Category: Social Trends

From The Conversation.

From The Conversation.

The prosperity that we are enjoying today could largely be attributed to the industrial revolution of the 18th and early 19th centuries. Yet this enhancement of our standard of living has come at a steep price: the creation of the so-called linear economy.

In other words, we have a “take, make and dispose” economy. We take natural resources, make things and dispose of them in landfills and elsewhere.

This business arrangement in which companies operate with blinders on has created vast environmental and social consequences. Mass and conspicuous consumption, the burning of fossil fuels, the creation of dense urban environments and increased ownership of cars not only significantly endanger the natural world but will also erode our quality of life.

This path is simply not sustainable, both for the environment and the way we live.

Fortunately, more of us are reimagining the global economy and how it could function differently. That kind of thinking has resulted in many advanced ideas, such as Leader in Energy and Environmental Design (LEED) certification for “green” buildings, life-cycle sustainability assessment (LCSA) and cradle-to-cradle principles. These ideas aim to extract more value out of existing resources and illustrate how business philosophies are slowly changing.

The thinkers behind these ideas have pioneered a new standard for how the world could be run: the “circular economy.”

But the question we must ask is, can a more sustainable economy also deliver the gains in prosperity we’ve grown used to?

Problems with our existing model

The central aim of moving toward a circular economy is to improve resource productivity by keeping products and resources in use for as long as possible, through recovery, reuse, repair, remanufacturing and recycling. It is therefore, by and large, recuperative in nature. It is not so much about “doing more with less” but rather doing more with what we already have by solving the problem of low resource utilization.

At the moment, the world’s growth model wastes most of everything. Research in the US and Europe on consumption habits have shown how often the resources we reap from the Earth end up in landfills, little used. Planned obsolescence is how we live.

For instance, in any given year, only 40% of the garbage in Europe is recycled. In Germany, almost one-third of the household appliances consumers disposed of in 2012 were still functioning. Americans tossed out 141 million mobile devices in 2010 (89% went straight to a landfill). In the UK, it is estimated that as many as 125 million phones languish unused (four times the number currently in use). Cars in Europe remain parked 92% of the time, while business offices are used for less than half of working hours.

With this knowledge in hand, the opportunity for new usage efficiency across all industries and consumer lifestyles is right in front of our eyes.

Economy needs to change to survive

Though a circular economy may sound idealistic – if not like a fantasy – the truth is that the existing way of doing things is reaching the end of its utility.

Already, our economic productivity on a global level is being curbed by the rapid depletion of existing and readily available natural capital such as clean sources of potable water and forests. Since the 1970s, productivity gains in grain crops have fallen 66%, despite advances in fertilization and irrigation techniques over the decades. In a recent study by the MacArthur Foundation, it was found that perhaps 85% of Europe’s soil has been degraded.

The study also notes that mining for natural resources such as zinc has become more expensive and the quality has diminished, making it even more energy wasteful.

At the same time, resource consumption is expected to surge. According to the Organization for Economic Co-operation and Development, the global middle class will double by the year 2030. And that means even greater consumption, because we consume more as we earn more, if China’s rise is any guide.

This illustrates that we cannot continue to grow as a species and enjoy a high quality of life without changing the way we do things.

Creating a closed loop

As noted above, our primary goal in moving to a circular economy would be to preserve our way of life by making it sustainable, or technically viable indefinitely.

In a traditional linear economy, a landfill is the final stage of a resource’s life, when we can no longer make use of it. What the circular economy promotes is closed-loop recycling, which aims to reuse waste indefinitely and make new products without changing the inherent properties of the original material.

Rather than the economy or a company’s bottom line only growing from incremental cuts through efficiency gains, this economy seeks more value from existing materials in the current system. For sure, all physical materials eventually degrade. But if we can prolong their use as long as possible, we will gain more in value by extracting much less.

In a nutshell, the circular economy’s goal would be to decouple economic growth from resource consumption, allowing prosperity to continue rising while using less oil, minerals and other spoils of the Earth.

A piecemeal approach isn’t enough

On a small scale, many companies are already working on the problems of resource usage efficiency by developing new technologies, such as those underlying the so-called sharing economy.

Car sharing, for example, may reduce the number of vehicles on the road, or at least limit their growth, while apartment sharing provides a smart means to use our residences more efficiently, by making use of the assets in a more resourceful way. Not only does it reduce the environmental impact of our actions, but it also generates new revenue streams.

Or in a traditional industry such as carpet manufacturing, some companies are looking beyond efficiency gains in operations and supply chains to improve profitability. Dutch carpet specialist Desso, for one, focuses on ensuring all materials used are recycled, reused or remanufactured – and are not toxic.

But solutions within a single industry or company aren’t going to cut it, because this effectively ignores the needs of the overall system. It would be much better if all the players across the value chain from extraction to consumption teamed up to systemically alter the functioning mechanism of how products are produced.

Moreover, if we fix the problem in such a piecemeal way, we risk causing a so-called “rebound effect.” That is, efficiencies gained in one area – by driving less, for example – end up being offset by all those savings being spent consuming more of something else. We spend less on cabs and fuel but use that money to buy more gadgets.

For these reasons, we need the holistic and collaborative approach embodied in the circular economy to maximize the benefits of these new technologies.

A blueprint for fundamental change

The business case for such an economy is obvious: buying less and reusing more – in other words, increasing resource productivity – will reduce costs and efforts while improving efficiency, thus benefiting the bottom line. But the implications of greater resource productivity aren’t merely incremental.

Resource productivity has the potential to fundamentally change the way we produce products and services as well as create more value on both a micro and macro level. As such, the circular economy is a blueprint for claiming long-term sustainability and economic prosperity for companies and countries alike.

Authors: Mark Esposit,Professor of Business & Economics at Grenoble Ecole de Management and Harvard Extension School at Harvard University and Terence Ts, Associate Professor of Finance / Head of Competitiveness Studies at i7 Institute for Innovation and Competitiveness at ESCP Europe

From The Conversation.

A baby boom is generally considered to be a sustained increase and then decrease in the birth rate. The United States, the UK and other industrialized economies have experienced only one such baby boom since 1900 – the one that occurred after World War II.

In addition, many currently developing economies such as India, Pakistan and Thailand have experienced a baby boom since 1950 as a result of a sustained decline in infant and child mortality rates as a result of improved medicine and sanitation.

So what’s the economic impact of these baby booms? Do demographics play a role in determining when an economy expands and contracts? Do they boost incomes or cause them to fall as more young people enter the workforce? I’ve been studying the impact of baby booms on wages, unemployment, patterns of retirement and gross domestic product (GDP) growth for 20 years and, while there are some questions that haven’t been answered, here’s what we’ve learned so far.

Negative impact on employment

The initial impact of a baby boom is decidedly negative for personal incomes.

Baby booms inevitably lead to changes in the relative size of various age cohorts – that is, a rise in the ratio of younger to older adults – a phenomenon first described by economist Richard Easterlin. (In statistics, a cohort is a group of subjects who have shared a particular event together during a particular time span.)

These effects cause a decline in young males’ income relative to workers in their prime, a higher unemployment rate, a lower labor force participation rate and a lower college wage premium among these younger workers.

This occurs because younger workers are generally poor substitutes for older ones, so the increased supply of youths leads to these negative employment results.

Back in the 1950s, entry-level young males in the US were able to achieve incomes equal to their fathers’ current income. This was because of that age group’s reduced relative size as a result of the low birth rates in the 1930s. But by 1985 – about the time the peak of the baby boom had entered the labor force – that relative income had fallen to 0.3; in other words, entry-level men were earning less than one-third of what their fathers made.

In developing countries, these relative cohort size effects – the reduction in young males’ relative income and increase in their unemployment rate – are multiplied by the impact of increasing modern development, especially the rising level of women’s education.

In addition, the large influx of baby boomers into the labor market in the US forced many older workers, who would otherwise be working in “bridge jobs” prior to retirement, into earlier retirement. This explains how the average age of retirement for men and women went down in the 1980s.

This decline in income relative to their parents and their own material aspirations has a host of repercussions on family life. It leads to reduced or delayed marriage, lower fertility rates and increased female labor force participation rates as young people struggle to respond to their worsened prospects.

From boom to bust … to boom?

The reduction in relative income – which the US experienced in the ‘60s and ’70s – thus results in a subsequent “baby bust” as people delay starting a family.

It was hypothesized that these baby booms might be self-replicating as reduced birth rates on the trailing edge of the boom caused the subsequent cohort to be smaller in size, thus leading to better labor force conditions, increased birth rates and an “echo boom” in the next generation.

This theory was based on what led to the baby boom in the first place, when the favorable labor market conditions experienced in the 1950s emerged as a result of fewer children being born during the 1930s, reducing the young-to-old-adult ratio.

Though the echo boom of the 2000s represented an increase in the absolute number of young adults, it didn’t lift their cohort size relative to their parents because birth rates have remained fairly stable at low rates since the end of the post-WWII baby boom.

That has not, however, translated into significantly better labor conditions, at least not the kind experienced by young adults in the 1950s that led to the baby boom. The reasons for this phenomenon have not yet been explained.

So can changing demographics cause recessions?

Another way of exploring the effects of changes in the proportion of young adults in the population is to look at fluctuations in the relative size of the young adult population over time. These seem to have a significant effect on the economy.

As young adults move out of high school and college and set up their own households, they generate new demands for housing, consumer appliances, cars and all the other goods attendant on starting a new adult life. These new households don’t account for a large share of total expenditures, but they represent a major share of the growth in total consumer expenditures each year.

So what happens if, after a period of growth in this age group, the trend reverses? It is likely that industries counting on further strong growth will be forced to cut back on production, and in turn to cut back on deliveries from suppliers – which will in turn cut back on deliveries from their suppliers, creating a snowball effect throughout the economy.

This picture is supported by the patterns over the past 110 years depicted in the graph shown below.

The curve on the graph represents a three-year moving average of the annual rate of change in the proportion of young adults in the US population, as given by the United States Census Bureau. “Young adults” are defined as those aged 15-19 prior to 1950, and 20-24 in the years after, given changing levels of education over time. This curve is overlaid with vertical lines that mark the start of recessions, as defined by the National Bureau of Economic Research.

There is a very close correspondence between the vertical lines, and peaks in the curve, as well as points where the curve turns negative. In addition, the deep trough between 1937 and 1958 contained another four recessions, and there were two in the trough between 1910 and 1920 (not marked on the graph). The only recessions over the last 110 years that don’t appear to correspond to features of the curve, are those in 1920, 1926 and 1960.

The pattern of causation – if it is one – cannot run from the economy to demographics, since these are young people born over 15 years before each economic downturn. In addition, there’s a one-year lag in the age groups that has been used to control for possible migration effects of a recession – that is, how many people left the US as a result of worse labor market conditions.

The fact that no “double dip” recession occurred in 2012, even as the share of young people fell that year, might be the result of the economic stimulus applied after the most recent recession.

Food for future thought

Obviously there are many other factors associated with economic downturns, but aspects of the empirical regularity demonstrated here can be seen in many countries over the past 50 years – especially regarding the international financial crises of 1980-82, 1992-94, and 1996-98 and 2007-2008.

This is not to say that demographics were the sole cause of the recessions, but rather that they influenced the timing of such events, given a host of other possible factors. For example, did they play a role in determining when the recent housing bubble burst? That question has yet to be answered, but further study may shine some light.

Author: Diane J Macunovich, Professor of Economics at University of Redlands