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Piketty Acknowledges a Limit to Inequality–Will He Acknowledge the Limits to Growth?

by James Magnus-Johnston

Johnston_photoIn Piketty’s celebrated new work, Capital in the 21st Century, we are treated to a robust argument about the mechanics of worsening structural inequality. He narrates why owners of capital assets–stocks, bonds, and real estate–historically realize higher returns than wage workers. Piketty uses econ-speak to describe this as a gap in “the capital-income ratio,” and explains how our present system is engineered to favour capital-owners or “rentiers.” In the 21st century, he predicts slower growth in population and productivity, but a higher rate of return on capital, pushing us into inequality levels not seen since the 19th century.

But the limits we face are far greater than limits to just the capital-income ratio. While many of us share Piketty’s anxiety about worsening inequality (for me, every time I see a headline celebrating the rise of house prices), worsening structural inequality at this stage in history is but one symptom of our obsession with growth. Like Piketty, many post-growth thinkers are calling for a system change so the distribution of wealth will not inevitably concentrate in fewer and fewer hands. But rather than Piketty’s proposed progressive tax on wealth, we are calling for a fundamental adjustment to the financial system to make it more socially equitable and ecologically sustainable.

It might be helpful to interrogate the question of inequality this way:

  • Why is it that rentiers can achieve such high rates of net worth?
    Because overly-inflated asset values make rentiers look great on paper, and those funds can be leveraged for even more consumption.
  • How did asset values become so inflated in the first place?
    Because everyone from hedge fund managers to real estate investors bid up prices.
  • Why can prices be bid up? 
    Because banks lend out historically unprecedented amounts of money in the form of debt.
  • Why do we need so much debt?
    Because if we fail to grow by at least the rate of interest, the entire financial system enters a state of default and collapse! Herman Daly proposes an increase to the fractional reserve requirement so that banks are able to lend out real money instead of just creating more debt.

While Piketty does acknowledge how the “financialization of the economy in no way contributes to the real economy,” he stops short of acknowledging that the volume of debt-money in the economy makes money scarce for some and abundant for others, and that the system is set up to either grow exponentially or fail spectacularly. More dubiously, in Robert Solow’s review of Piketty’s book, Solow suggests that “a society or the individuals in it can decide to save and to invest so much that they (and the law of diminishing returns) drive the rate of return below the long-term growth rate.” Not so in a debt-backed monetary system steeped in stratospheric and unprecedented levels of debt!

Piketty similarly avoids acknowledging peak oil or ‘limits to energy returns.’ At the most fundamental level, economic growth and capital accumulation require huge flows of matter and energy. This important consideration takes the form of but a few small caveats in Piketty’s book. He predicts that “wealthy countries” will grow at a rate of “1.2 percent,” while acknowledging that such a growth rate can only be achieved as “new sources of energy are developed to replace hydrocarbons.” I’m not sure how this prediction can be taken seriously when we are always and everywhere these days confronted by diminishing energy returns. These limits are evident in our reliance on unconventional oil, including fracking, the tar sands, and all of the new hazards that come with shipping it, such as building new pipelines and ports in fragile ecological zones, the release of methane and other undesirables from fracking, and the looming spectre of another Lac Megantic disaster. Add to this the uncounted costs of climate change–from private insured losses to government disaster expenses–and we wind up in the highly questionable position of counting disaster rebuilding efforts as additions to GDP!

DivideByZeroError

What happens if Picketty assumes a growth rate of zero? ERROR.

Perhaps, interpreted liberally, Piketty’s prediction of 1.2 percent growth is a couched acknowledgement that we have a failed growth economy on our hands. Or perhaps there is an even simpler methodological explanation for Piketty’s prediction, which is that if he were to assume a growth rate of zero, the “law” he applies–“beta equals savings divided by growth”–would yield absolutely no results whatsoever! And who can make newsworthy predictions with a divide-by-zero error message?

Piketty’s research is certainly useful and clearly resonates with a disillusioned public seeking to understand the causes of growing inequality. But without full acknowledgement of the limits to growth, there are also limits to his historical analogies–after all, the extent of ecological overshoot makes this period remarkably different from any period before it. Which means that the laws and formulae used throughout his book must be taken with a healthy dose of skepticism. EF Schumacher wrote

economists themselves, like most specialists, normally suffer from a kind of metaphysical blindness, assuming that theirs is a science of absolute and invariable truths, without any presuppositions. Some go as far as to claim that economic laws are as free from ‘metaphysics’ or ‘values’ as the law of gravitations.

Piketty makes a compelling, historically grounded argument about worsening structural inequality. But perhaps we can call for bolder action to respond to contemporary problems, including serious financial reform that reduces or extinguishes unsustainable debt; nurturing a grassroots movement toward more equitable, democratic work structures (so that more people have access to assets and ownership in the first place); and teaching a new generation of economists that all financial capital is fundamentally a gift from nature.

Tensions in Ukraine: A Scramble for Growth?

by James Magnus-Johnston

The situation in Ukraine is undoubtedly complex, but it may be as much about a scramble for growth and fossil fuel as it is about ethno-cultural identity.

In a statement issued last week, Ukrainian Prime Minister Arseniy Yatsenyuk focused heavily upon energy politics. He accused Russia of using energy as a “new nuclear weapon.” The cold war reference is clear: just as the former Soviet Union used its nuclear arsenal to hold the world hostage to conflict, today it’s fossil fuel that’s used as a bargaining chip in the geopolitical game.

Europe’s dependence upon Russian fossil fuel helps explain why the Russian leadership has been able to act without fear of retribution. Over 50 percent of Russian gas exports to Europe pass through Ukraine, and Europe relies on Russia for 40 percent of its imported fuel.

The energy sector drives the European economy as well as the world’s high-finance casino, in which speculative claims on fossil fuel inflate dividends to inequitable heights. Yatsenyuk acknowledges that “[the Russians] sell oil and gas mainly to the EU and then take Euros, dollars and pounds — and buy weapons [and] military equipment.” This creates a vicious cycle in which super-inflated fossil fuel dividends can be leveraged to buy even more military equipment, which is in turn used to control fossil fuel infrastructure. And voila — uneconomic growth.

Danger in Ukraine

Pursuit of cheap energy and unending growth spell danger in Ukraine and elsewhere around the world (photo credit: Trey Ratcliff).

The resulting concentration of wealth in the hands of the few appears to feed nationalist fervor at home just as it buys political favor abroad. Russia’s biggest players have been investing around the world for years, but references to Russian power and influence belie the extent of Russian inequality. Russia “has the highest level of wealth inequality in the world, apart from small Caribbean nations with resident billionaires,” according to a 2013 report by Credit Suisse. In Russia, 110 billionaires hold a shocking 35% of all wealth; globally, billionaires collectively account for only 1-2% of total household wealth.

My intent is not to characterize Russia as the classic American villain. In fact, Ukrainian nationalists are, by some accounts, as menacing to Ukraine’s future as Putin’s Russia, and there is plenty of Western hypocrisy for a second editorial. What we need to consider is that the remaining Russian carbon should not be removed from the ground, and all of the supposed spinoff benefits — the military buildup, the further fuel extraction, the super-inflated dividends — generate harmful growth that benefits only a few.

Yet according to the outdated neoclassical script for economic success, growth is signalling to some that Russia is somehow on the right track — a display of power, progress, and innovation. Like other present-day examples, including nationalistic rhetoric surrounding tar-sands production in Canada, dogmatic support of growth is more accurately characterized as hubris, stagnation, and ill-advised development.

The planet’s life support system doesn’t have time for a rehearsal of twentieth-century nationalism fed by a rush for cheap oil; nor will the “victors” in any contemporary power struggle have the opportunity to cash in their casino winnings. Without embracing a post-growth paradigm shift, we’ll all be in for a gruesome ride. With cheap oil and the casino economy fading into history, we need to adopt a steady-state economy and give everyone a chance at winning; otherwise we’ll have to accept senseless land and resource grabs in which everyone loses.

James Magnus-Johnston is the Canadian Director of CASSE and a professor of political studies and economics at Canadian Mennonite University.

Top 10 Policies for a Steady-State Economy

by Herman Daly

Herman DalyLet’s get specific. Here are ten policies for ending uneconomic growth and moving to a steady-state economy. A steady-state economy is one that develops qualitatively (by improvement in science, technology, and ethics) without growing quantitatively in physical dimensions; it lives on a diet — a constant metabolic flow of resources from depletion to pollution (the entropic throughput) maintained at a level that is both sufficient for a good life and within the assimilative and regenerative capacities of the containing ecosystem.

Ten is an arbitrary number — just a way to get specific and challenge others to suggest improvements. Although the whole package here discussed fits together in the sense that some policies supplement and balance others, most of them could be adopted singly and gradually.

1. Cap-auction-trade systems for basic resources. Caps limit biophysical scale by quotas on depletion or pollution, whichever is more limiting. Auctioning the quotas captures scarcity rents for equitable redistribution. Trade allows efficient allocation to highest uses. This policy has the advantage of transparency. There is a limit to the amount and rate of depletion and pollution that the economy can be allowed to impose on the ecosystem. Caps are physical quotas, limits to the throughput of basic resources, especially fossil fuels. The quota usually should be applied at the input end because depletion is more spatially concentrated than pollution and hence easier to monitor. Also the higher price of basic resources will induce their more economical use at each upstream stage of production, as well as at the final stages of consumption and recycling. Ownership of the quotas is initially public — the government periodically auctions them to individuals and firms. There should be no “grandfathering” of quota rights to previous users, nor “offshoring” of quotas for new fossil fuel power plants in one by place by credits from planting trees somewhere else. Reforestation is a good policy on its own.  It is too late for self-canceling half measures — increased carbon sequestration and decreased emissions are both needed. The auction revenues go to the treasury and are used to replace regressive taxes, such as the payroll tax, and to reduce income tax on the lowest incomes. Once purchased at auction the quotas can be freely bought and sold by third parties, just as can the resources whose rate of depletion they limit. The cap serves the goal of sustainable scale; the auction serves the goal of fair distribution; and trading allows efficient allocation — three goals, three policy instruments. Although mainly applied to nonrenewable resources, the same logic works for limiting the off-take from renewable resources, such as fisheries and forests, with the quota level set to approximate a sustainable yield.

2. Ecological tax reform. Shift the tax base from value added (labor and capital) to “that to which value is added,” namely the entropic throughput of resources extracted from nature (depletion), and returned to nature (pollution). Such a tax shift prices the scarce but previously un-priced contribution of nature. Value added to natural resources by labor and capital is something we want to encourage, so stop taxing it. Depletion and pollution are things we want to discourage, so tax them. Payment above necessary supply price is rent, unearned income, and most economists have long advocated taxing it, both for efficiency and equity reasons. Ecological tax reform can be an alternative or a supplement to cap-auction-trade systems.

3. Limit the range of inequality in income distribution with a minimum income and a maximum income. Without aggregate growth poverty reduction requires redistribution. Unlimited inequality is unfair; complete equality is also unfair. Seek fair limits to the range of inequality. The civil service, the military, and the university manage with a range of inequality of a factor of 15 or 20. Corporate America has a range of 500 or more. Many industrial nations are below 25. Could we not limit the range to, say, 100, and see how it works? This might mean a minimum of 20 thousand dollars and a maximum of two million. Is that not more than enough to give incentive for hard work and compensate real differences? People who have reached the limit could either work for nothing at the margin if they enjoy their work, or devote their extra time to hobbies or public service. The demand left unmet by those at the top will be filled by those who are below the maximum. A sense of community, necessary for democracy, is hard to maintain across the vast income differences current in the United States. Rich and poor separated by a factor of 500 have few experiences or interests in common, and are increasingly likely to engage in violent conflict.

4. Free up the length of the working day, week, and year — allow greater option for part-time or personal work. Full-time external employment for all is hard to provide without growth. Other industrial countries have much longer vacations and maternity leaves than the United States. For the classical economists the length of the working day was a key variable by which the worker (self-employed yeoman or artisan) balanced the marginal disutility of labor with the marginal utility of income and of leisure so as to maximize enjoyment of life. Under industrialism the length of the working day became a parameter rather than a variable (and for Karl Marx was the key determinant of the rate of exploitation). We need to make it more of a variable subject to choice by the worker. Milton Friedman wanted “freedom to choose” — OK, here is an important choice most of us are not allowed to make! And we should stop biasing the labor-leisure choice by advertising to stimulate more consumption and more labor to pay for it. At a minimum advertising should no longer be treated as a tax-deductible expense of production.

5. Re-regulate international commerce — move away from free trade, free capital mobility, and globalization. Cap-auction-trade, ecological tax reform, and other national measures that internalize environmental costs will raise prices and put us at a competitive disadvantage in international trade with countries that do not internalize costs. We should adopt compensating tariffs to protect, not inefficient firms, but efficient national policies of cost internalization from standards-lowering competition with foreign firms that are not required to pay the social and environmental costs they inflict. This “new protectionism” is very different from the “old protectionism” that was designed to protect a truly inefficient domestic firm from a more efficient foreign firm. The first rule of efficiency is “count all the costs” — not “free trade,” which coupled with free capital mobility leads to a standards-lowering competition to count as few costs as possible. Tariffs are also a good source of public revenue. This will run afoul of the World Trade Organization/World Bank/International Monetary Fund, so….

Ten pieces of the policy puzzle for an earth-centric economy

Ten pieces of the policy puzzle for an earth-centric economy

6. Downgrade the WTO/WB/IMF. Reform these organizations based on something like Keynes’s original plan for a multilateral payments clearing union, charging penalty rates on surplus as well as deficit balances with the union — seek balance on current account, and thereby avoid large foreign debts and capital account transfers. For example, under Keynes’s plan the U.S. would pay a penalty charge to the clearing union for its large deficit with the rest of the world, and China would also pay a similar penalty for its surplus. Both sides of the imbalance would be pressured to balance their current accounts by financial penalties, and if need be by exchange rate adjustments relative to the clearing account unit, called the “bancor” by Keynes. The bancor would also serve as the world reserve currency, a privilege that should not be enjoyed by any national currency, including the U.S. dollar. Reserve currency status for the dollar is a benefit to the U.S. — rather like a truckload of free heroin is a benefit to an addict. The bancor would be like gold under the gold standard, only you would not have to tear up the earth to dig it out. Alternatively a regime of freely fluctuating exchange rates is a viable possibility requiring less international cooperation.

7. Move away from fractional reserve banking toward a system of 100% reserve requirements. This would put control of the money supply and seigniorage (profit made by the issuer of fiat money) in the hands of the government rather than private banks, which would no longer be able to live the alchemist’s dream by creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements. Banks would earn their profit by financial intermediation only, lending savers’ money for them (charging a loan rate higher than the rate paid to savings or “time-account” depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a depositor (and not available to him during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by prior saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully — no more easy credit to finance the massive purchase of “assets” that are nothing but bets on dodgy debts. To make up for the decline in bank-created, interest-bearing money the government can pay some of its expenses by issuing more non-interest-bearing fiat money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, driving the price level up. As soon as the price index begins to rise the government must print less and tax more. Thus a policy of maintaining a constant price index would govern the internal value of the dollar. The Treasury would replace the Fed, and the target policy variables would be the money supply and the price index, not the interest rate. The external value of the dollar could be left to freely fluctuating exchange rates (or preferably to the rate against the bancor in Keynes’s clearing union).

8. Stop treating the scarce as if it were free, and the free as if it were scarce. Enclose the remaining open-access commons of rival natural capital (e.g., the atmosphere, the electromagnetic spectrum, and public lands) in public trusts, and price them by cap-auction-trade systems, or by taxes.  At the same time, free from private enclosure and prices the non-rival commonwealth of knowledge and information. Knowledge, unlike the resource throughput, is not divided in the sharing, but multiplied. Once knowledge exists, the opportunity cost of sharing it is zero, and its allocative price should be zero. International development aid should more and more take the form of freely and actively shared knowledge, along with small grants, and less and less the form of large interest-bearing loans. Sharing knowledge costs little, does not create un-repayable debts, and increases the productivity of the truly rival and scarce factors of production. Patent monopolies (aka “intellectual property rights”) should be given for fewer “inventions,” and for fewer years. Costs of production of new knowledge should, more and more, be publicly financed and then the knowledge freely shared. Knowledge is a cumulative social product, and we have the discovery of the laws of thermodynamics, the double helix, polio vaccine, etc. without patent monopolies and royalties.

9. Stabilize population. Work toward a balance in which births plus in-migrants equals deaths plus out-migrants. This is controversial and difficult, but as a start contraception should be made available for voluntary use everywhere. And while each nation can debate whether it should accept many or few immigrants, and who should get priority, such a debate is rendered moot if immigration laws are not enforced. We should support voluntary family planning and enforcement of reasonable immigration laws, democratically enacted.

10. Reform national accounts — separate GDP into a cost account and a benefits account. Natural capital consumption and “regrettably necessary defensive expenditures” belong in the cost account. Compare costs and benefits of a growing throughput at the margin, and stop throughput growth when marginal costs equal marginal benefits. In addition to this objective approach, recognize the importance of the subjective studies that show that, beyond a threshold, further GDP growth does not increase self-evaluated happiness. Beyond a level already reached in many countries, GDP growth delivers no more happiness, but continues to generate depletion and pollution. At a minimum we must not just assume that GDP growth is economic growth, but prove that it is not uneconomic growth.

Currently these policies are beyond the pale politically. To the reader who has persevered this far, I thank you for your willing suspension of political disbelief. Only after a significant crash, a painful empirical demonstration of the failure of the growth economy, would this ten-fold program, or anything like it, stand a chance of being enacted.

To be sure, the conceptual change in vision from the norm of a growth economy to that of a steady-state economy is radical. Some of these proposals are rather technical and require more explanation and study. There is no escape from studying economics, even if, as Joan Robinson said, the main reason for it is to avoid being deceived by economists. Nevertheless, the policies required are far from revolutionary, and are subject to gradual application. For example, 100% reserve banking was advocated in the 1930s by the conservative Chicago School and can be approached gradually, the range of distributive inequality can be restricted gradually, caps can be adjusted gradually, etc. More importantly, these measures are based on the impeccably conservative institutions of private property and decentralized market allocation. The policies here advocated simply reaffirm forgotten pillars of those institutions, namely that: (1) private property loses its legitimacy if too unequally distributed; (2) markets lose their legitimacy if prices do not tell the truth about opportunity costs; and as we have more recently learned (3) the macro-economy becomes an absurdity if its scale is required to grow beyond the biophysical limits of the Earth.

Well before reaching that radical biophysical limit, we are encountering the classical economic limit in which extra costs of growth become greater than the extra benefits, ushering in the era of uneconomic growth, whose very possibility is denied by the growthists. The inequality of wealth distribution has canceled out the traditional virtues of private property by bestowing nearly all benefits of growth to the top 1%, while generously sharing the costs of growth with the poor. Gross inequality, plus monopolies, subsidies, tax loopholes, false accounting, cost-externalizing globalization, and financial fraud have made market prices nearly meaningless as measures of opportunity cost. For example, a policy of near zero interest rates (quantitative easing) to push growth and bail out big banks has eliminated the interest rate as a measure of the opportunity cost of capital, thereby crippling the efficiency of investment. Trying to maintain the present growth-based Ponzi system is far more unrealistic than moving to a steady-state economy by something like the policies here outlined. It is probably too late to avoid unrealism’s inevitable consequences. But while we are hunkered down and unemployed, enduring the crash, we might think about the principles that should guide reconstruction.

A Mindful Path to a Steady State Economy

by Rick Heller

The Occupy Wall Street movement has struck a chord with its protests against growing inequality in the United States. Suddenly, it is conceivable that policies may be enacted in the next Congress that would raise taxes on the rich and make the American dream more affordable. But if all the Occupy movement does is to restore middle-class demand for large homes and late-model automobiles, it will have been a failure.

The United States faces two economic crises: one is a crisis of severely unequal wealth and political power; the other is a climate crisis driven by an economic model based on insatiable consumption. A Robin Hood approach that redistributes wealth from the rich to the less affluent but does not address the dynamic of excess consumption will not fix and could even exacerbate the climate crisis.

These two economic crises have a common driver — greed. Is it possible that the Occupy movement could take on greed itself, or is that pie-in-the-sky dreaming?

Consider this. Back in 1966, only 42 percent of college freshman considered “being very well off financially” to be an important personal goal. That figure rose to about 75 percent by the time President Ronald Reagan left office. If it is possible to promote greed, it must also be possible to promote generosity.

A traditional way to discourage greed is by shaming those who engage in elaborate displays of wealth. But if criticizing excess consumption made a powerful difference, we would have seen results already. Allow me to introduce a practice that can address greed called mindfulness. Although derived from Eastern thought, it has been appropriately secularized for Western audiences.

I’ve led mindfulness meditations at the Occupy Boston spirituality tent. Mindfulness is the practice of paying attention to the present moment with a nonjudgmental accepting attitude. Many Americans have been exposed to it as part of Mindfulness-based Stress Reduction, a hospital-based program that helps people deal with physical and emotional pain. Indeed, the program I am trying to create could be called Mindfulness-based Greed Reduction.

When one pays close attention to the present moment with a welcoming attitude, the here and now becomes more vivid and joyful. Mindfulness can make negative experiences feel neutral. It also makes neutral experiences feel positive, by restoring a sense of freshness to the wonderful things in life you take for granted. When you realize how much you already have, you feel less need to accumulate more and more. It thus promotes modest appetites in place of greed.

The best way to verify this is to start practicing mindfulness yourself and see if it works. But for those interested in a technical explanation, let me go into the neuroscience.

Our appetites go through a cycle of wanting and liking — which reinforces further wanting. When we desire something, the brain transmits a chemical called dopamine. When we get what we want and like it, the brain releases internal opioids. The latter are chemically similar to morphine and heroin, which helps explain how desires can become addictive.

Addicts need increasingly higher doses of a drug in order to continue to get the same high. People who get their satisfaction from having and spending money likewise need more and more of it to feel rewarded. This is because of habituation. Dopamine neurons in the brain react most strongly to unexpected rewards. When rewards come in steadily and predictably, handling them shifts to the habits system, which operates with little conscious involvement and little sense of pleasure.

This presents a challenge to advocates of a steady state economy. How can you keep people excited when the stream of rewards fails to grow?

Spirituality Tent at Occupy Boston

Mindfulness addresses this challenge by showing how to find novelty in the smallest details of daily life. As you tend your own garden, you become absorbed by each blade of grass. This absorption produces a steady flow of dopamine and a continuous feeling of satisfaction. Mindfulness generates novelty and excites the dopamine neurons not by covering a lot of ground fast, but by delving deeper into familiar turf. As the poet Allen Ginsberg once wrote, “You own twice as much rug if you’re twice as aware of the rug.”

Mindfulness practices, including yoga, are spreading rapidly in the United States. They will spread even more quickly if movements like Occupy embrace them. But will this be quick enough to make a difference for the climate crisis? Although I can’t predict the future, it may be easier to change young people’s minds about consumption that it is to alter the energy infrastructure of the United States.

Ultimately, we need to pass legislation that restrains carbon emissions. But it will be easier to do if Americans realize we can continue to grow in happiness even as we shrink our dependence on the planet’s resources.

Rick Heller is the author of Occupy the Moment: A Mindful Path to a New Economy.

Growth of GDP and Discontent in Egypt and Tunisia

by Eric Zencey

The regime changes in Egypt and Tunisia have been hailed as victories for democracy, as proof of the liberalizing power of social networking media, as testimony to the power of nonviolent political action. All of that they may indeed be; but the events in Egypt and Tunisia also illustrate a major defect in our economic thinking, one from which we should draw a very different and much more cautionary conclusion.

The flaw in standard economic theory that’s behind the Middle East’s winter of discontent is the acceptance of gross domestic product (GDP) as an indicator of citizen well-being. A recent poll by the Gallup organization, reported in early February, found that despite significant gains in per capita GDP in both Egypt and Tunisia, the level of well-being of their citizens has been falling over the past decade. This decline in well-being certainly played a role in the unrest that put citizens in the streets, challenging their governments.

In Egypt, between 2005 and 2010 per capita GDP rose from $4,762 per year to $6,367. In Tunisia it rose from $7,182 to $9,489. But both countries saw a significant decline in the percentage of the population that is classified as thriving according to a standard, well established measure.

That measure is the Cantril Self-Anchoring Striving Scale, developed by a researcher named Hadley Cantril. It’s a survey research tool, and asks respondents to answer a few simple questions:

Please imagine a ladder with steps numbered from zero at the bottom to ten at the top. The top of the ladder represents the best possible life for you and the bottom represents the worst possible life for you. On which step of the ladder would you say you personally feel you are standing at the present time? On which step of the ladder do you think you will stand about five years from now?

To rank as “thriving,” respondents have to have positive views of their current place on the ladder (seven or higher) and positive expectations about the future (eight or higher). Below that, respondents are ranked as “struggling”—their “ladder-future” expectation is lower than the present, or both values fall below the thriving range. Below struggling is “suffering,” people who report their place on the ladder at four or below.

The Cantril Scale correlates with objective markers of well-being. Thrivers have fewer health problems and fewer sick days, while reporting less worry, stress, and anxiety and more enjoyment, happiness, and respect. Those in the struggling category report more daily stress and worry about money than the “thriving” respondents, and more than double the amount of sick days. Those in the “suffering” category are more likely to report that they lack basics like food and shelter, more likely to report physical pain, and more likely to experience higher levels of stress, worry, sadness, and anger. They have more than double the rate of diseases compared to “thriving” respondents.

In both countries, as GDP rose steadily, the number of citizens categorized as “thriving” fell. In Egypt, 29% of people reported themselves as thriving in 2005, but that number fell to just 11% in 2010. In Tunisia, Cantril Scale data are unavailable prior to 2008, when 24% of the population could be classified as thriving; that number fell to 14% in 2010, a 40% decline.

The nonviolent revolutions in both countries may have been motivated less by abstract commitment to democratic freedom than by widespread experience of a declining standard of living and increased economic insecurity, even in the face of rising GDP. Two factors contribute to this result that seems paradoxical within the standard model of economic thinking: (1) increasing inequality in income and (2) increasing food prices.

Thanks in part to the Aswan Dam, which interrupted the regular cycle by which Nile delta farmlands were re-nourished by annual flooding, Egypt has been the single largest importer of grain in the world. When Russia announced an embargo on grain exports (the result of unprecedented, climate-change-driven weather that scorched into ruin nearly half of Russia’s usual annual harvest), the price of food shot up. Before the embargo, the average Egyptian family spent 38% of its income on food (compared to 7% in the U.S.). Most simply couldn’t afford the higher prices, and hunger and food insecurity spread through the middle class. Perversely, GDP counted higher food prices as a positive contribution to well-being.

Because of that basic flaw, a rising GDP did not mean a rising standard of living. And even if GDP were a more accurate measure of material well-being, it would still be mathematically possible for a very large number of people to become worse off economically as per capita GDP rises.  This situation could occur if there is growing income inequality (i.e., the benefits of increasing GDP aren’t widely shared). In Egypt and Tunisia, that mathematical possibility became an economic fact—and a politically charged social condition.

Declining standards of well-being are politically destabilizing, and lead naturally enough to sweeping support for regime change. In Egypt and Tunisia the regimes happened to be despotic, and the call for change came as a commitment to democracy, an end to corruption, and demands for civil liberties. But within democracies, declining standards of living can have the opposite effect. Open and institutionalized systems of regime change—voting—will absorb the discontent for a time, but if the decline lasts too long, and can’t be blamed on a particular party in power, pressure grows for stepping outside established parties for new, radical, revolutionary approaches. Democratic forms are no proof against a slide into repressive forms. In Germany in the 1930’s, a declining standard of living contributed to the rise of the Nazi party; Hitler was democratically elected to the office of Chancellor (and then proceeded to establish himself as Fuehrer).

As America’s perpetual-growth economy faces the reality of ecological limits, as climate change imposes costs and decreased well-being on us, as energy and other resource prices increase, we face the prospect of a widespread decline in our standard of living. Americans coming of age today are among the first generation who can’t be confident that they will be better off than their parents; by one widely used measure of well-being (the genuine progress indicator, which deducts loss of ecosystem services and other “disamenities” from the national accounts), the American standard of living has flatlined since the 1970s, despite continued strong growth in GDP.

Thus the cautionary lessons from Egypt and Tunisia. GDP is a measure of the commotion of money in an economy, not a measure of delivered well-being. If sustained or rising well-being is what is economically and politically desirable, we should measure it directly, instead of counting on GDP to do the job. And if we accept the idea of popular sovereignty—that governments rule with “the just consent of the governed,” as Jefferson put it in our Declaration of Independence—we must recognize that as the middle class goes, so goes the legitimacy of the regime in power. No system of government—despotic or democratic—fares well when the majority of its citizens experiences a declining standard of living.

When increasing the standard of living depends on continual expansion of the economy’s ecological footprint, that increase must at some point come to an end. The examples of Egypt and Tunisia invite us to ask: what then?

Eric Zencey is a visiting associate professor of historical and political studies at Empire State College of the State University of New York, and an affiliate of the Gund Institute of Ecological Economics at the University of Vermont. He is the author of the forthcoming The Other Road to Serfdom: Essays in Sustainable Democracy.