Steady State Economics

[a_majoor]

A three part article from Mesopotamia West. Some interesting thoughts on what the future might hold in economic terms:

http://mesopotamiawest.blogspot.com/2007/03/steady-state-economics.html

Steady State Economics

This is a long post on a difficult subject, so you may want to think twice before reading it; unless you're an Economist. If you are, you may want to boil me in oil and run me out of town on a rail. Remember, you've been warned, you'll either be bored or outraged.

Any Canadian who can read has read in their paper yesterday or today how only immigration can achieve the growth necessary for Canada's future. The replacement rate is nowhere near sufficient, so we should, according to the papers, import as many as 500,000 people a year to make up the difference. As Andrew Coyne says in the National Post today, more people will make us a bigger country. So true. Other commentators have argued that the baby boomer bulge must be coddled and feted by the working generations behind it and that therefore this group must be as large as, or larger, than the Boomers.

Throughout all the so called analysis I've read, and you've read, there is one overriding assumption; that growth is good, is necessary, is essential for the future of Canada.

I have, as a refugee from Kelowna, one of the fastest growing cities in Canada, long wondered where this assumption started and what it's based upon. Why, for example, would growth be so desirable and lack of growth so lamentable?

Let me give you one example, the centre of Paris. I invite you to walk along the Seine. Observe the buildings on either side of the river. Check the bridges.


What is the primary impression you receive from your surroundings? Perhaps it will be the amount of fine stonework. Perhaps it will be the art deco buildings. Perhaps it will be the lack of height of everything in the vicinity except the Eiffel tower. Perhaps it will be the cannon-ready avenues.

Whatever amazes and pleases you about this pedestrian delight, it will not be something that was built yesterday, or even in the last century. It will be, dare I say it, beauty and utility based on hundreds of years of slow accumulation. This is the very opposite of growth for growth's sake, so beloved by newspaper columnists, editors and, presumably the Liberal Party of Canada.

If you want to see growth in Paris, go to the suburbs where thousands of dislocated and disaffected, mostly North African youths living in vertical ghettos, burn cars and create no-go zones. There's the growth you've been looking for. There's the rampant, body on body, reproduction so desired at Number One Yonge Steet. It is not a pretty picture.

Too far away. I return you to Canada, to Kelowna. I visited it in 1954 as a 13 year old. There were ferries carrying a few cars across the lake. The main street looked busy, but most buildings were only two stories high. My grandfather's home, at the end of Bernard Ave., on a little rise, was almost in the country. Around on all sides were orchards. It was absolutely, beautifully bucolic.

Today the same area is suffering from the cancer of mall migration, homeless people and economic poverty while all around, for miles on every side, beautiful homes have been built on those hundreds of acres of orchards. The traffic from the floating bridge roars up and down, just like Toronto, and residents wonder what will happen -- actually they know -- when the bridge is shortly expanded to four lanes. What was beautiful, peaceful and a haven is now little better than North York.

Oh, but there are jobs; jobs for everyone, that's why growth is so good.

I knew you'd get around to that, so this is why the title of this piece is 'Steady State Economics'. This is not a phrase you're likely to run across in university or the business world because very few countries in the world have managed to achieve it with the possible exceptions of Germany and Norway. Steady state economics is the belief that it is possible to so organize the industrial, business and bureaucratic life of a country that it is possible to improve the lives of existing residents without building new cities, paving over new suburbs or importing (or birthing) new armies of consumers.

The opposite of steady state economics, is the economics of growth, which is, at its essential core, a kind of economic Ponzi scheme in which resources (tax dollars) are borrowed from future residents to pay for the needs of existing residents. Since the needs of existing residents are capable of endless expansion, so the number of future residents needs to be relentlessly expanded as well.

Try this out as a home owner. You buy a new house. You get a mortgage on it which means you are going to pay it off over 25 years. You need a job for 25 years to do so. Your job is building houses (selling car parts, stocking a grocery store, it doesn't matter) so the more people you build houses for, the longer your work life. So more people, more security. But of course, they do the same thing. They buy a new house. They get a 25 year mortgage and so on. Each generation is hoping and praying and betting that the next one will be larger in order to pay for the current generation's employment.

And it's not just construction, new family formation and all that goes with it; consider the environment. Consider our non-renewable resources. We're like a family that moves into a large castle and keeps warm by burning the furniture, selling off the pictures and conducting tours of what's left. In the end, all the gold, oil, copper and coal will be gone and the Toronto Sock Market will collapse.

What makes me a conservative and a Conservative? The belief that there is a way to run a country, a community, a business and an individual's life that conserves the best of what we have and builds -- gradually and incrementally -- to pass this on to a similar future generation.

But how without more and more and more people?

Has anyone here heard of the Industrial Revolution? What was the primary benefit? Yes, the abolition of slavery and the replacement of indentured workers by machines. What was the benefit of the various technological revolutions of the 20th Century. Yes. The replacement of workers by machines, processes and ideas that increased productivity far and beyond what anyone thought was possible even a few years earlier.

And this will continue in the 21st Century. The one factor that holds societies back is reliance on cheap immigrant labour. Look at Saudi Arabia where the residents loll about in air conditioned mansions while imported Filipinos do the work. This is true of any society. If industry has a choice between importing cheap labour and investing in labour-saving equipment, they'll go for the cheap labour almost every time. It's an old habit going back long before the Roman Empire. Breaking that habit will be hard, hard but necessary.

If we simply keep a grip on our selves, keep our expectations in check, and pursue innovation and technology with a passion, we won't need half a million immigrants a year.

And we will be able to fashion a lifestyle and a country second to none. Conserving what is good, increasing productivity to pay for it. Steady state economics, a concept whose time has come.

 

[a_majoor]

http://mesopotamiawest.blogspot.com/2007/03/steady-state-economics-ii.html

Steady State Economics II

Yesterday in this space, I opened discussion on Steady State Economics; today I'll dive a little deeper into the murky pool of economic growth and point to what's wrong with most Western Economies.

Take a look at business magazines and newspapers and check what they're really interested in. You'll find it's three things: new home sales, automotive sales and retail sales. Taken together they show how 'strong' the economy is. That's the conventional wisdom.

Now consider for a moment what drives those three categories. How many homes, for example, collapse, blow up in gas explosions, burn down or get demolished? Not many. So what the papers are really measuring isn't replacement homes for existing home owners, but new homes for new home owners.

Similarly, do you buy a new car when your old one rusts out? Usually not. You buy it because you're tired of a squeak in the door, or a paint chip, or some other minor matter you're too busy to deal with. Easier to just get a whole new car with its nice new-car smell. So what I'm really saying is that cars aren't replacements either, but are discretionary for most people. The exceptions are new cars for new car owners; the same group who just bought a new house.

Finally, what drives retail sales? Clothing. What drives clothing? Young people because they grow, change size and have to buy new; and because, well, they change fashion. When you think of it, fashion is just a marketing gimmick designed to get you to replace clothes that are actually just fine. Just not stylish.

OK, so we've looked at the big three categories. The main driver in each case is new family formation. New families buy houses (an individual's largest purchase), cars (the second largest) and have kids (third largest). Old families, by and large do not, except when they're enticed by greed, envy or a sellers' market in houses. What drives a sellers' market -- where more houses come up for sale -- rising demand. What creates rising demand? More buyers than sellers. What creates more buyers?

More people.

Well, here we are at the immigration/baby issue again. What a surprise!

The problem with this relationship -- between economic strength and rising population -- is that it's really a pyramid scheme in which the actual downstream costs of new people are deferred to more new people down the road. Each new individual requires new services for their new home and new car and new kids. The sewer and water, garbage, highways, and schools needed are financed by public debt. In other words we, the public, go into hawk so business can make a profit selling new products to new people.

Do you see anything wrong with this model?

One thing wrong is that eventually all flat ground in the country is covered by houses, roads and supermarkets. Take a look at the GVRD in Vancouver and you'll see what I mean. The second problem is that if you create an economy (factories, forestry, steel mills, etc.) that is dependent on growth, what happens when growth stops? Right. A depression. And then what happens to the debt I just mentioned? Right. Cities default on their borrowings.

Then what? Hyper inflation.

Then? Fascism. Or Communism. Or some other totalitarian 'solution' like, say, Islam.

What are we to do about all this mess? I have an idea, but I'll save that for the conclusion to this series in a third post.

In the meantime, happy shopping.

 

[a_majoor]

http://mesopotamiawest.blogspot.com/2007/03/steady-state-economics-iii.html

Steady State Economics III

The following post discusses economic development, foreign aid, immigration and Islam in a way you may not have seen before. It's my belief the solution to the first issue contains the solution to the last. Comments are welcome. Third in a series.

I'm going to use another example to illustrate the current Canadian economic model and why it's essentially a confidence game. Imagine a very, very large house, many thousands of square feet in size. Now imagine that only a small part can be lived in because heat, water, sewers only extend to about 10 percent of the floorspace. You are a family of five and in the ten percent there's plenty of room for each family member.

Now let's imagine that your business is home renovation. You sell lumber and drywall and nails and plumbing and you also provide architectural services, builders, financing, the lot. But here's the catch; you can't sell enough of these things to other home owners to keep your five family members busy. The wife suggest you invite in some strangers she wants to befriend. She also gets pregnant.

How convenient! You get your stuff and start subdividing the area of the house that's livable. It's messy with all your sub contractors and trades tromping through, and for a while there's nowhere to put the strangers and the baby, but eventually you get the rooms fixed up and there's now eight people at the family table. Of course the strangers didn't have any money (nor did the baby unfortunately), so you loaned it to them.

Now let's keep this model going for a few generations. More strangers move in, more babies are born, more loans are made (some are repaid, but the total debt keeps growing). Things are perking right along except that there's a lot of construction dust, shavings, odds and ends in one part of the building and there's quite a lot of wear and tear in other parts that haven't been built or renovated recently.

Then one group of newcomers says it doesn't like the house rules. It wants to set its own rules and, actually, it would like you to change your rules to match its rules. You try to accommodate them (Dalton McGuinty, hello) but there's no changing their views and they deliberately burn down your garage t0 send you a message. Humm, you think. I'm on the hook for a whack of dough, the house is a mess and I appear to have invited some deranged terrorists in to my house. What to do?

Solution One
It should be clear from this little vignette that the original mistake was to subdivide the home in order to find 'customers' for your business. What a crazy concept. You should have tried harder to sell your services to other 'home' owners who need them. Switching out of the analogy for a moment; the mistake was to rely on new domestic consumption for growth. You should have relied on export sales. New domestic growth should be satisfied at the natural rate of that growth (the actual replacement rate), not a forced version of it (replacement + immigration). Just because it's easier selling domestically doesn't make it right. This is a crucial mistake. Stop it! Export sales (above replacement rate sales) are the only sales that are morally justified.

The issues facing Canada as a country -- crumbling infrastructure, poor health services, exorbitant University fees -- are all related to a failure to replace existing services and a fixation on building new ones. Of course services in the inner city are crumbling; you're spending all your money in Barrie! Hello, Dalton!!

Let me divert from the main stream of this argument for a moment. In a growing country (Canada in the 1890's say) it's obviously necessary to provide for internal needs. But if you want to maintain your society, having achieved certain levels of development, it's necessary to switch to export sales for the vast majority of your business. The Government of Canada understands this is desirable (witness Export Development Canada), but it doesn't realize this is essential. Essential! Let me say that again. Export sales are the only morally justified sales for industry and business. Insisting on domestic sales is like your wife insisting on inviting the neighbours to live in your home and insisting that you renovate your home to accommodate them and providing them with the credit to do so. Nuts!

I know, you'd like an example. Here it is: Britain in the 1890's at the height of the British Empire. Number of net immigrants: zero. Number of emigrants, plenty. Prosperity? Unmatched in British history. Why? EXPORT SALES!!!!

Solution Two
Let me start by saying Conservatives are not against public-private partnerships, witness the CPR. Nor are they against major public economic initiatives, witness the North American Free Trade Agreement. This should mean they should agree to the following: targeted country-by-country economic partnership agreements in which the equivalent of the money Canadian governments currently spend on infrastructure to accommodate new growth (population fueled by immigration) would be spent on one country after another on condition that all the infrastructure be purchased from Canada. So, let's take Trinidad for example. We spend several billion dollars in infrastructure in Trinidad and Ellis Don and Syncrude build it.

The same would go for all our forest products industries, mining, auto manufacturing: the products shipped would be paid for by the rising wealth of the countries to which they were shipped.

Foreign aid as currently constituted is pathetically inadequate and ridiculously poorly targeted. Any country that provides foreign aid to China -- now the World's economic power house -- is a country living in a time warp (this would be Canada. Hello Stephen!!). We should pick our target countries, pick our deliverables, pick our industries and do a renovation job on other countries, not our own. Altruism in this case is just good business sense. The profits from this economic activity can be spent improving our existing infrastructure, our existing cities, our existing hospitals and centres of higher education.

Solution Three
Canada should pick a target population and then take whatever measures are necessary to reach it and maintain the population at that level. For example. Let's say we pick 34 million, reach it in ten years and then find the population is in decline (having turned 0ff the immigration tap); the government could start providing incentive baby bonuses that it could keep increasing until they drove the numbers back up. The bonuses could be scaled back later because the government could point to the target population having been achieved.

What's wrong with this? Nothing. We do good deeds in the world. We improve the living standards of the Caribbean, of Africa, of the Middle East (Kurdistan comes to mind) and we make money, invest it in our own people and infrastructure, and in more targeted foreign aid. A virtuous cycle.

Solution Four
Astute readers will have found the flaw in this scenario by now; what happens when all the world reaches the same high living standards? Close all the factories?

Absolutely not. As we rise to parity around the world, industries should retool for the great wave of exploration and expansion to neighbouring planets and solar systems, just like Europe tooled up for a great wave of expansion and exploration when it discovered the New World.

Utopian? God I hope so. The current economic model is positively antediluvian. Biologists talk about the possibility of resurrecting dinosaurs with DNA. Hell, we've got a dinosaur economic model right here in River City.

When are we going to move on?

Soon I hope.

And pray.