The End of Economic Growth

We’re at the end of growth. Growth of the economy, of consumption, of wealth. That this would happen isn’t news to those who’ve followed the writings of Meadows, Heinberg, and many others.  What’s different now is that it may have actually arrived. I’d like to briefly look at our current situation in this context and synthesize the various ideas we explored in previous posts.

On Friday we learned that after only two years of expansion (mid 2009 – mid 2011), the U.S. economy is re-entering recession:

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.

ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down – before the Arab Spring and Japanese earthquake – to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”

Why is this happening so soon? What’s the bigger context here?

We’re not just entering a new recession – we’re at the end of growth as we’ve known it. We have passed or are near many of the peaks in natural resources, both by drawing down non-renewable resources and by hyperexploiting renewable ones.

For example, here are some points we’ve passed and haven’t looked back (approximate dates, from Heinberg and other sources):

  • 1979: Peak per-capita gross energy production
  • 1986: Peak grain per capita
  • 1989-1995: Peak wild fish catch
  • 1990: Peak net energy production
  • 2000: Peak fresh water availability
  • 2005: Peak conventional oil production
  • 2011-14: Peak all-liquids (conventional+unconventional oil) production

It’s possible to overshoot a resource base – civilizations have done it time and again – but only temporarily. The list above is a small subset of what we’ve depleted or are depleting, and many of the critical ones – oil, for instance – have no real substitutes. Even if there were substitutes, we would have needed to start a crash program 20 years ago to transition without economic impacts. It’s too late for that.

What are the consequences of these constraints?

There’s a simple cycle that we can now step back and observe clearly, and we’re going to be stuck in it for at least the rest of this decade if not the next one as well:

  • A recession occurs (2007-2008)
  • Demand falls due to the recession (2008-2009)
  • Oil/gasoline prices fall (2008-2009)
  • A recovery begins (2009)
  • The recovery self-sustains for a short period of time (2009-2010)
  • Oil prices rise due to increased demand (2010-2011)
  • The recovery falters due to increased oil costs (2010-2011)
  • A new recession begins (2011)

When oil prices hit $90/barrel last December, those watching oil prices were worried this would cause a new recession. By May I expected we’d see a recession within 12 months due to the persistent high oil prices we’d seen from December through May, as did many others.

How does this lead to the end of economic growth?

As the foundation of oil upon which we’ve built our industrial system crumbles, we will face direct economic impacts. Hirsch conducted further studies to try to understand how oil connects to GDP. He concluded that there’s roughly a 1-to-1 relationship: for every 1% oil production declines, world GDP declines 1%.

How much does he expect world oil production to decline? Here’s what he says:

Best Case Scenario: Maximum world oil production is followed by a period of relatively flat production (a plateau) before the onset of a decline rate of 2–5% per year.

This indicates that in the best case scenario we should expect a yearly 2-5% decline in world GDP, which is roughly equivalent to having a recession nearly yearly (though it’s unlikely to be that steady).

The trend break happened post-2005, when global oil production stopped increasing. We’ve been on a plateau of sorts since then. While the graph above is technically about oil, it maps directly to the economy: we’ve been on an economic plateau since then.

This recent chart from Calculated Risk shows that the latest GDP numbers indicate that we’re still below 2007-level economic activity once you adjust for inflation, and that’s soon to decline given the impending recession:

Given that oil production is flat and soon to be declining, what happens? We hit our head on the oil ceiling, a recession ensues, and as we begin to recover, we quickly find ourselves hitting our heads on the oil ceiling again because production is declining. This has two consequences:

  • After a recession, the recovery that ensues will only be a partial recovery: the economy won’t recover to a better state than it was in before the recession.
  • Recessions are likely to be more frequent (maybe on the order of every 3 years).  ECRI has observed that from the 1790s through the 1920s and during the 1970s economic expansions generally lasted 3 years or less, so the fact that post 2007 we’re back in an era of frequent recessions has historical precedent.  However, they don’t mention that those time periods have something in common: they’re the times when oil was either not a major part of the economy or wasn’t cheap.

The bottom line is that we’ve likely hit the end of economic growth in quantitative terms.

One would expect that this pattern would be of concern to policymakers.  However, there is consensus among the mainstream left and the right, Democrats and Republicans, liberals and conservatives that growth is good and should be our objective. What all of the above is indicating is that growth isn’t possible any more, regardless of whether it’s “smart growth” or not. We’ve reached the long-forecasted Limits to Growth.

What can be done?

To be honest, I don’t expect that much can be done top-down or bottom-up. The institutions we have, and the forms of activism we have, don’t work well to address problems like this. The best approach may be individuals and communities first coming to grips with this situation, and then taking action to become more resilient. It’s unlikely that there exists a rescue remedy that will solve the problems above.

Few people have taken all of the many possible steps towards becoming more resilient to this future – I sure haven’t – but I’m working on them slowly and think that there’s the possibility of a simpler and fulfilling life ahead if we’re willing to adapt to our new circumstances.

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