The Growth Doctors keep overpredicting growth

The growth doctors keep overpredicting growth. Greg Gerritt November 2015

This past week Reuters published an article “Watchdogs struggle to explain optimism bias in rosy GDP forecasts” by James McGreevy.

The article goes on to explain that of the last 30 forecasts on the global growth of the Gross Domestic Product by the IMF and the World Bank 28 were too optimistic. In other words growth has consistently been lower than the economists have forecast. The article goes on to explain that if the forecasts were based on a proper understanding of the economy the direction of inaccuracy would have been mixed. But it seems everyone in the profession is consistently wrong and the experts seem to have no idea why they are consistently wrong. The article ends with a quote that seems very relevant “Everybody assumes that there’s mean reversion, which is what happened pre-2008 happens now,” said David Blanchflower, professor at Dartmouth College in New Hampshire and another former policymaker at the Bank of England.
“They don’t get that it’s a different world now.”

For a while I have been pointing out (see links at the end of this essay) that the bias towards growth infests nearly everyone thinking about economic development, and that their bias towards growth, and their lack of understanding that it is a different world now, means that often they push policies and actions that they think will lead to growth, only to find that the world economy is gradually slowing down and the old levers do not move the economy forward,

“There’s no single answer for why, but economists say explanations include an under-appreciation of the damage done by the 2007-2008 financial crisis both to consumer demand and to banks’ willingness and ability to lend; the poorly-understood effects of increased global debt levels and a failure to predict surprisingly weak productivity.”

I think the experts are barking up the wrong tree and really lack an understanding of just how fundamental the changes in the economy are and the reasons for the changes. I am sure the factors mentioned above have something to do with slow growth, but a big part of why the policy experts over estimate how much growth is going to happen is that they actually refuse to look at the role of ecological collapse (including climate change) and inequality in downshifting the long term structural rate of growth for the economy. I also believe that the analysts are unwilling to look at how the resistance to the corporate order is changing the investment climate for the fossil fuel industries and other industries gobbling up the planet to build malls and fill them with plastic. The bias for growth extends even to the language. A shrinking economy has negative growth, do we need more evidence of bias in thinking. They can not imagine a world without growth. But they need to get used to it.

I doubt anyone in the US policy establishment, especially those working on development at the municipal or county level, is thinking about how the fires in Indonesia in pursuit of palm oil, are negatively impacting productivity, speeding up climate hell, damaging the health of millions of people, and sparking the resistance of millions in Indonesia and around the world. Both the fires and the resistance portend a world in which there is much less growth, and with growth concentrated in the places that are now the poorest. The old industrial world has passed its growth peak and is moving towards a steady state economy.

The fires are just one of hundreds of examples in which ecological catastrophe and public health crisis are jointly ripping holes in the global economy. Thankfully the resistance grows daily. Another example is fracking and the resistance to all of the gas infrastructure that is building in communities from Providence to Peru, to Oregon, where Portland just passed a city ordinance directing the zoning regulators to zone out fossil fuel export facilities. I do not think any prudent investor is betting on a huge pipeline infrastructure getting built in the US between the earthquakes, floods, droughts, methane leaks, hurricanes, spills, and a resistance that is everywhere. I do not have to discuss the jobs picture other than to say pipelines create very few, whereas solar creates neighborhood jobs. Economically, If we just do not need it, and if the money does not get spent, GDP is smaller but the community is better off. A prime example is that if local forest communities are allowed to maintain ownership of the forest instead of forest concessions being sold to global commercial interests, and the community manages the forest in traditional or ecologically sound ways including selling forest products to the local markets, it raises living standards in the community, increases revenue in the national treasury, and protects the forest and biodiversity. I really appreciate that leaving the forest in the hands of the community increases tax revenue significantly more than the concession model, at least partly due to much less corruption.

Until the economists start to truly account for the damage being done to the planet and our communities in the pursuit of ever faster growth, they will continue to predict growth, they will continue to offer growth oriented policies that more and more often fail, and they will tell us growth will come if we just deregulate and let the corporados shut down democracy a bit more. Unfortunately for our communities the wrong headed policies and actions based on those wrong headed policies continue to benefit the 1% and therefore the political class, so it is just fine for the experts to be wrong in a consistently biased way. It helps constrict the policy space to what the rich want, even if those policies are almost guaranteed to make the situation worse for most communities.

It is quite clear that old industrial places are furthest along on the road to the end of growth. Rhode Island is much more likely to achieve a general prosperity if it gave up on real estate lead speculative growth and high tech health care and concentrated on local self reliance, solar energy, food security, and community health. No matter what policies Rhode Island appears to adopt, no matter what gyrations we perform to appease the wealthy in their ever greater quest for more, no matter what tax breaks we give to millionaires, it is not going to speed up our rate of growth. A GREAT business climate on a good day, will bring your growth rate up 5% a year, which in Rhode Island means the gyrations and business friendly politics may bring our growth rate from 2% to 2.1%. No matter what policies we adopt Rhode Island is going to lag the national and global growth rates. We are not in a resource boom, Fracking was the only thing that kept US GDP growth last year above 2%. Global growth is more and more going to be concentrated in low income countries. It should be no surprise that giving tax breaks to the rich does not work. Even the IMF says that giving tax breaks to millionaire “job creators” is a big waste of money as it does not work and actually makes your economy work less well. My guess is that giving tax money to millionaires to build buildings increases inequality and as Picketty noted, inequality is very bad for an economy.

In the 21st century we have reached the point where cutting more forests does not actually build your economy, it just creates refugees and brings more floods. Where the easy to reach mineral deposits of high grades are long gone and it takes ever more effort to mine and refine the same amount of iron or copper or drill for oil. Where we need to leave the fossil fuel deposits underground beneath healthy forests and soil. Where soil health and reforestation provide a lot more value than clearcutting and it has become clearer and clearer that the only way to keep our communities healthy is to keep the forest people in charge of the forests instead of allowing outsiders to squander them.

We need, and I mean need, for the policy people at all levels, and especially in old industrial places like Rhode Island, to understand that growth is going away and that it is going to take a very different approach to economic development to keep our communities prosperous in a world where things are truly different and our communities and the planet need a lot of healing. Many authors and thinkers have offered us a vision of a different economy over the last 50 years. Much of what was in the Whole Earth Catalog is coming to pass. Almost all of the predictions in “The Limits to Growth” are coming to pass. Much of what was once considered truly radically out there is now mainstream. The climate disasters are already here, we need a different economic model and new practices that focus on healing, not ripping more holes in the fabric of our lives. The old guard wants to continue in power, the new world demands democracy and an end to the fossil fuel industries and throw away culture.

The issue of running an economy based on growth for the 1% or for prosperous communities is going to be the same kind of struggle we who have to resist the empire have long endured. We can only hope that we make the voyage of true ecological and community healing faster than we have been traveling that road in the past. Holding to the policy and power dynamics of the past is holding us back and offers no way forward.

The following are fully referenced articles on that have the links to the more sources.