The following is Part 3 of an essay which was originally an address to the International Conference on Sustainability, Transition and Culture Change, November 16, 2012, by Richard Heinberg

Read Part 1, Part 2, Part 4, Part 5

Setting aside the discussion of international conflict, what will be the options of nations for dealing internally with economic decline?

So far, the first resort of many countries has been fiscal austerity. A shrinking economy leads to declining tax revenues, while deficit spending leads to increasing levels of government debt. If a nation controls its own currency, deficits and debt can theoretically continue to increase for some time, as has occurred in Japan since the 1980s; however, 17 individual European nations have given up their domestically-controlled currencies in favor of a common currency, the Euro, over which they have very little control. They therefore cannot follow the usual strategy of reducing the value of a domestic currency so as to reduce the weight of foreign debt. Other countries, including the U.S., are hesitant to run up colossal amounts of debt for fear that interest payments will eventually overwhelm the budget, or that inflation will eventually ensue, reducing the value of wealth held by those at the top of the economic pyramid. So, for the U.S. and much of Europe, a stagnant or contracting economy is assumed to require cuts in government spending.

There are two big problems with this tactic. The first is that it tends to shrink the economy even further and faster: as government payments dry up, citizens have even less to spend. As the economy contracts, investors tend to become skeptical that government will be able to pay off its debt, so they demand higher interest rates on government bonds. Having to pay more interest on debt, government must then cut spending even further to remain credit-worthy, which causes the economy to contract even more, and so on. This in essence is the crisis faced by the European peripheral nations. For the U.S., austerity will be the inevitable result of efforts to resolve the so-called “fiscal cliff” crisis. The need for social spending explodes when unemployment, homelessness, and malnutrition increase, while the availability of social services declines under austerity. The desired way out of this death spiral is a revival of rapid economic growth. But, as the world collides with environmental limits to growth and fiscal limits to debt, that’s simply not in the cards.

The other big drawback with austerity is that it makes people miserable and angry (a typical recent headline, dated November 14: “Anti-austerity protests, strikes spread across Europe.”) And social instability can pose a problem for governments.

Eventually, at least somegovernments are likely to hit upon a different strategy: the increased provision of basic services as a way to minimize social instability. How to pay for an expansion of services in a time of over-indebtedness? Nations that control their own currencies can simply create more money without necessarily having to borrow from private banks. In the early stages, this need not lead to inflation. With energy and resources in short supply, the economy will continue to shrink no matter how much money governments spend into existence; but if there is more money to be had, that will lead to increased demand for scarce commodities, forcing up prices. Nevertheless, up to a point, increasing government payments—for example, by providing a universal basic guaranteed income—and more equitable distribution of income—most likely achieved through progressive taxation—could reduce human misery even as the economic pie continues to shrink. Under this regime, government would play an ever-larger role in every aspect of the economy.

Where the path of austerity is followed to its bitter end, social disintegration will eventually ensue. Centralized provision of basic services might postpone social unrest; but, as available energy declines, average standards of living will erode even if government takes on more responsibilities and wealth is more evenly distributed. Under those circumstances citizens would likely eventually rebel against what they perceived as being a monolithic, inefficient, and corrupt central government. Regardless which strategy the system’s managers choose, the scale and interconnectivity of today’s national and global systems of political organization and trade are likely to devolve.

This suggests a third approach to dealing with economic decline—the building of localized, decentralized resilience. This strategy is unlikely to be supported by national policy, and may even be discouraged by regulations and laws that undergird the authority of large corporations and the central government. Indeed, a new source of conflict is likely to arise between local communities and failing national or global power hubs as communities seek to withdraw streams of support from federal authorities. Today localism is cute, trendy, and progressive; in a few years it may achieve the status of national security threat.

If and when there is a failure of transport networks, electricity grids, and other basic infrastructures that bind modern nations together, local communities will likely be able to maintain only a fraction of current energy and material flows. We will probably never see neighbors getting together in church basements to manufacture tablet computers from scratch, though they might congregate to try to repair whatever gadgetry can still be made to work. For the most part, during the next few decades a truly local economy will be mostly a salvage economy (as described by John Michael Greer in The Ecotechnic Future, pp. 70 ff.).

John Robb at ResilientCommunities.com disagrees with this view. He believes that new technologies like 3-D printing, powered by decentralized renewable energy production, will enable communities to manufacture everything they need to maintain a high level of communication and amenity even as total energy consumption declines. It may be too soon to see whether Greer or Robb is offering the more accurate scenario.

In either case, a more localized future seems inevitable; thus a managed pathway to that end state would seem preferable to an unplanned path forged by the cascading failures of centralized systems.

Image credit: Grafitti – eamoncurry123/flickr