The current economic and political situation is very serious and has deteriorated in recent years. This is due to a number of factors, but the political and economic leaders have made many mistakes. The global economic system is broken, with numerous failures and imbalances. This note looks at what we can do to try to resolve these problems and minimize the economic and societal damage that humanity will unfortunately suffer and which will get worse.
To continue dominating society, many neo-liberals, libertarians and billionaires have decided to join forces and support the far right. This alliance has no solution to offer to today’s problems, other than more deaths from war and global warming. They are creating all the conditions for the system to collapse. This article outlines some possible marcoeconomic policies to solve our current problems.
A new financial crisis generated by the overstepping of planetary limits seems difficult to avoid
Fujin Zhou, Thijs Endendijk, & W.J. Wouter Botzen (2023) reviews the literature on the impacts of natural disasters and physical risks related to climate change on the financial sector (including banks, insurance, equity markets, bond markets and international financial flows). The results show that natural disasters and climate change-related risks reduce insurers’ profitability and risk-sharing capacity, bank stability and credit supply, equity and bond market returns and stability, foreign direct investment flows and international lending. Natural disasters can worsen household accounts and the balance sheets of companies, financial institutions and governments. Direct economic losses can lead to production disruptions, deposit withdrawals, insurance repayments, investment losses, asset and collateral depreciation, increased non-performing loans and public spending, and reduced tax revenues. These consequences also affect supply and demand for capital and financial services. The risk diversification capacity of (re)insurers and the lending capacity of banks may be reduced, while the demand for compensation (including insurance cover) may increase.
Despite international agreements, government spending and regulations, and technological advancements, global fossil fuel consumption surged by 55 percent between 1997 and 2023. And the share of fossil fuels in global energy consumption has only decreased from nearly 86 percent in 1997 to approximately 82 percent in 2022 (Vaclav Smil, 2024).
The damage caused by rising temperatures and environmental degradation (loss of biodiversity, depletion of natural resources, fires, rising sea levels, etc.) is likely to destroy the value of certain assets until the Minsky moment[1]. The slower the increase in climate-friendly investment and the transformation to a more energy-efficient economy, the greater the chance of a major financial crisis in the coming years.
In a study published in 2022, several authors from Cambridge University and MIT (Kemp et al., 2022) believe that climate change could lead to the collapse of society or even the extinction of humankind, and that most studies fail to take these issues seriously. These authors consider that global crises tend to occur through such « synchronous failures » that reinforce and propagate across countries and systems, as was the case in the 2007-2008 financial crisis. It is plausible that a sudden change in climate could trigger systemic failures that destabilize societies worldwide. Human societies are vulnerable to cascades of risks triggered by climate change, such as conflict (including nuclear), political instability and systemic financial risk. The cascading impacts and extreme consequences of soaring temperatures are under-examined in the literature.
There is little very time and growth left before the economic system collapses or stabilizes.
Climate change can and will have disastrous consequences on the economy and societies. According to a recent report by the Institute and Faculty of Actuaries the global economy could face 50% loss in GDP between 2070 and 2090 from the catastrophic shocks of climate change unless immediate action by political leaders is taken to decarbonize the economy and restore nature.
According to a 2021 study realized by Gaya Herrington, when she was Head of Sustainability and Dynamic Systems Analysis at KPMG, published in the Yale Journal of Industrial Ecology, the findings of the authors of the book « The limits to growth » are very close to reality. Gaya Herrington and her team believe that the most likely future scenarios are those called « BAU2 » (business-as-usual 2) and « CT » (comprehensive technology). The BAU2 and CT scenarios lead to a halt in growth around 2040. In the BAU2 scenario, industrial production falls by 85% between 2040 and 2100, and the world population collapses. In the CT scenario, industrial production falls by 40% between 2040 and 2100, and world population declines slightly. It is still possible to reach the SW (sustainable world) scenario, in which industrial production will stabilize around 2040, but the longer we wait, the further away we are from this scenario.
The transition to a carbon-neutral economy will have both positive effects on GDP and negative ones. Some sectors will grow (renewable energies, energy efficiency, sustainable finance, rail transport, local services, etc.) while others will shrink (fossil fuel production, air transport, car transport, etc.).
Stern and Stiglitz (2023) believe that solving the climate crisis will require massive climate action and investment, resulting in higher growth over the next 20-30 years before it comes to a halt. In the second part of the century and moving into the next, the boundaries may well constrain growth (both in GDP and population) and should already be prominent in thinking about public policy.
It’s no disaster if in a few years’ time GDP growth is close to or at zero in the advanced countries. The counterfactual scenario is a collapse of the economy and societies. The advanced countries have never been so rich. Several studies show that it is possible to have a stable and sustainable economy, even if this raises a number of challenges (Berg et al., 2015, Jackson & Victor, 2015, Rosenbaum, 2015, Cahen-Fourot & Lavoie, 2016, Barret, 2018, Fontana & Sawyer 2015, 2022).
If we want to avoid a collapse of markets and society, we need to put in place robust policies that are very different from the current ones.
As Arthur Okun (1962) has shown, low growth still results in higher unemployment in the current system. According to Valeria Jimenez (2024), major interventions in the labour market will be necessary to avoid a rise in unemployment when growth comes to a halt. She examines the conditions under which an economy can be characterised by a stable employment rate and zero productivity growth. The results of her model show that state intervention in the labor market is crucial to make long-term convergence compatible with a constant and stable employment rate. She then shows that a stable employment rate is possible as long as the negative effect of labor productivity growth on the employment rate is offset by the reduction in working time. Working hours cannot be reduced indefinitely. This is why a better distribution of work is necessary. The same applies to pension funding systems, which depend on GDP growth.
A Keynesian investment policy to accelerate the transition to a low-carbon economy
Although green investment has increased in recent years, the share of fossil fuels in the economy is declining far too slowly.
The ideas defended by Frederich Hayek, Milton Friedman, Ludwig von Mises and Frank Knight, described as ‘neo-liberal’, have strongly structured the economic debate of the last thirty years. According to this neo-liberal model, the market is efficient, so it should be left to its own devices; companies are innovative, so they should be left in charge; and finance should be trusted to be infallible.
Post-Keynesian economists believe that markets are inefficient and that the state must play an important role in the economy, while neo-classical economists believe that if markets can be inefficient, the state is even more so. It has to be said that the climate crisis has largely proved the Keynesians right, and that markets should be organized at the very least. Neoliberal or neoclassical economics lead to under-investment, which risks leading to the collapse of the markets.
The current unstable neoliberal capitalist system naturally leads to excesses of inequality and pervasive exploitation. The latter undermines the moral legitimacy of our system, and the former leads to political divides and instabilities, which, in turn, undermine the system’s economic performance (Stiglitz, 2024). Neoliberalism is not self-sustaining. It’s self-negating. It has misshaped our society and the people in it. The materialistic, extreme selfishness that it has cultivated has undermined democracy, societal cohesion, and trust, resulting in weakening even the functioning of the economy.
According to Julia Steinberger (2024)[2], the climate crisis is brought to us by highly unequal and undemocratic economic systems. The recent history of these economic systems, in the Americas and Eurasia, is dominated by the ascendance of neoliberal ideology. Neoliberal ideology is antidemocratic at its very core. Its aim is to give free-reign over our societies to corporations, not citizens. The fossil fuel industry is a long-time promoter, as well as beneficiary, of the neoliberal takeover of our societies.
How can a fair competition policy work with such heterogeneities? Small businesses and average households pay more taxes in proportion of their revenues than some big corporations and billionaires using fiscal optimization according to several studies[3]. In view of the climate crisis, this leads to a vicious circle and a prisoner’s dilemma (Although some very wealthy people don’t seem to understand this, or think they still have time…).
According to Stern and Stiglitz (2023), an increase in progressive taxation would increase public revenues and reduce the need to borrow. These revenues would go a long way towards providing the funds needed for climate-related investment. Better tax administration can lead to a sharp rise in tax revenues in all countries. The same applies to international agreements aimed at closing the avenues through which wealthy individuals and companies can avoid and evade taxes, including tax havens and profit shifting. Responding to climate change does not require austerity and cuts in public spending. It makes little sense to cut public investment in education, infrastructure, R&D or the environment today simply because, if things go wrong in the future, the debt may not be sustainable.
A fairer and more redistributive tax system, based on the approach adopted at the end of the Second World War
At the end of the Second World War, taxation was much more redistributive. Taxes on capital, high incomes and profits were higher, and the system was more balanced in western countries.
The financial crash of 1929, in which millions lost their savings, was only the worst of the financial gyrations the economy had experienced. Just twenty-two years earlier, there had been the panic of 1907, which had led to the creation of the Federal Reserve, but even it could not save the banking system and the economy; broader government help was needed, which President Franklin Roosevelt delivered through the New Deal (Stiglitz, 2024). Economist John Maynard Keynes provided not just an explanation of what had gone wrong in the Great Depression but also a prescription for what to do about it. His recommendation included a large role for government. Private enterprises were dominant, but government played a vital role in ensuring competition, preventing exploitation, and stabilizing the macroeconomy. In the prevailing system in Western Europe and the United States, markets and the private production of goods and services remained at the center, with government contributing, too, through education, research, infrastructure, helping the poor, providing retirement insurance, and regulating financial and other markets. This economic model was enormously successful.
With the oil price shock of the 1970s, postwar economic arrangements faltered and inflation soared—not the type of hyperinflation that had prevailed in Germany in the 1920s but inflation the US and much of the rest of the world hadn’t seen before. It was disturbing and worrisome. The Right, joined by Democrats whose faith in the system seemed to have been shaken, seized the moment and argued for a new economic system. Before long, regulations and restrictions were stripped away willy-nilly, in what was called liberalization, the freeing of the economy.
Ronald Reagan and Margaret Thatcher were at the forefront of the political battle that reshaped economic policy and Western economies in the last third of the twentieth century. But long before the arrival of these political leaders, the intellectual groundwork had been laid by Friedman and Hayek.
In the United States and Western Europe, the share of the richest people’s income in national wealth fell sharply after the Second World War, before rising again at the end of the 1970s. In the United States, the income of the richest 1% of the population as a percentage of total income fell from 21.6% in 1941 to 10.3% in 1978 and will reach 20.7% in 2023. In France, this share rose from 18.5% in 1935 to 7% in 1984, then to 12% in 2023. In the United Kingdom, this share rose from 19.4% in 1930 to 7.3% in 1982 and 13.1% in 2023.
The income of the least well-off 50% of the population as a proportion of total income rose from 13.2% in 1934 to 21.2% in 1969, then to 13.4% in 2023. In France, this share rose from 14.3% in 1935 to 22.9% in 1982, then to 20.4% in 2023. In the UK, this share rose from 21.4% in 1930, to 23.1% in 1970 and 20.1% in 2023[4].
Three IMF economists (Vitor Gaspar, Shafik Hebous and Paolo Mauro, 2022) believe that evasion and avoidance cause the loss of revenue that could have financed social spending or infrastructure investments. Self-serving national policies of one country can affect others in damaging ways. If each sets its own tax policy without regard for the adverse effects elsewhere, all countries can end up worse off. In 2021, 137 countries achieved a major breakthrough in coordination through an agreement that establishes a global minimum corporate tax of 15%, which will come into force in 2024. Although this is a good start, it will be necessary to go beyond this threshold to further harmonize the global economy.
Some studies suggest that while some of the investments needed to decarbonize the economy are already profitable, others are not[5]. The transition will not be achieved by relying on the goodwill of the players or the free play of the markets. The State must regain an important role in the economy. This is why it is important to return to a system in which the state has the means to invest and plays an important role in the economy. To achieve net-zero carbon, affluent countries will incur costs of at least 20 percent of their annual GDP (Vaclav Smil, 2024).
A reduction in economic asymmetries is necessary. There are many macroeconomic imbalances around the world. In the eurozone, for example, resolving macroeconomic imbalances would make the economy more resilient and efficient in terms of green investment. Countries like France with a large public deficit can reduce it by speeding up the transition to renewable energies and reducing their trade deficit through a policy of ecological re-industrialization.
A reduction in inequalities between emerging and advanced countries and within countries is essential
The US is absolutely going in the wrong direction. Anthropologist Peter Turchin, professor at the University of Connecticut, believes that all the factors conducive to the collapse of societies are present in the United States. In his 2023 book, he explains that when a state has stagnating or declining real wages, a growing gap between rich and poor, overproduction of young graduates with advanced degrees, declining public trust, and exploding public debt, such developments have served as leading indicators of looming political instability. He argues that happy countries don’t elect Donald Trump president. Desperate ones do. Europe has developed a more resilient system, but it still has a lot work to do.
Regulations that promote the low-carbon transition, combined with tax reforms (taxes and subsidies) that reduce and eliminate tax competition between economic agents and between agents with high externalities and those with low externalities.
Economist and former trader Gary Stevenson explains very well why the current economic system is broken. After the Second World War, the Western governments, which owned many assets, handed them over to the private sector with liberalization and the transition from a Keynesian to a neo-liberal economy. States now have much less passive income, which prevents them from redistributing (even when they raise taxes) the agent and reducing inequalities and investing. This is one of the reasons why their debts have increased, even if the rise in debt is mainly due to macroeconomic imbalances and the subprime and Covid-19 crises.
Given that many billionaires resort to tax optimization, economist Gabriel Zucman proposes taxing them not on their income but on their wealth. Some millionaires and businessmen have realized that the system is unsustainable and are asking to be taxed more. This is the case of Patriotic Millionaires movement who are pushing for a wealth tax.
Steering the economy with other indicators beyond GDP alone
Alternative indicators to GDP and IFRS can be implemented at national level, but at company compatibility level. At the macroeconomic level, for example, a country that sees its GDP increase as well as its level of inequality and its greenhouse gas emissions would not be going in the right direction. In tomorrow’s world, governments and businesses will have to think not just in terms of profitability, but also and above all in terms of solvency.
Policymakers should use alternative indicators to GDP to steer the economy based on the work of Kate Raworth’s “Doughnut Economics”. Tim Jackson and Peter Victor (2020) use two composite indicators in their study: an environmental burden index (EBI) which describes the environmental performance of the model; and a composite sustainable prosperity index (SPI) which is based on a weighted average of seven economic, social and environmental performance indicators.
A better industrial and competition policy is necessary
A better competition policy which would make it possible to resolve, in particular, the problem of the domination of platforms that damage demonocracy through the dissemination of misinformation. The digital platforms should be regulated to avoid the spread of misinformation. Industrial policy, competition policy and innovation policy must favor the green economy. Competition and industrial policies should fosters innovations that favor sobriety and the development of the circular economy.
Greater cooperation between economic agents
Although competition has a role to play, cooperation must play an even greater role. If Garrett Hardin described the commons as tragic, which fitted in perfectly with the neoliberal scenario, it was because in his view open access inevitably led to the abuse and depletion of grazing lands, forests and fishing grounds. On this point, he was probably right (Raworth, 2017). Elinor Ostrom, however, has shown that successfully managed commons are not intrinsically open access. On the contrary, these successful commons are governed by clearly defined communities with collectively agreed rules and punitive sanctions for those who violate them, and are far from tragic. Many communities actually manage their land and common resources better than markets do, and better than comparable state systems according to Elinor Ostrom’s analysis. Elinor Ostrom has shown that the truly protective value is not economic but social-ecological: it is by highlighting the social links that underpin natural resources that they can be preserved through the institutionalization of symmetrical relationships of trust, reciprocity and justice, which is what is covered by the notion of ‘bio-solidarity’ proposed by Eloi Laurent (2021).
A better functioning of trade between advanced and emerging countries is also necessary.
References
Barret, A. Stability of Zero-growth Economics Analysed with a Minskyan Model. Ecological Economics.
Berg M., M. Hartley and O. Richters (2015), A stock-flow consistent input-output model with applications to energy price shocks, interest rates, and heat emissions. New J. Phys., 17 (1) p. 015011.
Trust, S. Saye, L. Bettis, O. Bedenham, G.Hampshire, O. Lenton, T. M. & Jesse F. Abrams (2024). Planetary Solvency – finding our balance with nature. Global risk management for human prosperity
Cahen-Fourot L. and M. Lavoie (2016), Ecological monetary economics: a post-Keynesian critique. Ecol. Econ. 126, pp. 163-168.
Institut des politiques publiques (2023). Quels impôts les milliardaires paient-ils?
Jimenez, V. (2024). Labour market stability in a zero-growth economy. Econstor Working Paper, No. 211/2023.
Kemp, L. et al. (2022), Climate Endgame: Exploring catastrophic climate change scenarios. PNAS 2022 Vol. 119 No. 34.
Fontana, G. and M. Sawyer (2015), The macroeconomics and financial system requirements for a sustainable future. In Finance and the Macroeconomics of Environmental Policies, pp. 74–110. London: Palgrave Macmillan.
Fontana, G. and M. Sawyer (2022), Would a zero growth economy be achievable and be sustainable? European Journal of Economics and Economic Policies Intervention 19(1):89-102.
Jackson T. and P. A. Victor (2015), Does credit create a ‘growth imperative’? A quasi-stationary economy with interest-bearing debt. Ecol. Econ., 120, pp. 32-48.
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Herrington, G. (2020). Update to limits to growth. Comparing the World3 model with empirical data. Journal of Industrial Ecology. 2020; 1–13.
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Smil, V. (2024). Halfway Between Kyoto and 2050. Zero Carbon Is a Highly Unlikely Outcome. Fraser Institute.
Stern, N. and J. Stiglitz (2023), Climate change and growth. Industrial and Corporate Change, 2023, 32, 277–303.
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[1] When there is no more growth or when asset values fall sharply, investors’ debts end up strangling them, becoming greater than the value of their assets. Investors then reduce their investments and are forced to sell their financial assets to repay their debts. The resale of assets then causes a downturn in the financial markets and a financial crisis. Source: Minsky H. (1986). Stabilizing an unstable economy.
[2] Source : https://jksteinberger.medium.com/what-we-are-up-against-2290ba8c4b5c
[3] According to a 2021 White House study, the wealthiest 400 billionaire families in the U.S. paid an average federal individual tax rate of just 8.2 percent. For comparison, the average American taxpayer in the same year paid 13 percent. source: https://www.oxfamamerica.org/explore/stories/do-the-rich-pay-their-fair-share/. In France, a study by the Institute of Public Policy (IPP) showed that the very wealthy pay half as much tax as the rest of the population.
[4] Source: https://wid.world/
[5] SPGE, 2022 for France.