Recession: eclipse - or stimulus?

Recession doesn’t have to mean a rollback of enthusiasm for sustainability, argues Ian Christie. Indeed, it might just act as a stimulus. Assuming we actually have one, that is… 

If there is a recession or worse ahead in the UK and around the world, what difference would it make to environmental attitudes, policies and priorities? Conventional wisdom on this issue, already on display in parts of the media, says that an economic downturn means a Green recession too - in attitudes, behaviour and political attention.

Not so fast.  A great deal depends on what kind of recession or turbulence we are entering, and history will not repeat itself; the limited experience of economic recession colliding with Green attitudes and action does not provide much of a guide to how things might go in the next two to three years. A recession now will be different from previous downturns in the memory of households and policy makers - and might even help sustain or raise the profile of green issues and priorities. Moreover, the political context, if exploited well by NGOs and other advocates for environmental action, ought to make for greater competition for votes based on Green concerns.

How worried should we be?

There is a saying in Hollywood: ‘Nobody knows anything’. That is, the place runs on rumour, half-truths, hunches, delusions and best guesses. The financial services sector seems to be operating on the same basis. No-one can say exactly what kind of economic crisis - if any - we might be facing in the UK and around the world.

There is broad agreement that the USA is probably going into recession. There is agreement that house prices here probably will fall - though when and by how much is unclear. There is consensus that the banking sector has been too clever by half, for years, in its selling-on of complicated packages of debt - and that it has shown itself in urgent need of more and better regulation and business ethics. It is certain that a lot of highly paid people in banks and trading houses will lose their jobs, and equally certain that few outside the sector will be weeping on their account. We also know that many banks have little or no idea how far their liabilities extend in relation to ‘sub-prime’ debts, and that they have lost trust in one another’s reputation and risk management. (You might well wonder how it is, in the face of widespread scandal, incompetence and ignorance, that many top executives are still receiving enormous salaries and bonuses. Sadly we will have to leave that very good question for another time.)

But not much else is clear. The crisis could become a deep recession, or it might be largely containable to the banking sector and not affect what is tellingly called the ‘real economy’.

So we face massive uncertainties. Donald Rumsfeld’s time has come again - ‘there are known unknowns, and unknown unknowns’. This matters, because if we want to work out how impending economic turbulence could affect attitudes and policies on the environment, we need to know what trouble might plausibly be in store. As things stand, the general outlook is still very uncertain. From studying the mass media and specialist coverage of the sub-prime crisis and its ripple effects, a wide range of possibilities can be identified:

• A new Depression: some commentators see the current turbulence as the sign of a system-wide crash on a par with that of 1929. However, the differences between now and 1929 are at least as marked as the parallels in the irrationality and bubble markets of the banking sector, and talk of a new Great Crash has subsided in recent months. 
• The ‘perfect storm’ - the collision of the financial crisis with fuel price inflation (thanks to soaring demand for oil worldwide and especially from China) plus serious shortages of food (thanks to a combination of climate problems, diversion of land from food crops to biofuels, and spikes in price leading to withdrawal of some foods from export by producer countries). This is a variant on the new Depression-forecast. We will come back to this scenario below.
• A global recession, rather than full-scale slump - but note that no official sources such as the International Monetary Fund rate this as very probable, even given the problems of debt, confidence and capital in the financial markets.
• A severe recession in the USA, while Europe and much of the rest of the world remains largely ‘insulated’. This seems plausible, although there is more exposure to ‘contagion’ from US sub-prime lending in some economies than others. Against this, we have to set the efforts being made by the central banks to stabilise the banking sector and the housing market: these may well work and reduce the shock to the ‘real economy’.
• A recession of some length and severity in the USA and UK as both economies adjust to the over-valuation of property and to the pile-up of personal debt. Lag effects in the economy mean that the pain has hardly begun and there will be worse to come in 2009 and 2010. This seems plausible, but the nature of the pain depends a great deal on how far overall employment is affected. Provided people keep their jobs, then even negative equity is not an insuperable problem: the answer is to stay put in your home - possibly frustrating but not a disaster. Remember that most house moves are for ‘aspirational’ reasons and not forced by financial factors.
• The continuing growth in the big developing economies - and above all in China - will mean that their demand will help reduce the impact of downturns in the USA and beyond, and so recession could be avoided.

Reasons not to be too fearful

There is no doubt that the current turmoil exposes serious structural problems for the Western economies, and especially for the USA and UK. These include the quality of banking system regulation, the reliance on consumer debt to propel growth in the economy, the proliferation of ill-understood financial products for selling on debt and generating profit out of thin air, and the dangers of over-reliance on imported fuel and food. But even with all these problems combining as in early 2008 to create a period of severe turbulence, it must be said that the crisis does not feel anything like as serious as in previous recessions. In 1973-74 the lights went out and there was a three-day week in Britain, amid talk of revolution and ungovernability. In the late 1970s and early 1980s, there was mass devastation of manufacturing employment and of whole communities, along with riots in the streets, even in the placid backwater of Hitchin, Herts, where I lived at that time. In 1990-93 hundreds of thousands of people lost their jobs and/or found that they could not afford to keep their home or to move.

Other factors are relevant, too. First, Western economies in general and the UK in particular are a lot richer than they were even 15 years ago, and (despite the rise of the super-rich) the gains in wealth have been widely spread. So a downturn from the current high point of consumption might not be felt as a return to anything resembling hardship for most (though it will be that for some).

Second, despite all the accumulated consumer debt in the form of mortgages etc, the exposure of the UK population to the dread negative equity is less than it was in the early 1990s. The ‘loan-to-value’ ratio on homes is much less alarming for householders than it was 15 years ago. This means that prices would have to crash by 20 per cent or more to expose more than one million households to negative equity. This could happen, but it is not inevitable. Even if it did, the key issue is whether a house price fall is accompanied by a steep rise in unemployment. Provided people have jobs and reliable incomes, then even negative equity is something that can be coped with. As it is, the national shortfall in housing supply seems likely to mean that a price slump will be short-lived.

Finally, in spite of their frequent mistakes in the past period of irrational economic exuberance, the regulatory authorities do seem to have managed to stabilise the situation in the USA and UK. Northern Rock has not been the start of a domino effect, and nor has Bear Stearns. It could all yet unravel, but the seriousness of the situation has focused minds in the central banks and governments and legitimised substantial public intervention, a point to which we will return.

To sum up: we don’t know what is coming, but it seems unlikely to be a Great Depression and it could yet be managed with relative ease. The crisis - and it really is a crisis for the banks - has largely been contained within the virtual economy of the financial services, and has not contaminated the ‘real economy’ of jobs, production and consumption, or not yet significantly.

Greens squeezed?

However serious or otherwise the downturn we face, some commentators have been quick to argue that green politics and policies will face a recession of their own. Economic turmoil, they claim, will take policymakers’ and voters’ attention away from the environment, and focus it instead on more ‘pressing’ concerns.

This conventional wisdom has two things going for it: first, it is widely believed in the media and in politics, and so has a self-fulfilling character; and second, it seems to rest on solid experience - namely the supposed decline of green politics from 1990 as recession struck.

This second claim is true up to a point. The Green Party vote plummeted from its high of 15% in the 1989 European elections. And polls such as the British Social Attitudes Survey showed diminishing concern for environmental issues. Recession did indeed seem to have eclipsed the environment as a key focus of public concern.

This is perhaps unsurprising, given the sharp rise in unemployment and home repossessions experienced at the time. But we need to think more than twice before we use the 1990s evidence as the basis for a general law that fatalistically assumes every economic downturn means an environmental one, too. And here’s why.

First, a focus on immediate economic concerns does not necessarily mean a loss of concern for the environment. If I lose my job or take a large pay cut, I might worry a great deal about those things while still caring about the environment; and I might still care about the environment while feeling less of a sense of ‘agency’ for taking green action. The survey evidence from the 1990s shows a plateauing of green priorities - but not a crash. The Rio summit of 1992 had a pervasive effect at local levels throughout the decade, and there was no sharp decline in NGO membership or support.

Second, economic upheavals don’t repeat themselves precisely, and the wider context shapes their effects. Consider the last three downturns. The 1973-74 crisis was a ‘perfect storm’ of inflation, strikes, fuel shortages and oil price rises. It focused minds in the West on energy conservation and over-dependence on oil – though sadly not for long enough. The early 1980s were plunged into recession by more oil price hikes, and also by policies of deflation and deindustrialisation. The early 1990s crisis was the result of a credit boom and a (burst) bubble in the housing market. So downturns are not all created equal, and the wider political and economic context counts for a lot.

So there is no cause for fatalism about environmental priorities in the current turbulence. There are plenty of reasons to believe that the recession, if such it proves to be, may not be as severe as widely feared. But even if it is, public awareness of climate change, waste and environmental issues relating to food has risen considerably since the economy last took a dive. Such awareness will not simply be eliminated by a downturn, even if it is not ‘front of mind’ for some any longer.

Then there’s the fact that the momentum behind significant eco-policy commitments is now established. In the UK, the Climate Bill, along with the pervasiveness of climate change discussions and initiatives in general, means that there will be no escaping the issue, even if action is less than optimal.

A green recession?

Moreover, the current economic turbulence is partly due to factors that will, in effect, help maintain a focus on environmental priorities. Those who fear a ‘perfect storm’ recession note that the crisis for the banks coincides with a spike in food and oil prices. Now, some of the latter can be attributed to speculators and to the denomination of the oil price in dollars. But more significant is the shadow of Malthus. The food price surge is rooted in the crowding out of crop production by biofuels and land take for development, in localised damage caused by the first signs of climate shifts, and in growing demand for meat from China and India. And the oil price spike is related to ever-rising demand for fossil fuels, and increased competition for diminishing supplies. So the recession, if it comes, will be accompanied by growing concerns about food, climate and energy security among governments, and by more focus from citizens on the cost of food, travel heating and lighting.

Each of those can be a driver for greener behaviour. The surge in food and oil prices can be the basis for communications about local sourcing, fair trade and the transition to a low carbon economy. It could encourage interest in frugality and conservation in both households and organisations, and this too can be given a green dimension - cheaper living can be better quality living.

Meanwhile, the banking crisis has forced regulators and politicians to make major interventions in the marketplace for the common good, and to save the markets from themselves. Public intervention is now legitimised in a way unthinkable 15-20 years ago, and this can be used to argue for more environmental incentives and smart regulation for the economy. More immediately, the time is surely right for a message of ‘Don’t get fooled again’ when it comes to the hollow promises of debt-fuelled consumerism.

And finally, the electoral context is much more promising for green issues than in the last recession. Assuming the general election is fairly closely contested, as seems possible, then environmental concerns could well be a ‘deal-breaker’ for many marginal voters - and for parties in coalition or minority government talks.

So there should be no fatalism about economic downturn meaning a green recession. If the above is accurate, environmentalists will have only themselves to blame if public and politicians downgrade their interest in the environment.

Ian Christie is an Associate of Green Alliance and independent writer and advisor on SD.

23 May 2008

Ian Christie