubbles, and bubbles pop.
And never mind the whole chewing up the planet thing where we are fishing out all the seas, removing all the mountaintops, cutting all the trees, drilling and mining deeper and deeper holes, putting more and more carbon into the air.
Bill Gross of PIMCO, says government stimulus plans should borrow to invest, not to push consumption. Writing about "New Normal" in Privates Eye at Real Clear Markets, worries that declining population growth is a warning flag for capitalism itself,
Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence. The more and more consumers, the more and more need for things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population.
WIth a growing population, the growth model of capitalism continues for a while,
Currently, the globe is adding over 77 million people a year at a pace of 1.15% annually, but slowing. Still, that’s 77 million more mouths to feed, 77 million more pairs of shoes to make, 77 million more little economic units of demand – houses, furniture, cars, roads, oil – more, more, more.
Gross speculates that this is at the root of the wobbly economies we have seen in recent decades,
The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt ... Lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita ... Finally ... there was nowhere to go but down.
Gross writes that continually borrowing to push consumption is not the right way to spend that money. You should borrow to invest, not to consume. Other countries are pe\ursuing policies of investment not consumption:
Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services.
If our government "stimulus" continues to push consumption -- i.e. tax cuts -- instead of spending that invests in infrastructure, education and health care, things can only get worse.
Posted by Dave Johnson at July 30, 2010 10:26 AM
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