Are there limits to growth?

By |  December 4, 2012

By David Chereb

Of course there are limits. But too often the discussion about limits occurs after we’ve had a few years of slow growth. Then we start releasing opinions and research articles about why this is the new normal.

It’s bunk; it’s nothing more than an excuse so we don’t have to make tough choices or make difficult changes. The U.S. and Europe used to grow at over 3 percent/yr. Now both regions grow at less than 2 percent/yr. Why aren’t we growing at over 4 percent/yr.?

Limits to growth

Most limits are time dependent. That is, if you have a fixed amount of resources, then there are many limits in the short run about how much you can produce. I grew up in a farm family so it’s natural for me to use a farming analogy. If you have 100 acres of land and 1 million seeds, there is only so much you can produce that season. Even if you have 2 million seeds you won’t be able to double production due to planting limits (i.e. each plant needs some soil and space around it to grow).

But what about over 20 years? If that is the time horizon, it is possible that with new super seeds and fertilizer that same 100 acres will now yield more than double the crop harvest of 20 years ago.

Think of the various reasons for limits to growth just in the past 40 years. Here are just some of the limits:
• Water
• Land
• Minerals
• Energy
• Pollution
• Climate

All of these are valid reasons restricting growth (in the short run).

And even though it is true that each one can impede growth, there are at least three reasons why none of them are true limits. One, we frequently find new sources of the resource that we didn’t know existed. No matter how smart we think we are, in 20 years we always wonder how could we not have known about the new resource field. Two, when something is scarce, its price goes up. If you had the last 1,000 barrels of petroleum left in the world, would you sell it at $100/barrel? When you get down to just 100 barrels left, would you still sell it at $100? By then someone is probably offering you 50 times that price. As the price goes up, use goes down and the remaining inventory lasts longer. Three, and the most important reason, technology changes. Do any of you still use the original Mac? Today’s computers are vastly faster and cheaper. Fifty years ago five of the top 10 companies on the Fortune 500 profit list were oil companies. Now only two of the top 10 are oil companies. Apple (#3) and Microsoft (#4) were not yet created.

As long as humans remain curious and innovate, we will adapt to and create new environments. We yearn to innovate.

How fast can we grow?

Production and growth occur by transforming inputs into more valuable outputs. Typical inputs are: labor, capital (equipment, buildings), land, energy and knowledge. Adding more of any of these to production leads to more output. If all inputs double, then output doubles. Smart growth occurs when inputs are used in more productive ways; i.e. by innovating.

Rapid growth requires not only more labor, capital, etc. it also requires an environment that fosters growth. The chart shows some of the major environmental factors that make rapid growth likely. These factors work in a synergistic fashion. Combining capitalism with entrepreneurs and new technology results in a true multiplier. For instance, median household income increased 18% between 1984 and 2007, a period of relatively rapid growth. However, since then incomes have dropped by 8% per household showing the pain that slow growth causes. Even if my income hasn’t increased, many of the things I buy have dropped in price during that period: computers, TVs, cell phones, etc.

By the way, notice anything missing? In potential growth equations and models, there is no government; there is no QE3 or Federal Reserve. Why not? Because most government spending, deficits and monetary policy are short run tools that do not increase our innovation or our productive capacity to grow. Growth is about producing more cars, computers, software, drugs, etc., more efficiently. Highly efficient and productive societies grow faster on average and become rich societies.

China had about 1.1 billion people 20 years ago, but it produced only $392/yr. on average (1990 GDP per capita, 2,000 US$). Now China produces about $2,425 per capita (as of 2010). That’s over 9%/yr. in real terms and means its average income is six times higher. That’s quite an achievement in 20 years when land hasn’t grown and population is only modestly larger. In China’s case, it decided to adopt capitalism and its growth shot up to where many people think it will become the new number-one economic power within the next 20 years. Capitalism for China means make as much money as you want but keep quiet about politics. So far, it’s working economically.

So if China can go from averaging less than 4%/yr. growth to over 9%/yr. growth, why can’t the United States grow at over 4%/yr.? We can, but we don’t want to.

Because we don’t want to grow rapidly we make up excuses for why we can’t grow rapidly — then we don’t have to do the things it takes to get there. Similar to losing weight.

Alternative growth paths: a high investment path vs. no policy changes (baseline)
The charts show two very different paths — one we call the High Investment Path and the other a continuation of current policies. How we get to the High Investment Path is shown after the charts. It will require major changes to begin to move along the High Investment Path, but over time there is a large payoff: higher employment, higher profits and higher personal income.

 

The two growth paths we have shown have an even more dramatic impact on construction materials. Construction has a high beta, to use a stock term. Without rapid growth, there just isn’t much need for more construction.

How do we reach 4+% growth?
History supports the conclusion that private investment outperforms public investment — most of the time and for most things. Therefore, to grow faster we need more private investment. Next are a few ways to get to 4+% GDP growth. This list is not exhaustive.

Rapid GDP growth is a winner for workers, owners and politicians. Faster GDP growth means higher demand for workers and higher profits for business. Faster GDP growth means higher tax receipts, which can be spent on more government programs or given back to the people. The vast majority of stake holders win.

Short run vs. long run

Getting from under 2%/yr. in GDP growth to over 4%/yr. is difficult and won’t happen in our current situation. There are just too many road blocks in our way; political, educational, financial and, most importantly, we don’t have the mind set to try. Many people reading this don’t think it’s possible and therefore won’t support the changes required to make it happen. We went to the moon with Apollo 11 because we worked very hard at it. It might have failed, but it’s for certain we wouldn’t have gotten there if we didn’t try. And we did all this in less than 10 years (1962-69).

An aggressive growth effort will get us to 4+%/yr. in less than 10 years. Ten years is not that long. Sept. 11, 2001 was more than 10 years ago. Ten years ago Microsoft was worth about 30 times Apple. A lot can happen in 10 years (Apple is now worth twice as much as Microsoft). Also, trying to accomplish something worthwhile is very satisfying.

Is it wise to grow?

Maybe it’s not worth it to make the changes necessary to grow rapidly. After all, it means rewarding innovation and those who innovate. It means becoming business-friendly. It means reducing the debt/GDP ratio. We are not headed in this direction now and to change course means new winners and losers in the short run even if almost everyone wins in the long run (i.e. within 10 years).

While a discounted cash flow model can show how the benefits are greater than the cost, it cannot decide voters’ attitudes towards more growth, higher average incomes and continued income inequality. Even if the outcome is that 95% of the people gain, some may reject this path because 5% will be worse off. Those who favor rapid growth, such as me, cannot convince voters to enact these policies if a majority of voters will not accept any policy that makes one person worse off. That’s why it is likely the U.S. will suffer slow growth for another decade. Rapid growth is a result of enacting rapid growth policies.

Capitalism produces rapid growth. Rapid growth produces wealth.

Dr. David Chereb has many years of experience forecasting construction materials, and his web-based forecasting models have captured every major turning point in materials demand for more than 15 years. Chereb received his Ph.D. in economics from the University of Southern California. He can be reached at dc@davidcherebgroup.com.

 

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