Shifting the economic system onto a sustainable path

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By Graeme Maxton

[Editor’s note: Graeme Maxton and Jorgen Randers are the authors of Reinventing Prosperity: Managing Economic Growth to Reduce Unemployment, Inequality and Climate Change, (Greystone, 2016).  The German Edition is Ein Prozent ist genug (One percent is enough)( oekoem Verlag, 2016 ). Graeme Maxton is the currently Secretary General of the Club of Rome.  Jorgen Randers is  one of the original authors of The Limits to Growth (1972) and Professor emeritus at the BI Norwegian Business School]

For most of the last 30 years there has been strong economic growth in the rich world and yet unemployment has remained stubbornly high while the gap between rich and poor has widened. According to traditional economic thinking this should not have happened. High rates of growth should have created lots of new jobs, for a largely stable population, and spread wealth around more evenly, especially as it was supplemented by more open trade and less market regulation, two other economic foundations praised by traditional economists for their beneficial impacts. Instead, average standards of living have stagnated or declined in much of the OECD and only the rich have become richer.

Because the problems of unemployment and inequality have affected such a comparatively large percentage of the population, and absorbed so much political effort, they have made it much harder for humanity to address its big environmental challenges, such as climate change. This is partly because many politicians and business people think that any substantive response to the ecological problems will make the economic situation worse. That is, they think that the steps needed to reduce energy-related emissions and slow the pace of climate change will bring slower economic growth, further job losses and even wider inequality, at least for a while. As a result, economic policies remain predominately focused on the promotion of further GDP growth and greater market liberalization.

Yet continuing on the current path makes no sense, because the ever-widening gap between rich and poor that it causes will eventually undermine social stability. The existing path will also ruin the planet for future generations. If emissions continue to rise as they are currently doing, the level of CO2 in the atmosphere will reach 450ppm by around 2035 which will make a 2°C increase in average global temperatures compared to pre-industrial times a certainty by 2050. Among many other consequences, this will spark runaway climate change, which the vast majority of scientists say would be impossible to stop and which would eventually have catastrophic consequences for the majority of living things.

So there is a need for alternative economic thinking, and a change to the current ideology.

In the past, attempts to encourage a transition to a more sustainable economic system have failed largely because they have appealed to people’s good consciences, to their desire to ensure a better life for their grandchildren. They have involved asking people to make a short term sacrifice – to reduce consumption and emissions, in effect – for a long term and largely unquantified benefit, most of which will accrue to others, that is, the next generation and nature. This has not been an appealing message for the majority, whose interests are greatly focused on their immediate problems, including unemployment and inequality, and so it has failed.

For any sustainable policy to be acceptable then, it needs to provide a benefit to the democratic majority in the short term, because that is what motivates most people.

A new approach should also avoid making the current problems worse in the interim, to overcome the other major stumbling block.

In a new book, Reinventing Prosperity, written by Jorgen Randers and me, we provide 13 politically feasible proposals to achieve this transition in the rich world. (We think that the approach needs to be different in the poor world, as the challenges there are different.)

In formulating these proposals, our goal has been a future where average living standards are higher than today and the pace of climate change is greatly slowed. We believe that by combining our ideas—by grafting them onto the current economic system—it is possible to steer the world toward a better future. Almost all of our proposals will need to be implemented gradually, over many years, to give the economic system, businesses and society time to adjust.

13 proposals to shift the economic system onto a sustainable path in the rich world

1. Shorten the length of the work year

Every year a certain amount of work is done in an economy. Typically, only part of the workforce is fully employed in doing this work, while many others are employed part-time when they would like to work more. There is also a large number of people who are unemployed. This problem exists not because the economies of the rich world need to grow more, but because work, incomes and wealth are so unevenly shared. If the GDP of the OECD is divided by the population, as a simple proxy for average income and economic value per head, there is already more than enough output for everyone. Logically then, if the work can be shared more evenly, those employed full-time could work less, giving others the chance to work more. With a little jiggling, everyone can have enough work, and sufficient income to live comfortably, without there being any economic growth at all. The way to achieve this is to increase the amount of paid vacation time each year, by around two days a year, over 20 years.

For this idea to work best, vacation time needs to be compulsory and self-employment discouraged.

Norway, Germany and other European countries have already applied this policy systematically since 1960. The citizens of these countries have a work year (1,600 hours a year) which is much shorter than that of US workers (2,000 hours). Incomes in these countries remain high, vacations are longer, productivity is good – and well-being has risen.

2. Raise the retirement age

To raise the compulsory retirement age and boost the size of the workforce at a time when there are already too few jobs in the rich world, and when robotisation threatens to increase the number of unemployed even further, might seem counterintuitive. Yet, combined with our other proposals to shorten the work year (proposal 1) and provide a basic income for those who need it (proposal 13), raising the retirement age makes sense. If the elderly want to work and look after themselves, and not become a drain on the welfare system or their families, this should be encouraged. It means others can work less, because they will not have dependents to care for, and governments can spend less than they otherwise might on healthcare and welfare.

3. Re-define paid work to include home-carers.

Some essential work done in the economy currently goes unpaid while some of exactly the same work is paid. This is an anomaly that society can easily correct and simultaneously boost the size of the workforce, increase GDP and redistribute income. In this case, we are talking about the home-care sector, where millions of (mostly) women spend their days looking after children and the elderly. They mirror what happens in the rest of the economy, in schools, kindergartens, hospitals and care-homes, only the work they do at home is unpaid while those employed elsewhere are paid. So our third proposal is for the state to pay all those who provide care at home, to recognize the valuable work they do and bring millions of people into the economy.

This proposal would also help soften the impact of aging populations in many rich world countries. Today, many families find themselves stuck in a situation where they have to care—without pay—for their ailing parents. If this work was properly remunerated it would reduce the pressure on the public health system, not only by requiring fewer places in nursing homes, but also because it is often cheaper and better to care for the elderly in their homes.

4. Increase welfare payments.

Our next proposal is for governments to increase welfare payments. This would quickly reduce inequality and social tension, and with it the growth of political extremism. This is essential for another reason though, because many millions of people will need a proper safety net if there is to be a transition to a healthier and less polluting economic system. Positioned correctly, companies should welcome the idea of higher welfare payments too, because it will boost consumption in the short term, and make it easier for them to boost efficiency through mechanization by reducing backlash from those being made redundant. Businesses would need to pay higher taxes on their earnings to cover the cost of this, of course, and also to share the rewards of greater robotisation more evenly. This proposal would also result in a long term decline in total consumption (and so the human ecological footprint) as incomes were spread more evenly.

5. Tax corporations more

Increasing corporation taxes is not just about raising funds for the state to redistribute. It gradually changes the structure of the economy. It increases demand for public services (those things that governments buy with their increased tax revenue) and a lowers demand for investment goods (those things that rich individuals and corporations buy with their excess liquidity). This leads to higher consumption growth in the short term, but lower consumption growth in the long term—because of the lower rate of addition of new productive capacity. During the transition there may be a temporary increase in unemployment and smaller business profits, but not in the long run: higher taxes simply change the balance of the economy.

If governments are wise enough to use part of the increased tax income to pay for the production of collective goods, such as improved energy efficiency, reduced emissions of greenhouse gases, and a cleaner environment, the tax increase could not only maintain GDP and jobs, but also lead to a reduction in the production and consumption of physical goods that increase the human ecological footprint. Increasing business taxes provides the opportunity to gradually increase the time-horizon of the banking and finance sector too, reducing the substantial risk it currently presents to economic stability by accentuating and amplifying short-term fluctuations.

6. Expand the use of green stimulus packages

Non-profitable collective activities, such as increasing the capacity to generate renewable energy or reduce inequality through higher welfare payments, can be paid for through higher taxes or they can be financed by printing money. Cranking up the printing presses has the advantage of spreading the cost across society in the form of slightly higher inflation. The idea should also find political support, because it would create a number of interesting new jobs.

The “green stimulus packages” adopted by some rich nations after the 2008 financial crisis can serve as a model. At the time, these failed to have the reflationary impact that was expected because the money was not given to those who needed it – the poor and unemployed – but to the rich. The rich proved unable to find enough investment opportunities because there was so little unsatisfied demand, and so they used the money instead to drive up the cost of other assets (real estate, shares, etc.). Unemployment remained high and GDP growth anemic.

We propose that QE continues, in other words, but that the money is invested in an energy transition and in actively reducing the gap between rich and poor.

7. Tax fossil fuels and return the proceeds in equal amounts to all citizens

Our next proposal is to adopt, in a slightly different format, James Hansen’s idea of taxing fossil fuels and distributing the income equally among adult citizens. This benefits the majority, the poor and those with lower energy consumption, while encouraging a shift to clean energy.

The tax would be levied at the coal face, oil well, or gas pipeline entry point (or at the port of import) and returned to the people equally in monthly pay cheques. This would make coal, oil and gas more expensive, and accelerate the transition to renewable and energy efficient activity. The dividend cheque received by the majority of people would also be larger than the extra cost of energy, since most people use less than the average. So the policy will benefit most people and also be re-distributive. The majority would have an immediate short term cash advantage and everyone would have an incentive to use less dirty energy. As fossil energy use declined, the tax could be increased to maintain the flow of revenue or applied to other undesirable activities.

Iran has used this method to reduce its subsidies on fossil fuels. To gain popular support for the measure the government started by sending cheques to all households one month before they cut the subsidy.

8. Shift taxes from employment to emissions and resource use

If we are to stop climate change and still have expanding economies, growth needs to become “green”, in the strictest sense, meaning it should decrease the ecological footprint.

One way to achieve this transition is for externalities to be charged back to businesses using Pigovian taxes. Companies then pay the full costs for what they produce, as classical economics says they should, and governments have a source of revenue to assist in dealing with the negative effects of pollution. Of course almost everything that is consumed would then cost more, and so the policy will need to be implemented gradually. Demand for many items would also gradually decline, though GDP need not as it is a measure of value not volume. Companies would then find it more profitable for goods to be repairable and recyclable, and to last longer, reducing the human ecological footprint. The sales revenue and profitability of companies need not necessarily decline either, if prices increase to reflect added costs.

Contrary to popular belief, switching to a green economy could also create millions of jobs, many of which would be more satisfying jobs than those that exist today, with more people employed to repair, redesign and recondition products, rather than working on the drudgery of a production line.

9. Increase death taxes

The next proposal is that the unfair transfer of wealth to those lucky enough to be born to rich parents should gradually be phased out. The state can then devote the proceeds according to agreed social priorities rather than leaving the choices to wealthy individuals.

10. Encourage unionization to boost incomes and reduce exploitation

For many people, this proposal will seem heretical because there is today a widespread belief that the greatest human achievements of the last 100 or so years are the result of innovations by a relatively small number of enterprising individuals. When it comes to democracy, freedom, improved human rights and higher average standards of living, health and education, however, most of the important gains have been the result of large and organized groups of people demanding change – first in the work place, to make it safer and to reduce exploitation, and then in wider society, to demand a greater say in the political process, equal rights for women and less discrimination generally. Much of this was achieved with the explicit and essential support of trade unions. More of that sort of thinking will make the transition to a sustainable economic system easier.

11. Restrict trade where necessary

Trade policies should in future be designed for the benefit of the majority. Today, free trade and open markets have become accepted as essential pillars of a healthy economic system, even though the policy is mostly to the benefit of big companies. It allows them to shift manufacturing overseas and then re-import whatever is produced, tariff free. So the next proposal is for governments and society to think a little harder about trade, and to act on the basis of wider social interests, jobs and well-being. By imposing tariffs on products that damage the environment, a progressive country can also encourage others to do the same.

12. Encourage smaller families

While the world has improved its energy and resource efficiency dramatically in the last 30 years, these gains have been more than offset by the near-doubling in the number of people, with the result that the total human ecological footprint has continued to rise. Humanity lives today as there were 1.6 planet Earths, something which is only sustainable for a short time.

Fixing this problem is hard and without some sort of famine, war or pestilence on a near-global scale, the number of people in the world will continue to grow for many decades, and with it the pace of ecological damage. It often appears as if the only steps that can be taken to reduce the rate of population growth are to improve levels of education, especially of women, encourage wealth distribution from the rich world to the poor world, increase urbanization and provide easily available contraception. This is certainly what we advocate in the poor world.

A new proposal for the rich world is to reward families that have one child only, or none. We propose a financial bonus of $80,000 to be paid to every woman in the rich world with fewer than two children on her fiftieth birthday. This will help strengthen the status of women and further increase their influence over the crucial decision of family size.

We do not pretend that such an idea will be easy to implement, or indeed easy to accept. We accept, too, that there are all sorts of practical problems, such as how societies should reward singles, same-sex couples, the infertile, those who adopt children, and couples who have twins, triplets, or more when they planned for just one child.What we are trying to encourage is a change in mind-set—and for the rich world to lead by example, because a child born in the US or Europe creates as much as 30x more ecological havoc than one born in the poor world.

13. Introduce a guaranteed livable income for those who need it

Many of the previous proposals move the rich world closer to having a universal basic income. However, providing a basic income for everyone today is likely to be politically divisive, especially in those countries most wedded to the current economic model. So our last proposal is only to provide a basic income, at about one third of the national average, to the sick, the elderly and the unemployed. We also know this is possible without a revolt from the rich because something like it already exists.

A rich nation generates economic value per person of around $40,000 a year (in 2005 USD terms) and so it is theoretically possible to pay each citizen a decent income. Unfortunately, such a dramatic redistribution is not feasible. It would require imposing high taxes on those earning more than $40,000 a year and negative taxes on those earning less, as well as direct payments to those without an income.

Unfortunately, the current income distribution in the rich world, while skewed, is not skewed enough to achieve this. The Palma Ratio (the share of income received by the richest 10% divided by the share of income received by the poorest 40%) ranges from 2.5 in poor countries to 1 in the OECD. This means that even reducing the income of the top 10% by a quarter would only increase the income of the poorest 40% by 25%. So, redistribution can only be used to increase the incomes of a minority, and not for all.

Back-of-the-envelope calculations show what is possible.

In Nordic countries, around 27% of the population (POP) are dependent (pensioners 15%, disabled 6%, sick 3%, unemployed 3%), and all receive around $15,000 a year. So the total transfer is 27% x POP x $15,000 out of the total national income of 100% x POP x $40,000. In other words, around 10% of the total is taken from those who work and given to those who, for some reason or other, do not.

So it appears to be financially and practically possible (at least in homogeneous societies) to pay a guaranteed income equal to 40% of the GDP per person to 30% of the population. If $15,000 a year can be regarded as “livable” in societies where the average GDP is $40,000 a year, then it is possible to pay a livable minimum income to a third of the population—without going broke, inciting the rich to move abroad, or sparking a tax revolt. But that is probably the limit of what can be achieved.

We have provided much more extensive analysis on each proposal in our book as well as a range of additional reading.

To many people, these proposals will seem an idealized list that has absolutely no chance of being accepted by those in power—by which we mean financiers, the rich, and big corporations, not elected politicians. Many will also be resisted by those who fear losing their jobs or paying more tax. But we have deliberately offered proposals that we believe have a chance of being politically accepted. This is because each of our proposals, with a couple of exceptions, provides an immediate benefit to most people. They should appeal to the democratic majority, which in much of the world still carries enough weight to push through change—although we acknowledge that this is likely to take time and be difficult in a number of countries.

From: pp.2-5 of WEA Commentaries 7(1), February 2017
https://www.worldeconomicsassociation.org/files/Issue7-1.pdf

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