In the past couple of years, we’ve heard plenty of talk about economic costs of our recession: rising energy costs, jobs lost, homes foreclosed, investments ravaged and retirements delayed. But what isn’t said enough is how our economic messes – and perhaps more importantly, their causes – are interrelated with environmental problems.
It’s critical here to know how the economic crisis began. It is, unfortunately, a very complicated disaster, with many speculations as to what caused it. But the first truth is that the blame is bipartisan. The second truth, which no politician, not even Barack Obama, is willing to say, is that it’s our fault. I’m not running for office, so I’ll say it. Our wasteful consumption, financial illiteracy, political apathy, cultural superficiality, and our environmental disrespect, all of it – it is the American people who first and foremost created this economic disaster, however unknowingly.
It all began when housing prices crashed, devaluing the mortgages that had been used to purchase once-overpriced homes that were now worthless. This was also the first housing crash since 1999, when Depression-era regulations that prevented the consolidation of the home mortgage and stock markets were repealed by a Republican Congress with a Democratic president’s signature. This consolidation meant that when housing prices crashed, other markets did too.
To make matters worse, Democrats concerned about equitable access to homeownership while housing prices were inflated had made it easier for people with limited financial means to get mortgages. These were the first to default, having been given mortgages that they couldn’t afford. Finally, as banks were no longer getting payments on mortgages, they began to foreclose, and ran out of money (that was tied up in houses) to lend to businesses. Because many business operations are financed on credit, this eventually caused layoffs and production stoppages. And that made consumers worry about their job security, and caused them to quit buying products. Shrinking consumer demand meant falling market prices, and on and on and on.
So the problem, in essence, was that housing was overvalued, and eventually reality caught up. But what caused housing to be overvalued? This is perhaps the most interesting part of this crisis.
Back in 2004, when housing prices were on the rise, housing developers saw the market and assumed the rise in prices was based on what usually causes rising prices: growing demand and/or shrinking supply. There weren’t enough houses to meet the demand of consumers who wanted them, so the market response was to build houses until that was no longer the case. Under this pressure, developers pushed to expand the housing stock. This is the time when Measure 37 was passed in Oregon, relaxing environmentalist laws that limit housing supply growth. And with the rising prices of housing, countless housing units were subsequently built. This shouldn’t have been a problem: They were simply responding to a market demand – when that demand was met, building would slow down.
But what if rising prices were not caused by increasing demand? Market prices are not simply affected by the supply and demand for the commodity at trade. They can also be affected by the supply and demand for dollars. Typically, we assume in reading market prices that the value of money is relatively constant; that prices rise because commodities are becoming more valuable, not because our money is becoming less valuable. If money became less valuable, it would take more money to buy the same product, which would give the illusion of rising prices – and increasing demand. In 2002, when the “economic growth” supposedly took place, increasing government spending coupled with the refusal to raise taxes created the need for more money – money that had to be borrowed. To meet this need, essentially, the Federal Reserve expanded the money supply.
This is obvious when commodities are priced in gold. The value of gold began increasing in 2002, and money began losing value. Everything that increased in dollars over the last five years – gas, housing, food, stocks, GDP – actually decreased or remained constant during that time if priced in grams of gold.
As a result, many houses built during this period of “rising prices” weren’t demanded at all; it was simply that more money was needed to buy the same house.
Thus, the environmental consequences: Undeveloped land was converted to sprawl, acres were deforested, gallons of fossil fuels were burned, and all of it to meet an economic demand that didn’t really exist.
Some communities were cautious about their development practices. Oregon and Washington, by state law, manage growth of the housing supply based not on market prices but on scientifically calculated population projections. That’s not because we’re worried that overproduction of housing will create a mortgage crisis, but because we’re worried our precious forests and farmland will be converted to wasteful sprawl.
But the result of this hippie legislation became economic in 2005. Compared to cities that don’t practice aggressive growth management, Portland and Seattle’s housing markets remained relatively stable. This is not to say the Northwest economy was immune. We still overbuilt, and still suffer foreclosures. Our economy relies on selling products all over the world, too, so Oregon’s unemployment rate is still worse than the national average. However, it is to say that environmental restrictions on the housing supply tamped down the overproduction that is largely to blame for this economic mess.
The lesson here is that expanding the supply of money, and therefore creating inflation, can carry with it serious environmental consequences as well as economic consequences. Overproduction means the depletion of resources without any worthwhile economic reason, and the mistaken perception of rising demand causes overproduction. If we are to approach anything near sustainability, we simply cannot tolerate needless inflation. Earth’s resources are too limited to waste on producing a supply that isn’t actually demanded.
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