Home page About me Thoughts for the weekend // Romania //The World My guests Contact

Chief Economist: Many economists will call me mad, a traitor of my trade

Published at: 01-03-2020

Posted on: March 1st, 2020 by RaduC No Comments

I am talking this week with Valentin Lazea, chief-economist of the National Bank of Romania whose opinions do not involve the liability of his institution. Together I want to look at how much demographic growth, the obsession of governments, is a pre-requisite of economic prosperity.

RC: Valentin, thank you for accepting my invitation. I am intrigued by the following fact. Take the last two thousand years and whether it is Antiquity, the Middle Ages or Capitalism all economic systems associated with these periods of time were underpinned by an essential ingredient of economic growth, population growth. I think that the question that we should ask ourselves in the 21st century, as concerns about ecosystem degradation are rising, is whether we are capable to come up with another growth model that sets aside this centuries-old obsession with an ever-growing human race.

VL: Traditional economic wisdom states that labor is one of the three factors of economic growth and that without population increase you can’t have economic growth.

RC: Is that wisdom still valid nowadays?

VL: It is a paradigm specific to the 19th century and the first half of the 20th century that should be slowly replaced. In other words, we need to accept that populations do not have to grow in order for the economy to thrive. Japan or even EU countries are good examples. Few probably know that last year saw a slight decline in the EU’s population. More exactly, 10 out of the 27 states experienced such a dramatic drop that the increase in the other 17 countries could not make up for it. However, the EU is growing economically.

RC: Is this at the end of the day a bias? What you are saying is that from an economic theory standpoint, an economic system that does well despite demographic decline could happen.

VL: Firstly, it is hard to change any theory sanctioned over hundreds of years. Secondly, there is no interest in changing this theory.

RC: Shouldn’t the environmental crisis of the planet be a strong enough incentive?

VL: Yes, it should and that takes us to our problem. I start from an idea by a British economist, Tim Jackson, who said that the idea of a non-growing economy may be an anathema to an economist. Accepting an economy that does not grow is unimaginable.

But the idea of a continually growing economy is an anathema to an ecologist. In other words, we have two clashing concepts on our hands: the environmental thinking which says “keep growing, especially under the current model and we are all doomed” and the economist saying “I have been raised to believe in continuous economic growth”.

RC: So economists should revise their models.

VL: Yes, and two problems need to be addressed. The first: what do you do to help these two completely opposing visions co-exist? And the second, equally important one: how do you go about it in a democracy? Not in an autocracy which can order people how to behave. The second issue is even trickier than the first one.

The answer to the first question requires that focus is shifted from nominal GDP [Gross Internal Product] growth to GDP per capita growth.

RC: I agree, but you are suggesting that economists and not environmentalists need to change their mindset.

VL: Definitely yes, categorically. Clearly, many economists will start throwing stones at me, calling me mad, accusing me of betraying my trade and so on. But we need to consider that if we grasp the seriousness of the environmental situation, many professions will have to make concessions and sacrifices. I am talking about the mining industry, intensive farming that uses pesticides, constructions, architects who will have to forget about putting in large window areas that lose heat, air travel that needs to be cut dramatically, car manufacturing that will need to see their designs completely overhauled. All these experts, including the economists that I mentioned, will need to say to themselves: I am first of all a citizen of planet Earth, the father or grandfather of children who will have to live on this planet and only secondly a miner, farmer, economist or pilot. If no one in these professions takes on this change for the sake of our children and grandchildren, we will pay the price 20 – 30 years from now,

RC: Do people live better or worse in a country where the GDP is falling, but the GDP per capita is rising?

VL: Of course they live better. Not only are they better off, but they live healthier as well. For example, Romania continues to fixate on increasing energy consumption. Few people in the energy industry can actually get their head around the idea that GDP can grow with less energy.

This is what we are essentially talking about. Some economic trends can be negative with no effect on the quality of life. Let me go back a little. I was saying that macroeconomics needs to shift the focus from GDP growth to GDP per capita growth. A decrease in population helps that. On a microeconomic level, we need to stop mass producing poor quality items that break down after three years.

RC: Which are designed to break down after three years …

VL: …And go back to the 50s – 60s when you bought a car for 15 years, everything was made to last, people would resole their shoes and not buy 70 pairs of them and so on.

RC: This means that we will have lower consumption to deal with so the question would be: “For whom will businesses produce?”

VL: The answer would be more free time. Why not have a four-day or even a three-day week? Why shouldn`t people have more leisure time? The travel industry will not be able to sustain the momentum it has seen in the last 20 years, anyway. Travel will be mostly a VR experience. People will put their 3D glasses on and climb up the pyramids virtually, not physically.

So the world will be able to switch from work to leisure without expecting to consume more and more. This has also political implications because many are afraid of a shrinking business activity. This kind of development may lead to a left-wing ideology. It`s something that needs to be said. Why left-wing? Because the wealthiest will have to make the biggest sacrifice on consumption. That is those who lead a profligate behavior in terms of consumption. Differences in consumption between individuals will tend to level out, which means a more equalitarian society. This is why neither Trump, nor others will accept a change in consumption patterns and claim that technology is the only way out.

RC: As a matter of principle I think that you are right. But I have huge reservations as to the following issue. I do not believe that people will willingly change their behavior. Throughout the world’s economic history market forces or economic policies have been the ones to tip the supply and demand balance, with the level of prices and costs triggering behavior change. Basically, people have changed behavior when they had economic reasons for it. But it seems to me that the changes that you consider necessary are not backed by economic urgency that forces behavior change.

VL: Our discussion seems absurd in the Romanian context.  People have just lifted themselves out of poverty and are excited to travel, buy cars and so on. But I think there are three ways of doing that on a global level. The first has to do with educating individuals. The Nordic school system that instills civic duty and environmentally responsible behavior should be replicated across the planet. Secondly, countries should step in with “carrot and stick” policies. For example, punish polluting vehicles, reject permits for buildings with heat loss, increase flight prices, etc.

RC: But these measures would be deeply unpopular. They could lead to a mass uprising.

VL: They would, in uneducated countries. And thirdly, God will deal with it. Japan is an example. You get to the point where people are sufficiently affluent and numerous that further wealth accumulation does not make sense. The Japanese government’s efforts for the past ten years to boost the economy have gone down the drain. People have money, are old, the population is shrinking. So God got things settled. The point is not to be too little too late. So there are spontaneous adjustment mechanisms.

RC: There is a conundrum that is a great puzzle to me. On the one hand, you see analyses that expect massive job losses due to digitization. On the other, we see governments worried that populations are shrinking.

VL: Yes, we have the economic case against the political case. The losers of automation will probably be the least educated who will exert political pressure. Governments’ dilemma is how to find jobs for those losing out.

RC: But importing migrants will not beef up the number of losers?

VL: Yes, it will, but we are still influenced by old school economics: a big workforce is good for the economy. And despite net migration into Europe, the EU population is dropping.

RC: Is that tragic?

VL: It depends on how rapid the decline is. A steep drop is not a good idea and immigration reduces the decline rate which may make sense. Not to mention that Europeans refuse to do certain jobs, construction work, farming ….

RC: Won’t these unskilled jobs be the first to be automated?

VL: Only to some extent.

RC: Are there world-renowned economists coming together to suggest such a change in mindsets and economic model?

VL: No, because they are afraid of being pilloried by their colleagues. So those who share this thinking will not come forward to say it. Not to mention that economics textbooks will need to be re-written. Because it is very fashionable to support the green economy, but they do not go beyond the surface to talk about related costs and sacrifices: products with longer shelf life, less consumption, the losers will have to re-qualify, more leisure time, later retirement age, etc.

RC: It seems to me that politicians in the rich world want to have ‘their cake and eat it too’, not to call them hypocrites. They say “we want to take all measures to protect the planet provided that economic growth is not affected”. It follows that their measures will always come too little too late.

VL: There are three pillars that must be used independently. Controlling population growth is just one of them. Another pillar is technological innovation …

RC: Sorry, do you mean China-style population controls?

VL: They could be implemented because it’s an autocracy. But Europe and Japan also see their populations already dropping, although they are democracies.

RC: The main areas of demographic growth are currently India, Africa and the Middle East. So they should have a stricter demographic policy.

VL: Certainly, the international institutions should help them set up family planning programs. And going back, the third pillar should be the ecological footprint which is our consumption habits. There is a website, Global Footprint Network, that anyone can visit to see their consumption ecological footprint: based on food, generated waste, short-distance transport (by car or bicycle) and long-distance (by plane or train), the quality of home insulation.

So all these three pillars must be considered. Americans, for example, have fixated on technology alone. They say: “populations may grow, individual consumption may grow because technology will come up with an answer”. And they are really good at technology, but not that good that it prevents them from using up to 5 Earths every year. Sub-Saharan Africa, on the other hand, consumes 0.5 Earths per year.

RC: What do you think about that? There is a lot of talk about often expensive technological solutions meant to decrease CO2 emissions in the air when the cheapest way of reducing it is to increase the forest area. But there is no system that pays countries with large forest covers to encourage them not only not to cut them down, but increase them.

VL: I wrote about that too. Brazilians should receive financial incentives not to cut the Amazon rainforest. Romania could also receive the incentives to reforest and maintain its forests.

RC: Valentin, your principles make a lot of sense. The problem is that there is no competence center that is internationally recognized to advocate such ideas, as people fear the related reputational risk, and without legal measures or financial incentives behaviors will not change.  So, what is the likelihood to see this kind of steps taken?

VL: Environmental organizations should stop being everything for everybody, that is to advocate for gay rights, nuclear plant shutdowns and whatever nonsense that crosses their heads and think business. That is the only way to make the business environment change: sitting down and speaking its language.

RC: And pick their fight.

VL: Yes. They should forget about political correctness and publicly explain the gains, costs and the alternatives.

RC: Do you see that happening?

VL: This should come from the 30 – 40 year olds. The much younger have no knowledge of economics and are easily refuted by businesses, and the older ones do not care about the topic. So environmentally-conscious people from this age bracket should be the ones to push forward this agenda. But this requires first of all honesty and realism and acceptance of the fact that workwise they may also lose from the measures: fewer shoes will be made per day, fewer cars and in exchange we will have more free time. I mean to acknowledge that you can lead a decent life without I don’t know how many cars, big houses, boats and so on. Accepting a change in the cultural model.

RC: Valentin, thank you for this discussion.

We ask the readers of this material to consult the disclamer
in the Terms and conditions section

If you want to leave a comment regarding this article contact mehere

I want to be notified about new articles concerning Romania ,

or The World