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Ecological economics, part six
NewsNotes, November-December 2009

The previous five articles of this series have examined the various aspects and challenges of our current economic system. How do we move forward to a steady state economy, which recognizes the limits of economic growth? It will require significant changes in a number of areas, from lifestyles and mindsets to localizing economies and more. Below are a few public policy reforms that would assist in making this great paradigm shift.

New well-being measurements

Gross domestic product (GDP) growth must not be used as the principle economic goal for the reasons explained in the first part of this series. Workable alternatives have been created, most recently the green net national product (GNNP). As described by Joseph Stiglitz, co-creator of the GNNP, “The ‘green’ means that GDP must be reduced to take into account the depletion of natural resources and the degradation of the environment - just as a company must depreciate both its tangible and intangible assets. ‘Net’ national product (NNP) means that there has to be an adjustment for the depreciation of the country’s physical assets. A country that gives away its natural resources will see gross domestic product rise, but gross national product - which focuses on income earned by those inside a country as opposed to what is produced inside a country - may not rise much, since the value of what is produced accrues to foreigners.” Other alternatives include the Happy Planet Index and the Index of Sustainable Economic Welfare (ISEW). Shifting governmental priorities away from increasing GDP to higher scores on these other indexes would result in dramatically more ecological and equitable public policies.

New form of money creation

Currently, new money is created through the fractional reserve banking system, a seemingly simple yet mystifying mechanism. For every $1,000 deposited, the bank is only required to keep a fraction, currently about one-tenth, or $100, on reserve. The other $900 can be used by the bank to be loaned out, with the expectation of interest. This is the method by which most “new” money is created.

Say the $900 loan is used to buy a sofa. The seller of the sofa can then deposit the $900. That bank can then lend out $810 that money, which will eventually be deposited in another bank which then has $729 available for loans, and on and on. Eventually, from an initial $1,000 loan, banks can have $9,000 of “new money” to loan. The Federal Reserve has produced a comic book that describes this process more fully. Chapters 7 through 9 of Chris Martenson’s “Crash Course” also explain this well.

The important point is that all dollars are loaned into existence, which means that more money must be created to pay the interest on old money, which will again demand even more money. So our money supply also grows at an exponential rate. It took the U.S. until 1973 to create its first trillion dollars in stock. That means the total value of every road, building, car, etc. made in the U.S. until 1973 cost $1 trillion. The last $1 trillion of goods created in the U.S. took only 4.5 months. As Martenson asks, when will this end? When will we create $1 trillion of goods in 4.5 days? Hours? Clearly this is not a sustainable system.

The fractional reserve system is one of the fundamental drivers of our growth economy, and it must change in order to create a steady state. The alternative proposed by Herman Daly and others is to raise the reserve requirement to 100 percent. Banks would only be able to loan as much money as they had on hand. They would make profits from the difference in interest rates between their deposits and loans. New money would be created by the government that would spend new money into existence on public works projects and other societal needs. As Daly explains, “One hundred percent reserves would put our money supply back under the control of the government rather than the private banking sector. Money would be a true public utility, rather than the by-product of commercial lending and borrowing in pursuit of growth.”

Financial regulations

The financial part of the economy should be much smaller than it is now. The 100 percent reserve rate would shrink commercial banks in size, but to diminish the size investment banks, hedge funds and other financial institutions, governments can use financial transaction taxes to reduce the amount of unnecessary trading that destabilizes the market while providing much needed public funding.

Commodity future markets, especially for food and energy commodities like wheat, corn and oil, must be treated differently than regular financial instruments. The deregulation of those markets in the Commodity Futures Modernization Act of 2000 allowed massive influxes of capital from outside speculators. The result was the oil and food bubbles of 2008. The Commodity Futures Trading Commission (CFTC) should place limits on the amount of money from speculators not directly involved in producing and buying commodities. If Congress decides to develop a carbon market, it should also have the same strict standards that are needed for food and energy commodities.

Tax reform

Governments need to create fairer tax systems through international ecological tax reform. It is critically important to put a price on the scarce and currently under-valued contribution of nature. A simple guideline would be to tax what is bad – pollution, resource depletion and environmental degradation – rather than “goods” (value added by capital and labor). Using ecological taxes would help to establish some of the real costs of mineral and resource extraction not included in the current system which will indirectly limit pollution and force greater efficiency in other stages of production.

Ecological taxes would create new incentives toward creating lower carbon technologies generating productive investments in the real economy. Included in this ecological tax reform would be a tax on carbon emissions. Revenues from such a tax could go towards helping small island states and less industrialized countries of the southern hemisphere to adapt to the damaging impact of climate change. Funding could also be directed towards low-income consumers to compensate for higher energy prices, and to the development of appropriate, carbon-neutral technologies in non-industrialized, resource-strapped countries for further qualitative development and poverty reduction.

Labor/Income reform

Despite new jobs in the “green” economy, the cumulative effects of peak oil, climate change and loss of biodiversity will bring increases in unemployment. Two policies that address that reality are a shorter work week and a universal income. A shorter work week would generate more employment while allowing people more leisure time.

With the rise in unemployment, more people struggle to make ends meet. A universal income, or basic income grant, provides all citizens a basic level of income, as of right, with no means test, and regardless of age, gender, marital or work status. Proposed by John Locke in the 17th century, the idea is growing increasingly popular around the world, with Brazil being the most recent country to adopt a guaranteed basic income in 2004.

Community-based economy

As a response to dwindling resources, we must move away from a global economy to multitudes of sustainable local economies. A host of new business initiatives will help consolidate these local economies, such as community development corporations, employee-owned firms, community development financial instruments, land trusts, co-ops, municipal enterprises, state asset building initiatives and others. Governments at all levels should shift financial and other incentives away from transnational corporations and into local efforts like these.

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