July 30, 2021
What if the world – the global economy, businesses, stock markets, governments, everything – just stopped growing?
Growth has become so ingrained in the human psyche that it’s practically a part of our civilizational DNA… Bigger is better, more is good, forever. To thrive, to survive, to succeed, we need to grow, and to stay in one place is the worst kind of failure. The notion of no growth is like stripes with plaid, petting the cat against the grain, ketchup with filet mignon… It’s contrary to our most basic instincts, a violation of our very (economic) humanity.
Right now, the notion of no growth seems all the more impossible and remote as the American economy rebounds from COVID-19, featuring waiting lists for used Corollas, unanswered ads for $15/hour dishwasher jobs at Denny’s, and parking lot overflows at the local Target. The International Monetary Fund forecasts that the U.S. economy will grow 7% this year – which is a very long way from zero growth. And meanwhile, much of the rest of the world will likely in coming months enjoy a post-COVID bounce at least as vigorous as that of the U.S.
But looking past the post-COVID recovery, make no mistake: We’re moving toward a no-growth world, where stock markets return 0% in a good year… economies stay the same size… companies struggle just to keep what they have… and everyone has a frame of min
d that isn’t about growing and bigger and expanding. Instead, it will be focused on keeping things like they are – at best.
That’s not to say that change won’t happen, or that innovation will end: If anything, the pace of evolution will accelerate, as the scramble to find and create new markets and gain share in a flat market intensifies. Parts of the economy will grow, while others will shrink… But though the ingredients of the global economic goulash may change, there won’t be any more of it.
To a global economy that genuflects before the gods of growth, this sounds like atheism. And the adjustment – in terms of politics, perspective, people, and paychecks – won’t be easy.
But it’s not all bad… And there are three big silver linings that we – or, more likely, our kids and grandkids – will come to appreciate, as growth goes the way of tipping 10%, communism, and the Oh Henry! candy bar.
First, though… growth – and why it’s going away.
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Sisyphus and the Growth Obsession
“Without continual growth and progress, such words as improvement, achievement, and success have no meaning,” Benjamin Franklin said.
It’s a sentiment that the global economy – and America’s in particular – has taken to heart. It’s never good enough to make as many cars… write as many lines of code… harvest as many apples… or sell as many talking refrigerators, as last year, quarter, or month. As Mr. Franklin implies, without growth, there is no progress… And without progress, there’s stagnation. And there’s certainly no improvement, achievement, or success.
Last December – in the midst of a global pandemic – retail sales in the U.S. declined by 0.7% compared to the previous month. So for every 1,000 Vitamix 5200 Blenders that were sold in the earlier period, 993 were sold in December… If there were 1,000 Lego Millennium Falcon kits sold in November, 993 were bought in December.
In many realms of life, that kind of change isn’t even perceptible… It’s a rounding error. If I take 0.7% fewer steps today than yesterday, I wouldn’t notice. Speak 0.7% fewer words? Wouldn’t notice.
But in the weird universe of markets, it’s a catastrophe. That decline in retail sales last December, according to one economist quoted in the Wall Street Journal on January 15, was “an absolute disaster.”
Growth means to do, sell, produce, manufacture, cobble together, write – everything that we did last time during the period… and then do even more. It’s that even more that matters, without which we’re an utter failure.
And growth means that we have to do that this year… And then restart the growth clock the next year. And then do even more the following year. And so on.
It’s Sisyphus, the Greek mythological figure condemned to roll a boulder up a hill for eternity – and every time he got close to the top, it would roll back down, and he’d have to start all over. Put through a modern growth prism, if Sisyphus didn’t get a little bit closer to the top this time – well, he’s a total failure.
Soon, though, we’ll have to get used to the “failure” of not growing. That’s because the two key drivers of growth – productivity and people – are running on fumes.
How Much More Productive Can We Be?
Productivity is a reflection of the efficiency of an economy’s workers. If more people in a country are doing economically productive things like making widgets, frying French fries, or selling mops – and they’re doing it more efficiently than they did in the past – the overall economy will grow. As think tank Brookings explains…
[Productivity growth] can happen because workers become more skilled or more educated (increases in human capital), because workers have more physical capital to use in their efforts, or because of an overall increase in productivity from a combination of factors. This last element—often measured simply as the increase in output that cannot be explained by increases in labor or capital—is attributed to better technology, better management, and better institutions.
Growth in productivity in the U.S. has been slowing over the past 50 or so years, except for the decade starting in the mid-1990s. And over the past 10 years, it has been increasing at only 1.3% per year. Much of the rest of the developed world has suffered a similar deceleration in productivity.
That’s been partly a function of the law of big numbers: It gets more difficult to grow – whether it’s jars of peanut butter sold, sales forecasts completed, iPhones assembled – as the baseline level increases each year. Selling those additional 10 Vitamixes (after selling 1,000 already) to post 1% growth this year becomes more difficult each year – in the same way that being just that tiny bit more productive each year becomes a more Sisyphusian challenge each year.
And the one-off bump in efficiency thanks to the rise of the computer age has mostly run its course. While there will always be some new technology to improve efficiency (digitization, the cloud, artificial intelligence… take your pick), as the base continues to rise, any improvements will be incremental at best. Productivity growth is slowly decelerating towards zero.
Again, it’s doing all the work you did last year… plus something extra on top of that. If you can only do as much as last year, efficiency hasn’t improved… and there’s no growth.
The Demographics Are Dark
A rising population is a necessary – but not sufficient – ingredient for sustainable long-term economic growth. Even an economy where everything else is supporting productivity – like good policies, solid leadership, and sound macroeconomics – will in time struggle to grow if its population isn’t increasing in size.
The master key of demographic growth is the fertility rate, which is the average number of children that a woman gives birth to during her lifetime. It’s the most important indicator of the future size of the working age population… and thus, long-term economic growth.
The fertility rate in the U.S. hit a 35-year high in 2007, at 2.12 births per woman. But even that was only just above the replacement level (the number of children required to “replace” their parents) fertility rate of 2.1.
But since then, it has fallen steadily… dropping to a record low of 1.64 in 2020. Last year, there were more deaths than births in half of all 50 states.
The decline meant that the U.S. has joined the much of the rest of the developed world in sub-replacement level fertility. In fact, globally, fertility has been falling for decades. The average woman in 1960 gave birth to five children in 1960 – and just under half that, at 2.4, in 2019.
But even that level is aspirational for much of Europe and Asia – including Spain (1.2), Germany (1.5), Japan (1.4), and South Korea (0.9), according to World Bank figures – where the birth rate has long been well below the replacement level. Perhaps most alarming for global growth, the fertility rate in China – the world’s most populous country (for now… India is about to catch up) – has collapsed from 6.4 births in 1965 to around 1.5 today.
According to a widely discussed July 2020 article in medical journal The Lancet, by the end of the century, the populations of 183 of the 195 countries in the world will have shrunk (absent dramatic changes in immigration policies, which are politically unpalatable in most countries). A total of 23 nations – including Italy, Spain, Japan, and Thailand – will have at most half as many people as they do today. In another 34 countries – including China (down 48%) – the population is likely to drop by between a quarter and a half.
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Code Red for Growth
Both productivity and population growth are slowing. And it follows that growth as well… In the U.S., annual economic output grew by 4.7% in the 1960s… slid to 1.9% in the ‘00s… and nudged up to 2.3% in the ‘10s. Globally, it’s been a similar trajectory. And despite the slight recovery over the past decade, the long-term direction is clear.
And it’s time to recalibrate our expectations. As fund manager and economist Ruchir Sharma wrote in his 2020 book, The 10 Rules of Successful Nations…
Every class of countries needs to reset its economic ambitions at a lower, more realistic level. The benchmark definition of rapid growth should come down from 3 percent to between 1 and 2 percent for developed countries; from 5 percent to between 3 and 4 percent for middle-income countries such as China; and from 7 to 5 percent for emerging countries such as India.
That’s just a start. Given trends in productivity and demographics, zero growth is an inevitability.
Time For A New Model
The old model, where growth is God, is slowly grinding to a halt. And it’s just as well.
Nobel laureate – and former U.S. secretary of energy – Steven Chu has described the global economy as a “pyramid scheme” in which more and more younger workers are required to pay the steadily escalating costs of retirees. Demographer Joseph Chamie, writing in The Hill, has described pressure for population growth as “Ponzi demography” that is…
A pyramid scheme that aims to make more money for some by adding more people through population growth [higher fertility and immigration].
The underlying strategy of Ponzi demography is straightforward: privatize profits and socialize costs incurred from increased population growth.
Put into stock terms… as growth approaches zero, the global economy will shift from being a growth stock to a cash-flow and dividend story. That’s a difficult – and if you’re a shareholder, costly – process…
Go-go growth stocks post booming increases in revenues and (sometimes) earnings. Think of Amazon (AMZN) in its earlier days… when the company doubled (or more) in size every year. As an investor, you buy a growth stock because its share price – if everything goes according to plan – will triple, quintuple, and more as the underlying business keeps growing.
In contrast, dividend stocks have steady cash flows – and they earn a solid profit – but they don’t grow much… Think of Grandpa’s boring old power utility shares, which generated a comfortable dividend (thanks to strong cash flow), but the value of the underlying assets (and the share price) didn’t change much.
For the global economy, this shift – from growth to cash flow, framed in stock terms – isn’t going to happen next year… or maybe even this decade. Demographics move at a pace that makes a tortoise seem like a hare. But our kids, and their kids, are going to live in a very different growth – or rather, no-growth – world.
And though it’s difficult to conceive of now – in our growth-worship day and age – that will actually be a good thing…
Why No Growth Is Good, Reason No. 1: More To Go Around
As demographer Chamie explained, slower – or no – population growth…
… will make it far easier to address problems such as climate change, environmental degradation, poverty, homelessness, extreme socio-economic inequalities and human rights abuses.
Many of the greatest pressures that humankind faces are, indirectly or directly, a function of one key dynamic: More and more, and too many, people. Every day, nearly a quarter of a million new humans are added to the global population. That further strains the ever-escalating demand on resources – both natural and man-made. Simply by treading demographic water, there would be more to go around for everyone who’s already here on earth.
Why No Growth Is Good, Reason No. 2: A Healthier Mother Earth
In late 2019, a group of 11,500 scientists co-signed a paper in the research journal BioScience declaring a “climate emergency.” One of the measures they proposed to address it was a re-think of economic growth…
Our goals need to shift from GDP growth and the pursuit of affluence toward sustaining ecosystems and improving human well-being by prioritizing basic needs and reducing inequality.
Another step they proposed was to stabilize, and eventually reduce the world’s population. That’s because having one fewer child, according to research from 2017, each year saves 58.6 tons of carbon dioxide-equivalent from being created. That’s 25 times more than the carbon dioxide created by a car every year… and 293 times more than what’s saved by recycling. And, not surprisingly, children born in less-developed countries are responsible for a tiny fraction of what’s generated by developed-world kids.
Why No Growth Is Good, Reason No. 3: The ‘Forgotten Continent’ Emerges
In terms of positive working-age demographics, Africa is about where much of Asia was around 1970 – just before the massive Asian Tiger boom that fueled the growth of what’s today the most economically vibrant region in the world.
And more broadly, one of the very few demographic bright spots in the world is Sub-Saharan Africa. The region’s population is expected to triple by 2100 – to more than 3 billion. That would be slightly more than one-third of the total global population at that point.
For generations, Africa has been an economic afterthought on the global stage. If economic and demographic growth flattens elsewhere, Africa may be one of the few sources of real growth. And one result would be billions of Africans – finally – enjoying the prosperity that’s evaded the continent for so long.
The shift to a no-growth world won’t be easy. The must-grow mentality won’t go easily. But if – when – it does, the world and Mother Earth may be better for it.
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July 30, 2021