Economic growth will be a thing of the past unless we take the green route
Opinion: The choice is between secular stagnation and sustainable growth
Sometimes it takes only a few minutes to change the way we think about things. A month ago, Larry Summers spent about ten minutes at an IMF research seminar questioning why US economic growth was stagnant.
He said that since the end of the financial crisis there has been no evidence of growth that would restore economic equilibrium at the level of full employment. This is what he called “secular stagnation”.
His remarks have shaken the economic profession and media more than all the learned lectures and policy papers published since the financial crisis began. He has reshaped our understanding of the economic world we live in.
That’s no small achievement for a ten minute address.
It seems to me that he is right.
The evidence is conclusive. The most dramatic example is the Japanese economy which has stagnated for two decades. The US and German economies are growing only sluggishly while the UK economy has shrunk.
In short, economic growth rates of 3% or 4% per annum have become a thing of the past in the developed economies.
Larry Summers has made it a respectable, even a responsible, thing to say that the emperor has no clothes.
There has been no growth, there is no growth and there will be no economic growth - if we carry on as usual.
The old model depended on three conditions: cheap energy, no environmental constraints; and constant population growth.
Energy is no longer cheap. Fossil fuels are becoming dearer and the supply of raw materials, minerals, clean air and water is finite.
Environmental constraints are evident when you see smog, drought, floods, degradation, pollution and global warming.
Populations in advanced economies are set to decline, unless offset by immigration, which brings its own problems.
In summary, the conditions for annual growth of 4 per cent have long since ceased to operate. The current model has failed.
For the past few decades economic growth was artificially boosted by cheap, abundant credit funnelled into property speculation.
We know how that finished: financial institutions that had to be bailed out by the tax payer, massive public and private debt and the destruction of personal wealth.
We now have an impoverished middle class both in the US and Europe -- one without any hope of recovery if Larry Summers is correct.
At the same time, we have a planet that is threatened with catastrophic climate change caused by a lifestyle that is no longer sustainable.
In the face of these unpalatable truths, we need a new economic model that will enrich ordinary people and protect the planet.
There is an overwhelming social, political, ecological and economic need to re-float the world economy in the greatest ever act of creativity in history.
We need new factories, products and services, smart appliances and power grids, sustainable cities and intelligent transport.
Everything that either emits carbon or wastes energy will have to be replaced.
We need to think big. The imminent threat of climate change demands a dramatic response.
The global management of carbon will require a global governance system leading in turn to a global agreement on emissions at the COP 21 in Paris two years from now.
There is a real possibility the required leadership could come from an alliance between the EU and China on a global Emissions Trading Scheme which puts a cap on emissions and a high price on carbon.
I hope they do, for under a “business as usual scenario” temperatures could rise by as much as 4° Celsius by the end of the century, with consequences that have been graphically outlined in recent reports from the UN, the IEA, the World Bank and the IMF.
We cannot tolerate a “business as usual scenario” for it means there may be no business. The world as we know it would have ended.
Lord Stern says we only have till 2017 to get a binding agreement on a drastic reduction in emissions. After that, it would be too late to contain the rise in global temperatures below 2° Celsius and that would trigger irreversible climate change with disastrous environmental consequences.
We have to end secular stagnation by building a new green economy; and reduce greenhouse gas emissions by creating a low-carbon society.
This provides us with the rationale for launching a once-off transformation of the world we live in. As with any great project, we need a vision; human skills; money; and political will.
We can fashion the vision in simple terms; a low carbon economy by 2050, matched by a low carbon life style.
We can develop the human skills.
In a world with a savings glut we can raise the capital.
With the requisite political will we can devise the great infrastructural projects that will bring a sustainable society into being.
It is essential we restore annual growth rates to at least 4 per cent, otherwise we will never be able to lift the burden of debt from our shoulders.
The company I established five short years ago is now the world’s largest private developer of wind and solar power.
We are looking at new sources of finance, such as crowd funding, and at new forms of ownership, such as the social ownership of infrastructure.
We are establishing our own capital arm to provide innovative investment products specifically designed for energy infrastructure, where the need is vast and the appetite is without limits.
I believe we can transform secular stagnation into sustainable development. And some of what needs to be done globally can be done from right here in Ireland.
We Irish are a highly entrepreneurial people, we have business vision, a can-do attitude, cultural mobility, professional expertise and technical know-how.
Properly mobilised, we can make a disproportionate contribution to building a sustainable future.
In the choice between secular stagnation and sustainable growth there is only one decision that makes sense.
Go green and re-float the world.
Dr Eddie O’Connor is CEO of Mainstream Renewable Power. This is an edited version of a speech given at the Sustainability Gathering in Dublin last week.