In the introduction to his book “When the Money Runs Out: the End of Western Affluence”, Stephen D. King (a contemporary of mine age-wise and the Chief Economist of HSBC) notes that per capita incomes in the U.K. almost tripled in the first four decades since his birth in 1963, but in his fifth decade rose only 4%. Other advanced countries have done slightly better or slightly worse, but they have all seen a downward gear-shift in growth.
King goes on to expand on his thesis that the current growth stagnation is not a cyclical phenomenon, but a permanent change in the economic landscape. Further, such a change needs to be proactively adapted to politically and socially. In short, this time is really different (that is, as compared with the two hundred odd years of the industrial revolution).
The thrust of King’s argument connects directly with this blog — which basically can be seen as a meditation on post-growth scenarios. I would say that the most immediate threat to growth is almost Marxist in nature: the tendency for new technology to destroy effective demand through the concentration of wealth and income into an ever-narrower elite (with demographics and decreasing returns to technology thrown into the mix). Close behind this is the threat resource depletion poses for growth, and finally a few decades hence we have the potential damage to growth from climate change.
For advanced nations, slower or zero growth does not necessarily have to lead to unhappiness. The happiness literature is quite advanced and we know that a) individuals are quite capable of resetting to a different level of income and wealth (which is why Afghans are remarkable happy) and b) GDP per head is just one of the many determinants of happiness. I think we all know individuals who are intelligent, diligent and motivated but have made a conscious choice not to enter high-paying professions such as finance. Many (not all) are leading happy lives. Then again I have come across many multi-millionaire hedge fund managers who I wouldn’t characterise as happy.
The challenge for the political and policy makers here is to accept that there may exist a growth constraint. At which point the policy agenda of a Harold Wilson or a Margaret Thatcher looks totally inappropriate. Both followed similar growth philosophies, but with a different distributional tilt tacked on as per their ideological bent. But in a post-growth world, these orthodoxies look redundant and out of date.
In today’s Financial Times, Martin Wolf joins some of the dots up in seeing inflation as less of a threat following lax monetary policy but rather a danger that could emerge due to a lack of growth. Where we differ can be summarised in the fact that he titles his article “The Overstated Inflation Danger“. But his analysis appears correct, even if I would argue over the probability we should attach to such an inflation outcome is different. Simplistically, if you have growth, then the need for austerity or stimulus is a side issue.
The UK has an interesting recent history of managing high public debt. After the second world war, net debt was more than 200 per cent of gross domestic product. By the early 1970s, that was down to 50 per cent. How did this remarkable change happen? The answer is that nominal debt outstanding rose by just 29 per cent between 1948-49 and 1970-71, while nominal GDP rose by 336 per cent. Both real GDP (up 91 per cent) and the price level (up 128 per cent) contributed to this happy outcome: the compound rate of growth of nominal GDP was 6.9 per cent, of the real economy 3 per cent and of the price level 3.8 per cent.
But if we don’t have growth, what are our choices? Wolf describes them as austerity, financial repression or inflation. Of the three, inflation is the politically easiest to enact since is does not result in an open redistribution of wealth between debts and creditors, the young and old, the rich and the poor. In sum, not an open redistribution, but a hidden one all the same.
A more cogent argument for the likelihood of high inflation is not that it is a necessary consequence of today’s policies, but rather that it is the simplest way for policy makers to deal with the overhang of public (or private) debt. In this view, distributional conflicts – between creditors and debtors or perhaps between young and old – are resolved by inflationary default on liabilities. It is easy to think of precedents for such an inflationary redistribution of wealth. What, after all, are the alternatives? Broadly speaking, they are: austerity; growth; and financial repression (reductions in interest rates, probably combined with exchange controls and other restrictions on investors). Inflation can fit quite comfortably with these alternative elements.
We can restate this: inflation provides the most painless political path when faced with excessive debt and no growth.
For this reason, I still see inflation as a significant threat, even if it has not materialised to date (and inflation, in turn, a reason for still taking gold seriously as a store of wealth). In other words, if growth doesn’t return, inflation will become an increasing threat. The critical point here is that the predominant belief within political, media and financial circles is that growth will ultimately return. This is the dominant paradigm. In King’s words:
Of course, these (post growth scenarios) can all be readily dismissed as no more than Cassandra-like predictions of a less bountiful future. Who, after all, knows what sort of technological innovations might materialize in coming decades? Our disturbing early twenty-first century reality of continuing stagnation cannot, however, be easily ignored. Yet we haven’t even begun to think about the consequences for society of a world in which levels of activity are persistently much lower that we-all-too-casually used to assume.
From a risk perspective, we can expand on this. Advanced nations have had ten years of close to zero growth (and worse for median incomes). We can view this as a temporary or permanent phenomenon. The political and media elites, as well as the financial markets, have taken the second interpretation as given: growth is taking a respite but it will be back. Accordingly, the first interpretation is not discounted. When one outcome is full discounted and in the price, then personally I would always look at the alternative.
Your concluding paragraph is confusing to me. The second interpretation in “temporary or permanent phenomenon” is “permanent”, but you suggest that the elites take that as a given, while also saying that they believe that growth will be back. Please clarify.
On a more substantive topic- Inflation can redistribute wealth by eroding debt assets, but if middle income debtors are also seeing rapidly declining income, their purchasing power will not keep up and their living standards will fall.
The most likely result of post-growth forces will be continuous recession, not zero growth. Watching your mortgage payments become inconsequential might be somewhat reassuring, but not if one joins the multitudes affected by mass layoffs and cannot even buy groceries.
What has happened to the recent levels of personal happiness in Greece and Spain? Now imagine those economies continuing in recession forever. This is the most likely fate of all OECD countries in the near future and every economy in the medium term (10-20 years). When the entire world goes into permanent recession, just keeping people alive will occupy most of our attention.
My point is that we don’t really know if the low or no-growth state is a permanent or temporary phenomenon. The cornucopians could be correct. The current information technology revolution may perhaps just be on pause in terms of its ability to boost productivity and wealth. Technology may solve the challenge of fossil fuel depletion and so on (I don’t think so, but that is besides the point in terms of my argument). However, our systems are all based on the assumption that the growth recession we have experienced over the last 10 years is temporary. That to me is the risk. It’s like a casino where we have put all our chips on red. Accordingly, individuals need to hedge the risk by contemplating how their lives could unfold if growth doesn’t return – and act accordingly.
As regards your last paragraph, I don’t think we have binary outcome between growth or collapse – there are numerous stages in between. Japan is the classic post-growth society that has functioned rather well. In the case of Greece and Spain, the bone-crunching recessions they are experiencing are as much due to policy mistakes as due to structural reasons. Both are locked into a currency union at the wrong exchange rate. In a non-Euro world, they would both have depreciated their currencies to boost demand.
Does King take the main cause of the current recession to be the spike in oil and other commodity prices in 2008? I have found the books by Jeff Rubin to be an interesting angle on ‘mainstream(ish) economist does peak oil’ and was hoping for something in a similar approach. If we are post-growth, won’t the financial system simply collapse, thereby scuppering the investment required for the Cornucopian visions of alternative energy?
King doesn’t address the role of oil prices in causing the recession; or rather he sees higher commodity prices as a the result of lax monetary policy as opposed to resource depletion.
There are only a few economists who take the peak oil argument seriously. One of the best is Jim Hamilton, a top notch economist who has written some of standard texts on econometrics; he blogs at Econbrowser. See him, for example, spiking Daniel Yergin here:
Incidentally, interesting to see WTI pushing close $100. To me, it is extraordinary that the oil price did not come down a lot further during the aftermath of the Great Recession.