Last week I posted on air quality problems in the Great Smokies Nat'l Park which reminded me of a story a week earlier (Growth Threatens National Parks ...):
An Associated Press review finds the national parks are facing unprecedented pressures inside and outside their borders from population growth, homeland security concerns and Americans' insatiable desires for conveniences such as hotels, restaurants, stores, cell phones and vacation homes.
If economic growth is the culprit then a sure-fire way to fix the national park resource allocation problem is to reduce economic growth, right? Even better, how about a steady state, zero economic growth, economy? This issue is always on my mind these days as the AFS considers a policy statement on economic growth (I've fussed about this before).
This is a bad idea, I think.
Achieving a goal a zero economic growth would require a policy of contractionary macroeconomic policy. The two major macro policy instruments are monetary policy (i.e., interest rates controlled by the Federal Reserve system, the “Fed”) and fiscal policy (government expenditures and taxes controlled by the President and Congress). Monetary policy is a very blunt policy instrument. Changes in short term interest rates are used mainly to control the value of the currency, i.e., to control inflation with secondary goals of achieving economic growth and full employment.
In order to influence the inflation rate the Federal Reserve can control short term interest rates (i.e., the so-called federal funds rate) by buying and selling short-term Treasury bills but long term interest rates are only indirectly controlled. Long term interest rates (e.g., mortgage rates) have a greater effect on economic growth. A prime example of the limited ability of the Fed to control interest rates is the January 2006 inversion of the “yield curve” (the yield curve is the relationship between interest rates and their term to maturity). The Federal Reserve has raised short term interest rates from 2.25% to 4.25% during 2005. Long term interest rates (e.g., mortgage rates) have stayed constant, and even fallen slightly below short-term rates, over the same period.
Fiscal policy has its own problems. Fiscal policy is subject to significant lags and economic growth is subject to cycles. In a steady-state economy, by the time positive economic growth is measured and recognized by policy makers forces that might lead to moderations in growth might already be under way. Contractionary fiscal policy (increased tax rates and lower government spending) designed during this phase of the business cycle is likely to cause a recession.
Another concern is the effect of contractionary macro policy on measures of macroeconomic performance other than economic growth. Reductions in economic growth tend to be correlated with high unemployment and low inflation. High unemployment leads to a number of social ills that are avoided with economic growth. Low inflation can turn into deflation (a fall in the overall price level). Deflation is a major macroeconomic problem and one reason why the Federal Reserve drove short term interest rates to such absurdly low levels during the early part of this century. Deflation can lead to recession because consumers get used to low prices and put off purchases indefinitely. It is difficult to break free of a deflationary spiral (e.g., consider the economy of Japan during the 1990s).
While one can use monetary policy when attempting to control inflation and avoid deflation, and fiscal policy to increase or decrease economic growth, the links to the environment of these macroeconomic policies are tenuous at best. Indeed, zero economic growth could cause the perverse result of degradation in the environment.
Consider an economy that produces goods and services with three inputs: labor, physical capital (factories and machines) and natural capital (environmental resources). Each of these inputs can substitute for the others to some extent. Contractionary macro policy that reduces overall economic growth could lead to a degradation of natural capital. Higher interest rates would reduce the use of physical capital as the cost of loanable funds rises and business firms borrow less. Also, higher income taxes would reduce the supply of labor increasing wage rates. In order to increase output, business firms and individuals might substitute into more intensive use of natural capital. In other words, the relatively cheaper energy, forestry and fishery resources would substitute for the relatively more expensive labor and physical capital.
So, smartypants, what is the solution? Consider this excerpt from the same article:
In some cases, park officials have been able to balance the demands of visitors with the demands of progress. For instance, park superintendents increasingly rely on shuttle buses and vans to reduce traffic inside parks.
That sounds reasonable.
But superintendents are mostly powerless to control outside growth, which brings inevitable costs inside the parks.
Right, only the Fed, the President and Congress can do that (but, see above).
The encroachment shows no signs of diminishing. Scenic surroundings make for desirable real estate, uncertain oil supplies keep new coal-fired power plants coming, and at least some tourists continue to demand conveniences in the wild.
Microeconomics has solutions for each of these. Land and energy use can be regulated in an efficient way, so that growth occurs with less negative environmental impact. And ban cell towers in national parks. Tourists are free to choose other vacation spots when they demand modern conveniences.
