News December 1, 2019

The negative growth side effects over the last 50 years

Although growth has undeniably been a positive force in so many areas over the last 200-plus years, the side effects have often been ignored. In this section we address three key side effects – debt, inequality, and the environment.


With debt piles at record levels, and demography suggesting more debt is likely, a world without growth invites a financial crisis of epic proportions. If we can’t grow our way out of the increasing debt burden, our economic system is very vulnerable. Sustainable growth is therefore essential.

A look at recent history shows that to achieve the living standards people have collectively demanded, governments and individuals have accumulated more and more debt. This has particularly been the case over the last half century.

After the financial crisis, this debt began to look more unsustainable in free markets, and central banks embarked on policies of very low interest rates, aggressive money printing, and debt purchases that continue to this day. While that has had the effect of making high debt loads more sustainable today, it is setting the conditions for a debt crisis in the future, especially if we downplay the importance of economic growth. The reality is that many places around the globe have already passed the point at which debt can be sustainable without regular central bank money printing.

Inequality as a negative side effect of growth – an increase after centuries of decline

As Figure 10 shows, at a global level income inequality has actually narrowed in recent decades, which chimes with our earlier analysis on the recent big reduction in poverty during the globalisation era. So in that respect we should celebrate this era of global growth. However, there is evidence that inequality has increased in some countries, especially in the developed world and particularly in terms of wealth, as we’ll see below.

While there are flaws, it appears that the combination of capitalism and globalisation is the best way to build an economic system that fosters growth and wealth for all. However, over the last four decades, societies have not ensured redistribution to those left behind by globalisation. This has led to extreme inequality in many areas but is perhaps more acute in terms of wealth over incomes. Not only is this dangerous for society, but it risks fuelling more populist movements.

In the end, these populist movements may eventually support anti-capitalist and anti-globalisation policies. Not only would this risk curtailing growth, but it may also have more impact on those with lower incomes. That is because while everyone would be made poorer, the poor would be less able to afford to absorb their losses.

Prior to the twentieth century, wealth was heavily concentrated in the elites of society. Figures 11 and 12 show this for France and the UK (where we have long time series). From around 1900 to the end of the 1970s, both nations’ wealth spread out from the top one per cent and ten per cent of the population. Since then, this spread has stopped. It is interesting that even though France is one of the more redistributive societies in the world, even here, the trend started to plateau and steadily reverse.

If France is one of the more redistributive countries in the world, the US is arguably at the other end of the spectrum and as Figure 13 shows, the share of the pie owned by the bottom 90 per cent of the population rose consistently between the time of the Great Depression in the 1930s to the start of the 1980s. From this point, it has fallen sharply with the share owned by the top 0.1 per cent having approached the share owned by the bottom 90 per cent in recent years, after being far apart just four decades ago.

In many ways, this change in wealth is tied to asset prices. Figure 14 shows an index we have created of 15 developed market government bond markets and 15 equity markets over the last 200 years. The cheapest valuation mark is zero per cent, and 100 per cent is the most expensive. As can be seen, assets (typically owned by the better-off in society) have gone full circle from being the cheapest in history around the turn of the 1980s to the most expensive in recent years.

Exacerbating the problem shown in this chart is that fact that it does not include housing. With the explosion of widespread property ownership in recent decades, the increase in debt, and the reduction of interest rates, we have seen a huge rise in house prices. Anyone who has ridden this rise in property prices will now likely have higher wealth than those who have not. This certainly helps to widen wealth inequality. It also causes big inter-generational problems as the young have less means to buy property.

So while there are some unresolved questions over income inequality, there is little doubt that those exposed to asset price growth have done exceptionally well over the last 40 years. This has left a society of haves and have nots and a generational divide between young and old. Given that the assets of the older generation will eventually be passed on to today’s young, in some way or another, this is not a permanent problem but in the immediate period it adds to a divided society.

Environmental issues

Financial crises – as painful as they are – can be fixed over time, and their impact might not be cumulative. However, damage to the environment is more likely to be irreversible if a tipping point is reached. In the eyes of many scientists, such a point is close if not already passed.

Just as growth in emissions is falling, the public’s agitation on the issue has reached the point at which it now affects politics, policy, consumer behaviour, and share prices. Public support is moving towards environmental issues at a breathtaking pace, and governments and companies need to make sure they keep up.

At the start of this piece we showed that for most of the last millennium there was little economic growth, and little improvement in living standards or life expectancy. The Industrial Revolution was a key tipping point for economic growth, and it subsequently facilitated massively improved living standards, health, education, personal security, and, eventually, the extraordinary population growth of the twentieth century.

While correlation doesn’t equal causality, there is widespread scientific agreement that humans have created the dramatic increases in carbon in the Earth’s atmosphere. Today’s levels are unprecedented in at least 800,000 years.

Furthermore, when we zoom in on the last 2,000 years, we can see that carbon density in the atmosphere shot up right after the first Industrial Revolution.

While the US is the largest contributor to carbon emissions, the rapid emergence of China and India in the globalisation era has led to them emitting a greater share. The good news is that the US has reduced its emissions on a per capita basis for several decades, even if its total emissions are now similar to what they were in 1970. On the whole, they do seem to have declined slightly from their peak in the early years of this century.

The EU has done an even better job in managing its emissions on both measures since the 1970s. Of course, many developed countries have ‘outsourced’ their emissions as they have moved factory production to emerging countries. This reduces the beneficial impact of lower emission data. That said, some countries that outsource emissions are still lowering their 'consumption emissions'. For example, the UK's 'consumption' emissions are still below 1990 levels based on the latest data from the University of Leeds, even though 'territorial' emissions are well below.

Meanwhile there is good evidence that China’s emissions will level off at much lower levels on a per capita basis than the US saw at its peak.

There is also an interesting link between emissions and inequality. Work by Oxfam shows that the rich overwhelmingly pollute more than the poor. For example, the poorest half of the Chinese population (over 600m people) have a total emissions footprint that is still only one-third that of the richest ten per cent of US citizens (around 30m people). Similarly, the poorest half of the Indian population (around 600m people) emits only half as much – again, about the same – as the richest ten per cent of people in Japan (around 12m people).

This fact also feeds into one of the key difficulties in the climate change debate. While the rich are responsible for most emissions on a consumption basis, the production of the things they consume is frequently done in less-well-off countries. So while some emerging countries use dirty forms of power generation compared with some advanced countries, the poorer countries have a legitimate argument to make that they should not be penalised for both the demands of advanced consumers and the fact that their standard of living is still catching up.

In other words, many now-advanced countries acquired their wealth by polluting the environment, so it can be seen as unfair for them to now limit the capacity of poorer countries to catch up. There are, of course, complexities around this debate, and it is one to which policymakers need to be particularly attuned.

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