Growth and Sustainability in the Twenty-First Century 2

Figure 17.7 Capita Relationship between Carbon Dioxide Emissions and GDP per The relationship between economic growth and the environment is, in reality, more complex than implied by the EKC hypothesis. As one analysis of various Kuznets curve studies concludes: it would be misleading to follow the policy of polluting first and cleaning later as espoused by proponents of EKC. It does not make much sense to “do nothing” and wait for the magic-wand of economic growth to cure environmental problems. Proactive policies and measures are required to mitigate the problem. 44 4.2 Does Protecting the Environment Harm Employment and Economic Growth? Policies that increase environmental protections are sometimes criticized for causing decreases in employment or harming economic growth. What is the evidence on this subject? Several research studies have explored the relationship between employment and environmental regulation. The overall conclusion is that while increased environmental spending leads to the loss of certain jobs, it creates other jobs. These effects may cancel out or actually result in a net gain of jobs One study estimating the impact of environmental spending and regulation on employment in various industries found that: DRAFT contrary to conventional wisdom, [environmental protection (EP)], economic growth, and jobs creation are complementary and compatible: Investments in EP create jobs and displace jobs, but the net effect on employment is positive. 45 Another study reached the conclusion that strong environmental policies will change the distribution of jobs in society but will have little effect on the overall level of employment. Focused on Europe, the study found that well-designed environmental policies can sometimes result in net job gains. For example, the additional revenue from higher environmental taxes could be used to reduce the taxes on labor, thus reducing the cost of hiring workers and leading to higher overall employment. 46 A similar conclusion was reached by a 2016 analysis of policies to reduce carbon emissions in the United States. Job losses in “dirty” sectors such as coal mining were essentially offset by job gains in cleaner sectors such as renewable energy. The authors concluded that the “overall effects on unemployment should not be a substantial factor in the evaluation of environmental policy” because the net effects are likely to be quite small. 47 Another study found that shifting to renewable energy provides a net employment benefit. Public investments on clean energy sources in the U.S. create about three times as many jobs as similar spending on fossil fuel energy sources, according to a 2012 study. The reasons are that clean energy sources tend to be more labor intensive, and the money invested is more likely to be spent domestically as opposed to funding imports. Worldwide, renewable energy sources employed nearly 10 million people in 2016—more than one million each in solar photovoltaics, liquid biofuels, and wind energy. More than half of these jobs are in low- and middle-income countries, mainly China and India. Solar and wind technologies have advanced rapidly, making these sources economically competitive with fossil fuels for new power installation. 48 Another criticism of environmental protection based on the results of some studies is that environmental regulations reduce GDP growth rates. For example, a comprehensive analysis of the Clean Air Act in the United States estimated that GNP in 1990 was about 1 percent lower than it would have been without the policy. The aggregate macroeconomic loss from the Act over the period 1973–1990 was estimated to be about $1 trillion. Analysis of the economic impact of major environmental regulations in Europe suggests an aggregate economic loss of about 0.2 percent of GDP. 49 But these macroeconomic costs must be assessed against the benefits of the regulations. When an estimate of the Clean Air Act benefits was made, it was found that the central estimate of the 1973–1990 benefits was $22 trillion, giving a benefit cost ratio of 22:1. So while there appears to be a slight negative impact of environmental regulation on economic growth as traditionally measured, we need a more complete analysis to determine its effect on social welfare. As we saw in Chapter 5, GDP was never intended to measure overall well-being, and economists have developed alternative national accounting approaches to supplement or replace GDP. These alternatives may present a better framework for fully assessing the impacts of environmental regulations, since they take into account not just consumption levels but also improvement in the quality of life. DRAFT 4.3 Economic Perspectives on the Transition to a Sustainable Economy We now consider a broader question: Is continued macroeconomic growth compatible with a sustainable national or global economy? Some economists studying this topic believe that, at least for the foreseeable future, further economic growth is acceptable or desirable as we transition to a more sustainable economy. Other economists, who believe that we have already exceeded the planet’s carrying capacity, advocate for a transition to a “no growth” economy, perhaps requiring a period of degrowth (negative growth) during that transition. Among those economists favoring “greener” growth rather than no growth or degrowth is Nicholas Stern, whom we discussed above. While Stern believes significant policy changes are required to address climate change, he argues that “… the economic opportunities of the transition to the low or zero carbon economy are real and very attractive: it is a story of sustainable growth.”50 Another proponent of this perspective is the United Nations. The UN’s Green Economy Initiative, launched in 2008, seeks to promote an economy that “results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.” The Initiative proposed an annual investment of 2 percent of global GDP over the period 2010–2050 to fund sustainable technologies and practices. The UN developed a macroeconomic model to estimate the short-term and long-term effects of this investment, relative to a business-as-usual (BAU) scenario. Their results found that while in the first few years the additional investment reduced global GDP/capita by about one percent, by 2030 global GDP/ capita would be 2 percent higher in the Green Economy scenario. And by 2050, global GDP/capita would be 14 percent higher as a result of sustainable investments.51 Further, the Green Economy scenario resulted in dramatic reductions in environmental impacts. Relative to the BAU scenario, by 2050 global energy demand is reduced by 40 percent, water demand is reduced by 22 percent, total forested land increases by 21 percent, and the global ecological footprint is reduced by 48 percent. Economist Robert Pollin, in his 2015 book Greening the Global Economy, also advocates for an investment of 1.5 percent of global GDP in renewable energy and energy efficiency to fund a transition to a sustainable, low-carbon economy. His analysis concludes that green investments expand employment and economic growth, as jobs in renewable energy and energy efficiency tend to be more labor intensive than jobs in the fossil fuel sector, as shown in Figure 17.8. In each country, investments in green energy result in higher job creation, yielding 75–135 percent more jobs per dollar than fossil fuel investments, with the greatest job gains in developing nations. To assist displaced fossil-fuel industry workers, Pollin argues for job retraining programs and policies promoting full employment. 52 DRAFT Figure 17.8 Jobs Generated by Investing One Million Dollars in Clean Energy versus Fossil Fuel Production, Selected Countries Analyses such as Pollin’s book and the UN’s Green Economy Initiative suggest that not only is sustainability compatible with economic growth, but that green investments can actually increase rates of economic growth. But other economists argue that continual economic growth is incompatible with long-term sustainability. As we saw earlier in the chapter, economist Herman Daly has noted that indefinite expansion of the macroeconomy within a finite biosphere is physically impossible. Since the 1970s Daly has advocated for a transition to a steady-state economy in which population and the stock of physical capital is held constant. A steady-state economy would not hold human well-being constant, as things such as technology, information, fairness, and wisdom could continue to improve. Also, activities that do not involve resource consumption, and are environmentally neutral or environmentally friendly, could continue to grow. Such activities could include services, arts, communication, and education. But Daly maintains that consumption levels should be kept “sufficient” but not extravagant. After basic needs are met and reasonable levels of consumption achieved, the concept of a steady-state economy implies that economic development should be increasingly oriented toward these kinds of inherently “sustainable” activities. Thus, Daly distinguishes between growth and development—the steady-state economy “develops but does not grow, just as the planet earth, of which it is a subsystem, develops without growing.”53 A similar viewpoint is espoused in Tim Jackson’s book Prosperity Without Growth. Jackson calls for an ecological macroeconomics that maintains economic stability without a reliance on traditional growth. He proposes that three macroeconomic interventions are necessary to transition to a sustainable economy: DRAFT 1 A structural transition toward service-based activities. Like Daly, Jackson advocates for a shift of economic activity away from resource-intensive goods toward “dematerialized” services such as education and the arts. 2 Investment in ecological assets. Jackson notes that the definition of a “productive” investment would need to change under ecological macroeconomics. Ecological investments may provide lower financial returns, as traditionally measured, but can provide greater social value due to increases in resource efficiency and the enhancement of ecological functions. 3 A working time policy to maintain employment levels. Given that in a no-growth scenario total hours worked would likely fall, Jackson proposes that working hours per week (or per job) decline to prevent unemployment, leaving people more leisure time. Labor productivity could continue to increase due to improvements in technology, potentially further reducing working hours per week. 54 A macroeconomic simulation model developed by Canadian economist Peter Victor explores how a national economy would perform during a transition to a sustainable, low- or zero-growth future. A conventional economic growth scenario is compared to two scenarios with specific policies for greenhouse gas reduction and “sustainable prosperity”. These scenarios include: • In the “greenhouse gas reduction” scenario the Canadian government is assumed to introduce a tax on greenhouse gas (GHG) emissions, creating incentives to switch from high GHG energy sources to low-carbon sources, making energy in general more expensive (at least in the short term) and encouraging conservation, efficiency, and electrification of transport. The revenues from the GHG tax are used to reduce other taxes, so that the net effect on government revenues is zero. • In a broader “sustainable prosperity” scenario, there is an additional focus on “green” investment, reduction of inequality and poverty, a shorter work week, and a lower rate of population growth. In both of these scenarios GDP growth is reduced as compared with the standard case—in the “sustainable prosperity” scenario it is reduced to zero. But using a Sustainable Prosperity Index (similar to the Genuine Progress Indicator discussed in Chapter 5), both scenarios perform substantially better than the standard case, in which Sustainable Prosperity actually declines. 55 Those who believe that we have already “overshot” the level of population and consumption that can be sustained by the available natural resource base, known as carrying capacity, argue that a period of degrowth will be needed before a stable steady-state economy can be achieved. This is shown in Figure 17.9. As this hypothetical economy (blue line) exceeds its carrying capacity (grey line) it is forced to reduce its overall size until it stabilizes at a new, somewhat reduced, carrying capacity. This transition could be based on deliberate policy choices, or it could occur due to an “overshoot-collapse” syndrome similar to that predicted by the original Limits to Growth report. Regardless of whether we believe that “green growth”, steady-state, or degrowth scenarios are likely, it seems evident that much stronger policies for long-term sustainability are required. We now turn to an examination of such policies. DRAFT carrying capacity: the level of population and consumption that can be sustained by the available natural resource base Figure 17.9 The Degrowth Transition to a Steady-State Economy Discussion Questions 1 What is the principle of the Environmental Kuznets Curve (EKC)? In what areas does it seem applicable, and in what ways could it be inaccurate or misleading? What are some policy implications that can be drawn from an analysis of the evidence reading the EKC? 2 The promotion of economic growth is often seen as a major policy goal. What do you think is the feasibility of a model that stresses alternative goals such as ecological sustainability and well-being? How would you compare the Green Economy, steady-state economy, and degrowth concepts? 5 Policies for Sustainable Development Much of macroeconomic theory and policy is currently oriented toward promoting continuous economic growth. But an over-emphasis on policies that promote growth can result in outcomes that severely degrade natural resources and lead to environmental problems such as global climate change. What kind of policies would be required to promote ecological sustainability, whether defined as weak or strong sustainability? How can these policies be designed such that they also enhance wellbeing and promote human development? DRAFT 5.1 Rethinking Employment and Production Designing macroeconomic policies that are compatible with sustainability requires some fundamental rethinking about economic goals. Specifically, what do we want from employment and production? The macroeconomic models we developed starting in Chapter 8 have implicitly assumed that more employment is better. There is no doubt that employment contributes to people’s well-being, and not only as a source of income. People’s satisfaction with their jobs is an important predictor of their overall life satisfaction, while unemployment is a significant cause of family stress and other problems. About one in five suicides are linked to unemployment, and suicide rates increase during recessions. 56 Thus, maintaining employment levels is important, but people also benefit from time that they spend away from paid employment, to do unpaid work, including family care, and pursue leisure activities. As we saw in the previous section, working time policies have been proposed to maintain employment levels, while providing workers with more time for leisure and other activities. Several European countries have instituted labor policies that mandate comparatively short working weeks for most employees. France instituted a maximum 35-hour working week in 2000, and most German workers also have a standard 35hour working week. In 2018, workers in Germany’s largest labor union won the right to work a 28-hour working week for up to two years. 57 Research suggests that policies mandating shorter working weeks are not necessarily effective at reducing unemployment rates. But two positive effects have been identified. First, people working shorter weeks tend to be more productive per hour. Based on a sample of OECD countries, GDP per hour worked declines as the hours worked per worker increases. Second, shorter working weeks tend to be correlated with lower greenhouse gas emissions. According to one study, policies to reduce annual work hours by 0.5 percent per year could mitigate one-quarter to onehalf of future global warming. 58 Traditional macroeconomic models also assume that more production is always preferable. The model that we developed in earlier chapters focuses only on the level of output, Y, and says nothing about the composition of output. From a sustainability perspective, however, the composition of output makes a very big difference. Some things that we produce require relatively little use of material and energy inputs. Eating locally grown produce, taking a bike ride with friends, or engaging in educational and cultural activities, for example, puts little stress on the natural environment. Other activities, such as heating and furnishing a very large house, driving an SUV, or maintaining a perfect lawn using chemical fertilizer, have more negative impacts. Shifting away from producing goods and services that are most damaging to ecological systems and toward producing goods and services that are less destructive—or even environmentally beneficial—could allow an economy to maintain consumption, investment, and employment in a less environmentally damaging way. Rethinking employment and production for a sustainable economy means that traditional macroeconomic indicators, such as the unemployment rate and GDP growth rate, are no longer sufficient. We need to measure the quality, not just the quantity, of employment and consumption. The OECD has developed a framework for assessing job quality in a country by considering three dimensions: earnings, labor market security, and the quality of the working environment. 59 And of course we would DRAFT want to adjust GDP to account for resource degradation and pollution, as discussed in Chapter 5. 5.2 Reforming Tax and Subsidy Policies Green Taxes Fiscal policy affects economic behavior by setting taxes that discourage certain actions and subsidies that encourage other choices. Taxes have traditionally been placed on income and profits, an approach which is criticized by some economists for creating a disincentive for employment and entrepreneurism, and consequently reducing productivity. An alternative is to shift taxation away from income and profits in favor of higher taxes on negative externalities such as pollution. “Green” taxes make it more expensive to undertake activities that deplete important natural resources or contribute to environmental degradation. They discourage energy- and material-intensive economic activities, while favoring the provision of services and labor-intensive industries. One example of a green tax, as discussed above, is a tax on carbon emissions, favoring renewables and efficiency over carbonbased fuels. Another is a tax on extraction of virgin resources, which encourages resource conservation and recycling. All countries have implemented environmentally based taxes to some extent. As shown in Figure 17.10, environmental taxes in industrialized countries can range from less than 3 percent of total tax revenues (in the United States) to around 10 percent (South Korea). Environmental taxes in developing countries range even more widely, from less than 1 percent in Nigeria to about 18 percent in India. A shift toward higher reliance on environmental taxes does not seem to be occurring, with the OECD average remaining around 6 percent of all tax revenues since the mid-1990s.60 Green taxes are strongly supported by economic theory as a means of internalizing negative externalities. When a negative externality such as pollution exists, an unregulated market will result in an inefficient allocation (as discussed in Chapter 3). Because all taxes, in addition to raising revenue, discourage the “taxed” activity, it is economically and socially desirable to discourage “bads” such as environmental pollution and natural resource depletion by placing taxes on them, rather than on positive economic activities like investment and the earning of income. Two common objections to green taxes frequently arise. First, it is likely that green taxes would fall disproportionately on lower-income households. But as noted earlier with respect to carbon taxes, a rebate or credit to these households could be implemented to avoid making green taxes regressive. The other criticism is that green taxes are politically unpopular—no one wants higher taxes. Increases in green taxes can be offset, however, by reductions in other taxes (such as income taxes) so that the tax burden on a typical household remains unchanged. Also, households and businesses would have the option to lower the amount of green taxes they pay by undertaking energy conservation measures and other environmentally friendly practices, which is not the case with income or business taxes. DRAFT Figure 17.10 Environmental Taxes, as a Percent of Total Tax Revenues, Selected Countries Eliminating Damaging Subsidies While subsidies for renewable energy can encourage a transition to a more sustainable economy, many current subsidies actually increase environmental damages. Agricultural and energy subsidies that encourage the overuse of energy, fertilizer, pesticides, and irrigation water could be reduced or eliminated. This would reduce government expenditures, and the money saved could be used to lower taxes or to promote more sustainable agricultural systems that rely on the recycling of nutrients, crop diversification, the use of natural pest controls, and minimizing the use of artificial chemicals and fertilizer. Such systems also tend to be more labor-intensive, so they also have the potential to boost employment. The fossil fuel industry receives the largest share of perverse subsidies. According to a 2017 journal article, fossil fuel subsidies amount to about 6.5 percent of global GDP. This not only includes direct payments by governments to fossil fuel companies, but also the implicit subsidy when negative externalities are not included in market prices. This mispricing of goods and services effectively permits producers to transfer the costs of environmental damage onto society. A broader estimate of the global environmental externalities imposed on society from economic activity is about 11 percent of global GDP. These damages are expected to increase to 18 percent of world GDP in 2050. 61 DRAFT 5.3 Greening Macroeconomic Policy As discussed in previous chapters, Keynesian economics focuses on using monetary and fiscal policy to spur aggregate demand during economic downturns. Stimulus packages passed in many countries in response to the 2007-2009 and 2020 recessions included significant public investment in green projects. For example, over 10 percent of the 2009 stimulus package passed in the U.S. (the American Recovery and Reinvestment Act) was directed toward investment in energy efficiency, renewable energy, and other green spending. Green stimulus government spending in China was even higher, at over US$200 billion. 62 The $1.2 trillion Biden administration Infrastructure Investment and Jobs Act of 2021 included about $300 billion in specifically green investments such as electrical vehicle fleets and charging systems, zero-emissions public transit, bicycle infrastructure, expanding renewables and modernizing the electric grid, upgrading water systems, and climate resilience and weatherization. Some critics have argued that there is a contradiction between the “green Keynesian” goals of economic growth and environmental protection. 63 But it is possible to direct policies towards different kinds of growth. Instead of just thinking of consumption (C), investment (I), and government spending (G), we can divide each of these terms into environmentally harmful and environmentally positive activities. Thus, it should be possible to achieve growth in employment and well-being) while reducing throughput—the flow of material and energy inputs into the economy and outputs of wastes and pollution. According to one “green Keynesian” analysis: we can distinguish between those macroeconomic aggregates that should be strictly limited—resource-intensive consumption and investment, and energyintensive infrastructure—and those that can expand over time without negative environmental consequences. The latter would include large areas of health, education, cultural activity, and resource- and energy-conserving investment ... there is plenty of scope for growth in economic activity concentrated in these categories, without growth in resource throughput, and with a significant decline in the most damaging throughput, that of carbonintensive fuels. 64 throughput: the flow of raw materials and energy through the economy, leading to outputs of waste Discussion Questions 1 What specific economic incentives and policies would you recommend for promoting sustainability? Have you heard of any policy examples from the news recently that you think were good ideas? 2 Can you identify areas in which “green Keynesian” economic growth would be desirable, and areas in which economic growth is more destructive to the environment? In what ways would a “green” economy look different from our current economy? DRAFT 6 Concluding Thoughts Throughout the twentieth century, the main objective of macroeconomics was steady, strong economic growth. Considering the social and environmental challenges that we face in the twenty-first century, macroeconomics will need to adapt to new realities. Employment, price stability, and GDP growth will continue to be issues of great importance—not as ends in themselves but as the means to the broader goals of human development and sustainability. Keeping ultimate well-being goals in mind, macroeconomics must look beyond the experience of the past and ask new questions. A fundamental question confronting macroeconomics in the twenty-first century is how the majority of people in the world, currently at relatively low standards of living, can improve their well-being. The issues of “human development” discussed in Chapter 16 involve a combination of traditional economic growth and new approaches that are more oriented toward dealing with problems of poverty, inequality, and ecological sustainability. Economic analysis needs to take into account the need for technologies that can provide energy, food, and other materials for human consumption in ways that are ecologically sound, and that help to remedy past damages. The transition to a more sustainable economy will have economic costs, but also significant benefits, such as increased employment and improved quality of life. If the true goal of economics is to enhance well-being, then we need to realize that the economic goals and policies of the future may differ significantly from those of the past. This was recognized by John Maynard Keynes nearly a century ago. Even during the Great Depression in the 1930s, Keynes looked into the future and imagined a world of relative affluence, where humanity’s “economic problem may be solved,” creating little need for traditional economics, and where people will instead be able to focus on how to live “wisely and agreeably and well.” (See Box 18.3.) A macroeconomics of sustainability is possible. Policies are available to address all the major environmental problems discussed in this chapter. These will need to be combined with our earlier analyses of issues concerning national income, fiscal and monetary policy, unemployment and inflation, and economic development. This effort can generate a new macroeconomics capable of responding to the challenges of our current era. DRAFT Box 18.3 Economic Possibilities for Our Grandchildren Looking beyond the dire conditions during the Great Depression, John Maynard Keynes imagined what the world, and economics, might be like 100 years into the future (in 2030). Considering what would be the “economic possibilities for our grandchildren”, Keynes’ main conclusion was that as people’s needs and goals changed with further affluence, so should economics. Writing in 1930, Keynes suggested that: a point may soon be reached, much sooner perhaps than we are all of us aware of, when [basic] needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes. . . This means that the economic problem is not—if we look into the future—the permanent problem of the human race. When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. . . All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard. While Keynes did not specifically emphasize environmental issues, his comments foreshadow a situation in which policies to promote the maintenance of a sustainable and equitable world could replace a preoccupation with economic growth. Source: Keynes, 2009 (original publication 1930). Discussion Questions 1 How can we reconcile the need for global economic development with the problems of environmental limits? In what ways will established models of economic development have to be modified to deal with new realities? 2 Do you agree with Keynes’s belief that industrialized countries can reach a point where needs will be “satisfied in the sense that we prefer to devote our further energies to non-economic purposes”? Do you think that we are any closer to this point than in 1930, when Keynes wrote his essay? Do you see any evidence that this is starting to occur? Review Questions 1 What are some of the environmental issues related to economic growth? 2 What can we expect in terms of future global population growth? 3 Are we running out of non-renewable resources? What are the major problems regarding these resources? DRAFT 4 How well are we managing renewable resources? What are some of the major areas in which these resources are being depleted? 5 What are some of the projected effects of future climate change? 6 What are some policies that could be effective in responding to climate change? 7 What is the environmental Kuznets curve (EKC) hypothesis? What is the evidence regarding this hypothesis? 8 What are “green” taxes? 9 What are tradable permit systems? 10 What are “green Keynesian” policies? Give some examples. 11 What is a steady-state economy? Exercises 1 Issues of environmental sustainability can sometimes be a bit abstract. This exercise is designed to bring them to an individual level. Start at https://www.footprintnetwork.org/ and familiarize yourself with the notion of “ecological footprints,” then take the quiz to discover what your personal footprint looks like. What did you learn that was new information to you? What specifically can you do about this new information? 2 Go to https://data.footprintnetwork.org/ and access data for a number of different countries. For each country answer the following questions: a What was the per capita ecological footprint of consumption? b What was the per capita biocapacity? c Explain the meaning of the two numbers you just located. What are the implications? 3 Match each concept in Column A with a definition or example in Column B: Column A Column B a. “Green” taxes 1. The perspective that natural capital depreciation should be compensated for with restoration of other natural capital b. Tradable permit systems 2. An inverted Ushaped relationship between economic development and environmental damages DRAFT Column A Column B c. Strong sustainability 3. A situation where population and the use of raw materials and energy have stabilized d. Throughput 4. Based on the principle that a process of pollution reduction may be most efficiently achieved if businesses have choices e. Social discount rate 5. Designed to discourage pollution and natural resource depletion by making them more expensive f. Environmental Kuznets Curve 6. Reflects social rather than market valuation of future costs and benefits g. Steady-state economy 7. The flow of raw materials and energy into the economic system, and the flow of wastes from the system DRAFT