Degrowth is a real possibility in industrialized countries

But policymakers will fight it tooth and nail

Degrowth has recently gone from a fringe obsession to a mainstream-adjacent discussion topic. A vocal minority of experts have called for a policy of degrowth because of the environmental destruction that continued economic expansion causes.

I have a somewhat different view on this.

Considering how sclerotic the world’s industrialized economies are today, with the possible exception of the United States, degrowth in the future will be likely. In fact, some countries in Europe, such as Italy, have already gone for over a decade without meaningful economic growth.

The lack of economic growth is driven by weak economic fundamentals, possibly exacerbated by political instability. No policy change is needed to realize negative economic growth.

However, degrowth will face stubborn resistance from the policymakers. Because industrialized economies have built immense welfare systems based on perennial growth, they cannot give up on economic growth. Policymakers will fight very hard to increase economic growth.

1. Degrowth in a nutshell

The argument for policy-driven degrowth is simple. If we measure human progress by gross domestic product (GDP), we ignore issues such as inequality and happiness. We also fail to internalize environmental destruction, social instability, and other bad outcomes that are not measured in GDP.

Degrowth advocates argue that our obsession with economic growth is misplaced. We should focus on promoting quality of life instead and avoid destroying the natural environment. With such a shift, we would not pursue economic growth for its own sake.

2. Why degrowth is likely in most advanced industrialized economies

Recent demographic shifts in industrialized economies mean that degrowth as an empirical phenomenon is a real possibility in the coming decades. For the first time since the Second World War, countries from the United Kingdom to China and Japan may have to accept lackluster or even negative economic growth.

The logic is simple. With rapidly aging populations and limited immigration, the number of working people in the population relative to non-working people decreases. This places a significant burden on the small subpopulation of working people and makes GDP growth hard.

Even if productivity per worker grows, it may not grow fast enough to compensate for the cost of caring for a huge number of older citizens who are not working. Productivity gains from artificial intelligence, for example, may not increase production but instead compensate for an aging population.

3. The collapse of the welfare state

This structural shift could itself be manageable. Even if the percentage of workers in the population is low, a degrowth approach to policy could result in a good quality of life. Japan has struggled with these issues for a long time, yet quality of life in Japan is excellent by global standards.

The problem is that our welfare systems are based on perennial growth. Each generation pays taxes and social security contributions that are used to fund current retirement and healthcare needs. Even though current funds are used to pay for current needs instead of saving for the future, it is fine because there will be more funds in the future.

But without continued economic growth, this system will not work. If the economy does not grow, welfare systems will not be able to fund future generations. Punitive tax increases and postponed retirement may temporarily correct the situation, but there is only so far this strategy can go before life becomes unaffordable for young workers and political opposition to tax increases grows.

4. Briefly on American exceptionalism

The United States is the one major economy that may buck this trend, at least for a little while. It has a higher birth rate than any other major economy and continues to receive a lot of immigration. Because of this configuration, the United States might be able to continue funding its healthcare and social security systems.

The United States could fund the deficit with modest tax increases targeted at its wealthiest citizens. It can keep the working population stable or growing by encouraging employment-based immigration. There is no shortage of wannabe Americans.

But all this requires good policy. The current political environment in the United States rewards excess spending and focusing on social issues instead of strengthening economic fundamentals. If the United States stops immigration and the birth rate continues to fall, it will not be able to manage the fiscal deficit all that well.

5. The future of degrowth

To summarize, my prediction is that degrowth will soon be a reality in most industrialized economies. However, it will not be the pleasant degrowth of happy families working less and enjoying their free time. It will be a time of great economic disruption and hardship, as welfare systems crumble and citizens protest ever-longer working hours and higher retirement ages.

The United States can avoid the degrowth trap, but American policymakers need to recognize the need to stop excess spending, raise taxes to curb the deficit without hurting poorer households, and encourage employment-based immigration.

Neither the Democratic nor the Republican party seem to have appetite for maintaining U.S. structural advantage over the long run. Any one of these is politically hard, and the United States may waste its opportunity to create a second American century because of flawed domestic politics.