Degrowth & Deflation

I keep seeing naive arguments for degrowth that don't account for the disastrous impact of deflation on an economy, especially in the light of very high levels of private sector debt (across the first world). It would not be so bad if the advocates of degrowth had any sense of how deflation works, but they seem not to.

Deflation

Deflation has similar risks to inflation and can get out of hand just as easily. Deliberately pursuing a course of deflation is dangerous. In deflation, prices fall and consumers assume that if they delay a purchase the price will be lower. So it makes sense to delay it if possible. Demand for products tends to drop, putting further downward pressure on prices (there is a positive feedback loop). But as demand falls off, production has to fall off as well. Supply chains slow down and sometimes dry up. Wages start to fall, and businesses start to lay off workers, usually starting with the low paid, unskilled workers.

Normally we would hope that the fall in wages and rise in unemployment would counteract the deflationary spiral. But if we are actively pursuing degrowth then the deflationary spiral will keep going, we might see the first examples of hyper-deflation. 

We don't live in the kind of world that accepts equality of economic outcome as a goal. Thus the poor are going be worse off. The middle classes will cling on, while they have job. The ruling elite are now excessively insulated against declines by the ability to short stocks and buy credit default swaps in advance of the change of economic policy. They will actually grab an even larger share of a shrinking pie. And this will exacerbate the effects of degrowth. Businesses will downsize and force workers to work harder to preserve investors capital.

Debt Deflation

A problem that almost no one talks about is the fate of debt under deflation. While it is true that buying power increases in the short-term the subsequent fall in wages will cancel that out in time. The trouble comes when your debt stays the same in numerical terms, but your income is shrinking in real terms. In effect deflation multiplies debt. And we need to be clear that the first world is highly indebted. Politicians bang on about govt debt, but private sector debt is much larger. In the UK private sector debt is about 350% of GDP. Household debt alone is slightly over 100% of GDP. But debt is currently rising. Households have spent more than they earned for 9 straight quarters in the UK.

The interest on these debts must be a significant figure, though I have never found anyone who could tell me what that figure might be. If the average interest rate is 10% then the interest payments on debts to the value 350% of GDP are 35% of GDP per annum! As I say, no one seems to be able to tell me what that figure might be, not even the heterodox economists who bang on about private sector debt.

Consuming Less & Kill the Third World

There are powerful arguments for consuming a great deal less in the West in order for us all to survive the climate emergency and to turn around the mass extinction. But this will have massive consequences.

However, this is going to be happening on a global scale. Those countries most at risk from the climate emergency are also most at risk from degrowth.

If Europe stops consuming, say, jute and cheap clothing from Bangladesh, then vast numbers of Bangladeshis lose their livelihood and have no welfare to rely on. And just as we wipe out their economy to save ourselves, their whole country is inundated with floods and because we are following degrowth we have much less to offer them in terms aid.

If Western Europe rapidly stops using gas from Russia and Ukraine for cooking and heating then 190 million people are affected. Gas is by far the largest export from Russia and it mainly goes to the EU. We could expect mass unemployment, again without a welfare safety net. And at the same time their wheat crops are failing from the persistent drought that is already beginning to affect them. But of course we have to stop using fossil fuels and soon.

We desperately need to stop consuming plastic and a lot of the plastic tat we buy is made in China. If China suffers a downturn then we could be looking at 100s of millions of people losing their jobs.

If we suddenly stop going to Greece, or Bali, or Fiji, any of a 1000 places that rely on tourism then again, there will be job losses that create a drag on the local economy, exacerbating the deflationary trend. Factor in the effects of the climate emergency and we can see that a lot of places are going to cease to exist.

There are many of these strong dependencies in a globalised world and the poorer nations are always more vulnerable than the rich.

Surviving the Climate Emergency/Mass Extinction 

Degrowth has the potential to make things a lot worse and the worst impact will be on the poor. Which is not to say that we should not consume less. The catch 22 is that if we do not consume less we will probably all die.

I would say that our priorities would be consuming less locally produced energy. Cutting down the amount of coal and oil burned to power our lifestyles. Next would be transport. It's not enough that we all switch to electric cars. We have to be thinking in terms of using a fraction of the energy resources that we currently do. We need to switch from cars to bicycles, shared vehicles, and public transport.

Switching to plant/fungi/bacteria based foods so that animal farming is reduced will make an important contribution. We need to stop exporting animal products as well. But we need to be cautious about cutting back drastically on goods from poor and services countries, especially where their economic base is narrow. They need time to work out how they will survive the coming economic crash on top of the climate emergency/mass extinction.

Some single products such as palm oil might be good to target. Making and transporting the stuff involves cutting down vast swathes of rain forest and consumes vast amounts of energy. And yet it is not so central to any nation's economy that stopping it would bankrupt them. There must be many similar such products. Coffee and chocolate are probably both in this category and we'll probably discover how committed we are when we consider them.