Category Archives: Post Growth

Chart of the Day, 12 February 2015: The Slow Growth Movement

The holy grail of traditional economics lies in strong technology-led productivity growth.

Other types of growth are resource intensive (capital or labour) and suffer from diminishing returns. You can throw more and more capital into the GDP-producing pot (through increasing fixed investment as a percentage of GDP), but it will have less and less of an effect. This is what happened to the Soviet Union and Japan in the past, and this is what will happen to China in the future. (Resource intensive input growth can also sometimes produce an expansion of GDP, but not necessarily a rise in well-being–think spoiled environment.)

Similarly, you can throw more people into the GDP-producing pot, or make them work harder (more hours), or educate them to work smarter. But all three sources of growth also have limits.

So if you want quality, sustainable growth, you want technology-led productivity to expand. Will it? Last week, a short comment published by productivity researchers John Fernald and Bin Wang on the Federal Reserve Board of San Francisco web site looked at this issue. Fernald and Wang note that the ‘go go’ GDP growth years of the late 1990s were mostly built on labour productivity (click for larger image).

Contributoins to Business Sector Output Growth jpeg

But as I noted above, labour productivity can, in turn, be thought of as resting on the availability of more capital, better education or technological advance. Economists generally refer to the last type as total factor productivity (TFP). Think of it as a measure of innovation. And you can see which industries have been driving that innovation here (click for larger image):

Contributions by Industry Type jpeg

In IT-intensive industries in particular, there has been a step-change downward in innovation-led growth. Moreover, the non-IT industries have seen no TFP growth since 2007. But Fernald and Wang want to stress that innovation gains were struggling before the financial crisis hit:

The most recent slowdown in productivity growth predated the Great Recession of 2007–09. Hence, it does not appear related to financial or other disruptions associated with that event. Rather, it appears to mark a pause in—if not the end of—exceptional productivity growth associated with information technology.

This is one reason why I feel that Western countries will struggle to raise GDP growth above 2% any time soon.

Chart of the Day, 11 February 2015: Is Supply What Done It to Oil (Says Goldman)

“Is supply what done it,” says Goldman Sachs (as reported by Bloomberg; click chart for larger image).

The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”

Decomposition of Oil Price Demand jpeg

Looks authoritative? And, on top of the pretty chart, Bloomberg tells us that Goldman is using a “vector autoregression with sign restrictions”.

Yeah, right. Solid statistical (and thus econometric) forecasts need to be founded on known and stable relationships–we have neither (we rarely do in macro). Supposedly, Goldman knows that if demand is X (holding supply stable), price will likely be Y. Or, if supply is W (holding demand stable), price will likely be Z. And then a dynamic multi-factor model can be created to bring everything together.

But for oil, we neither have a good idea of what the underlying relationships look like nor, more importantly, do we understand how they evolve through time. As proof of my scepticism, recall that Goldman was predicting high oil prices just over a year ago (spot the oil forecast; source: Business Insider; click for larger image):

Goldman Sachs Macro Forecasts jpeg

Perhaps I am being too harsh. Goldman’s supply and demand decomposition does give us a cloudy window into past price movements, but it certainly won’t give us a reliable vision of the future. In reality, the prognostications of market strategists are a form of economic story telling. And the best story tellers get paid the most. In certain aspects, humanity has not come that far from 10,000 years ago.

Chart of the Day, 10 February 2015: Debt As an Existential Threat?

McKinsey Global Institute continues to run with a series of reports on the global credit bubble that spurned the Great Recession. The latest titled “Debt and (Not Much) Deleveraging” takes up the story seven years after the crisis (click for larger image).

Seeking Stability in an Indebted World jpeg

The report shines a spotlight on the world’s growth problem. Other things being equal, higher debt should translate into higher effective demand, either through increased investment or greater consumption. Again, other things being equal, more investment should result in a rising capital stock, which in turn should lead to more growth. Further, if growth were accelerating, then the debt-to-GDP ratio should be falling. Yet this text book economics isn’t panning out. Instead, we have rapidly rising debt and anaemic GDP growth. Result: debt-to-GDP grows and grows (click for larger image).

Change in Debt-GDP Ratio jpeg

This is interesting, but doesn’t really tell us anything new. And the McKinsey report avoids the big questions, the biggest of all being  “does debt matter?”

Commentaries at the doomer end of the economic blogosphere suggest that debt matters more than anything else–and, for some, burgeoning debt means the world is on the verge of a financial panic and subsequent collapse. But the relationship between the real economy and the financial economy is a complex thing. I can’t count the number of times that people confuse debt with stuff. Debt is not stuff: debt is a claim on stuff. Expand, contract or shuffle the debt–do what you will–and the same amount of stuff still remains.

Take the purest form of monetary collapse: the Weimar German  hyperinflation between 1921 and 1923. During this period, fiat money became worthless. Yet the real assets of the economy remained intact. Germany had almost the same number of factories in 1923 as it did in 1921. It had the same number of engineers, even if many lost their jobs. And, ultimately, this real economy was sufficiently robust to reignite within a year or two. Money died in 1923 Germany, the real economy didn’t.

What’s more, the real German economy then took a second financial punch in the form of the Great Recession in 1929. Yet despite undergoing all this turmoil (which makes our 2008 crisis look insipid by comparison), the German real economy had enough inherent strength to go on to support the expansionist policies of the Third Reich for a decade.

So when money died in Germany, the real economy didn’t. By contrast, what did die along with money were many of the original ownership claims on the real assets. Who owned what in 1924 (after the situation stabilised) was very different from who owned what in 1920 (before hyperinflation took off). Moreover, during the hyperinflation years, assets remained idle and incomes fell. So there were real effects–they just weren’t ever-lasting.

During the 2008/09 credit crisis we similarly witnessed under-utilised assets, and the claims on those assets were shuffled around to a certain extent. But the real assets that make up the real economy lived on. True, we had what Austrian economists call mal-investment. That is, the financial economy directed the real economy to make some real assets that no one wanted a year or two down the road. But the largest dead assets of America, such as the decaying factory and residential blocks of Detroit, are not the result of a credit bubble that went pop, but rather are due to far deeper and slow-moving underlying real economy forces.

For this reason, I don’t see debt as in the same league of existential threats to well-being as climate change or resource depletion.

To restate my argument: on the positive side, our most-pressing problem is not that of a dysfunctional financial system. But on the negative side, this means that the financial system will provide only limited help in solving our existing challenges.

Before the financial crash, it seemed that modern finance, derivatives and all, had led to a step-change improvement in matching limited resources with limitless needs (what economics is all about). That step-change improvement now appears a mirage. But this also means that real change will ultimately have to come from changing the real economy–and that, in reality, is a far tougher thing to do than fiddling around with our banks and brokers.

Chart of the Day, 1 Feb 2015: More Thoughts on Happiness, Tsipras and the Greeks

Yesterday, I referenced the OECD’s publication “How Was Life? Global Well-Being since 1820“. While it is still early days, it is encouraging that the OECD has started to treat GDP and well-being separately as seen in the OECD chart below (click for larger image):

OECD Framework for Measuring Well-Being jpeg

This is progress: for many year happiness studies and subjective well-being were viewed as being the domain of eccentrics and cranks, and certainly no subject for such a serious organisation as the OECD. One person who has done more than any other to help create the shift in perspective is Ruut Veenhoven of Erasmus University in Rotterdam.

Veenhoven is a vocal advocate of a rigorous evidence-based approach to happiness studies. Further, to encourage and help nurture the discipline, he founded the World Database of Happiness, which acts as a clearing house and repository for happiness data and its associated literature. For example, type in “Happiness in Greece” and you can find a time series like this (click for larger image):

Happiness in Greece jpeg

Veenhoven is the first to admit that his discipline is still young, and there are numerous blanks to be filled. Yet he feels that politicians can already find tentative answers as to what would make their electorates more happy–if they could be bothered to ask the right questions.

With this in mind, the rise of new non-mainstream parties across Europe can be seen as a reaction to the falling levels of happiness experienced by large sections of the population. And this, in turn, is not just a reflection of economic hardship. Rather, it also mirrors the loss of agency, or the ability to shape one’s life, felt by an increasing share of both the working and middle classes.

Alexis Tsipras of Syriza in Greece and Pablo Iglesias of Podemos in Spain have been tapping into this angst. My hope is that they then forge policies that underpin happiness. For example, insecurity is a happiness killer. The burgeoning precariat, created by 21st century technology coupled with 21st century capitalism, should have some predictability given back to their lives. Nonetheless, Veenhoven points out that hard left ideas produced some of the worst regimes possible in the 20th century happiness-wise. High happiness requires personal choice and control, not things necessarily fostered by interventionist states.

I wish an ideology would emerge that harnesses technology and markets to promote genuine human flourishing. Such an ideology would take a very nuanced approach to economic growth, but would not necessarily be labelled ‘left’. I find it extraordinary that post the Great Recession, most western democracies are still run by centre or centre-right neoliberal elites. Secular stagnation and falling medium wages would suggest that the present socio-economic model isn’t working very well.

Given these facts, I would have hoped that a vibrant ideological alternative would have emerged (or at least old parties would have started wearing new clothes). In the UK, the early coalition government, with its green agenda and community-based concept of the Big Society, looked like it was evolving (at least partly) to reflect the new economic and social realities. Unfortunately, such fresh thinking has been progressively dropped, leaving a party closer to a Thatcher-style political ideal more than anything else.

Meanwhile, in southern Europe, my fear is that what Tsipras and Iglesias end up offering is recycled 20th century socialism. As I see it, that ideology is no longer fit for purpose in tackling our challenges either.

Going back to Veenhoven, if you want to hear a state of play on what determines life satisfaction, watch a lecture given by him here:

Chart of the Day, 31 Jan 2015: Happy Danes, Sad Greeks

The Atlantic has just published a fabulous article entitled “The Danish Don’t Have the Secret to Happiness“.  It is a response to a myriad of charts that look like this (taken from a tongue in cheek article in the British Medical Journal that The Atlantic references):

Life Satisfaction jpeg

Michael Booth, the author of the Atlantic article, is a Danish happiness cynic, questioning the happy state of Denmark on three fronts. He posits that

1. Danish happiness is a false construct arising from low expectations,

2. the boring nature of Danes allows them to remain happy, and

3. their smugness will ultimately lead to the nation’s final demise.

The low expectations argument is a restatement of what the happiness economist Caroline Graham calls the ‘happy peasants and miserable millionaires’ paradox (see, for example, here). According to her, our happiness set point can be a function of our surroundings.

While the research confirms the stable patterns in the determinants of happiness worldwide, it also shows that there is a remarkable human capacity to adapt to both prosperity and adversity. Thus, people in Afghanistan are as happy as Latin Americans – above the world average – and Kenyans are as satisfied with their healthcare as Americans. Crime makes people unhappy, but it matters less to happiness when there is more of it; the same goes for both corruption and obesity. Freedom and democracy make people happy, but they matter less when these goods are less common. The bottom line is that people can adapt to tremendous adversity and retain their natural cheerfulness, while they can also have virtually everything – including good health – and be miserable.

Indeed, an individual’s happiness set point can not only be a function of relative health, wealth, beauty and so on relative to one’s peers but also the same yardsticks measured against one’s past life. So how about the Greeks? Are they adapting to their new straightened circumstances? According to OECD data, the answer must be “no” or at least “not yet”. From the “How’s Life in Greece, May 2014” survey, life satisfaction comes in at around 4.7 out of 10, which puts Greece at the bottom of the OECD (here).

Further, while life satisfaction can be dubbed a function of the remembering self (when I sit down in a chair and think of my life, am I satisfied), people’s happiness as also related to their experiencing self (using the Nobel prize winner Daniel Kahneman’s terminology– see my post here). In short, am I cold, hungry, stressed, anxious , sad and/or in pain; or am I warm, replete, joyful, relaxed, rested and/or content? The OECD reports that only 52% of Greeks report having more positive than negative experiences in an average day (the lowest in the OECD) compared with an average of 76%.

For Greece to live with long-term austerity, Angela Merkel and the Troika must believe that Greek happiness indicators must, in the course of time, reset upwards. Unfortunately, they haven’t been reading the happiness literature in sufficient depth. While life satisfaction can adapt, adaption is generally a reaction to a set of circumstances that you have grown up with. Such forms of satisfaction lack what Graham calls “agency” or “the capacity to pursue a fulfilling and purposeful life”.  And once you have tasted “agency” you don’t want to lose it.

The appeal of Syriza, and its slogan of “hope”, is its potential to restore a degree of agency to the Greek people. Whether they can deliver this agency is a different question. In reality, income and wealth bestow a high degree of agency since they give us the financial wherewithal to make choices. However, agency can still arise from non-financial means, such as having the ability to adopt a non-conventional lifestyle, move from one area to another, change career, better one’s education and gain access to art and culture.  To stop disillusionment setting in, Syriza will have to put much effort into the fostering of such sources of low cost agency.

Happiness can be viewed from other vantage points too. Many scholars of happiness have identified eudaimonia as a source of happiness. This is sometimes described as human flourishing, but I prefer to view it as the sense of participating in and contributing to something greater than one’s own life. Past political movements have tapped into eudaimonia to give their followers a sense of shared propose and even destiny–sometimes, of course, to disastrous effect. However, at its best, it can be a fuel for transformational social movements that enthuse and enrich those advancing the cause as much as the final beneficiaries. Alexis Tsipras has certainly given Greeks a vision of change that could stimulate eudaimonia, but whether this can morph into a philosophy or ideal that has some staying power beyond the post-election honeymoon is a different question.

Meanwhile, for Danes seeking eudaimonia, a temporary move to Greece would not be a bad idea. But remember that the Danes always have the option of returning to Denmark and restocking on more mundane sources of happiness. The Greeks don’t.

Chart of the Day, 27 Jan 2015: What Is Dr Copper Trying to Tell Us?

Many have been transfixed by the collapse in the price of oil, but that downturn has been paced by what is going on with copper and iron ore. Note: you can’t frack for copper (click for larger image):

Historical Price on Copper jpeg

And since the beginning of January, things have speeded up:

30 Day Copper Price jpeg

In market lore, copper is dubbed the metal with a Phd in economics due its reputed ability to portend the coming of recessions. But given China’s outsized role in providing almost all incremental demand for the commodity complex, is Dr Copper just signalling a hard-landing in China?

One observer who flagged this development well in advance is Michael Pettis, a professor of finance who blogs at China Financial Markets. Pettis wrote a piece entitled “By 2015 Hard Commodity Prices Will Have Collapsed” in September 2012 (here), in which he gave four reasons for his forecast:

  1. Supply was being massively ramped up, but with a substantial lag relative to demand
  2. The incremental increase in demand was almost all from China
  3. The Chinese growth model is severely imbalanced, being overly fixed investment, and so commodity, intensive
  4. Chinese inventories have also spiralled out of control

Pettis has long argued that countries that maintain repressive, or skewed, financial regimes that over-emphasise investment always hit a brick wall. Prime exhibits for this thesis are the Soviet Union and Japan. Moreover, the longer you pump up growth with state-directed credit, the more bone-crunching the final adjustment will be. This is what he said back in 2012:

The consensus on expected economic growth among Chinese and foreign economist living in China has already declined sharply in the past few years. From 8-10% just two years ago, the consensus for average growth rates in China over the next decade has dropped to 5-7%. But the historical precedents suggest we should be wary even of these lower estimates. Throughout the last 100 years countries that have enjoyed investment-driven growth miracles have always had much more difficult adjustments than even the greatest skeptics had predicted.

And further on in the article:

The current consensus for Chinese growth over the next decade is almost certainly too high. Even if Beijing is able to keep household income growing at the same pace it has grown during the past decade, when Chinese and global conditions were as good as they ever could be, it will prove almost impossible for the economy to rebalance at average GDP growth rates over the next decade of much above 3 percent.

Moving closer to the present day, Pettis published a thoughtful piece last month titled “How might a China slowdown affect the world?”. In the post he restates his China hard-landing scenario–nothing new there. However, he goes on to question the common description of China as the world’s ‘growth engine’.

For him, while this characterisation may be true when disaggregating the main contributors to global GDP growth, it does not correctly describe China’s role in stimulating growth in other economies. Indeed, China is more a deflationary force at present, since the suppression of consumption and the continued expansion of production have led to successive current account surpluses and a surfeit of savings seeking a home abroad.

Should the descent from GDP growth rates of 10% plus down to 3 or 4% within a decade take place in an orderly manner, it is possible that the economy could rebalance, consumption pick up and savings fall. The net effect would be mildly positive for the global economy. Should a hard landing be accompanied by chaos in the credit markets, you could see households actually increase savings and the authorities crash the yuan in a desperate attempt to use export demand to absorb excess capacity. China would then transform from being a minor deflationary influence to become a deflation monster. Nonetheless, Pettis errs on the side of optimism:

A slowing Chinese economy might be good or bad for the world, depending on how it affects the relationship between domestic savings and domestic investment, and this itself depends on whether Beijing drives the rebalancing process in an orderly way or is forced into a disorderly rebalancing by excess debt. My best guess is that Beijing will drive an orderly rebalancing of the Chinese economy, even as it drives growth rates down to levels that most analysts would find unexpectedly low, and this will be net positive for the global economy.

I am not so sure.

Chart of the Day, 26 Jan 2015: End of Greek Austerity?

So can Greece’s Syriza Party end austerity?  At least it starts with government finances in pretty good shape (Source: European Economic Forecast, Autumn 2014; click for larger image).

Greek Government Expenditures jpeg

Already, the Greek budget is showing a positive primary balance; that is, expenditures before interest payments are less than revenue. So if the government didn’t pay interest to its debtors, it could spend more on welfare. But we are not talking about a lot of money here: a few billion euro at most. Alexis Tsipras, Syriza’s leader, likes to point out that Greece still has an awful lot of debt even after the restructuring by the Troika (the European Commission, European Central Bank and IMF), but the debt that it has is very, very cheap.

Nonetheless, according to the EU forecast, Greece is poised to show an overall budget surplus even after interest payments in 2015. The purpose of this surplus is supposed to be to pay down the debt mountain. But if the Greek government won’t do that, then they would have even more to spend. So far so good. But actually what we obtain from these measures alone is still a government running along very Germanic lines; in short, only spending what it earns. Hardly a revolution.

Let’s look at a breakdown of general government operations in more detail (from the IMF’s Fifth Review of its funding facility; click for larger image)

Greek General Govt Operations jpeg

The pictures of poverty on Greek streets comes about through a combination of 25% unemployment and a safety net shrunken by the fall in social benefits from €47.2 billion in 2011 to ¢38.1 billion in 2014. If you ran the primary balance at zero in 2015 and growth stayed on the same course as the IMF projection, then Syriza may be able to restore a little over half of the social benefit cuts. Then each year after that (still assuming GDP growth holds up) you could claw back some more.

This, however, would do little to jump start the economy. To do that in a Franklin D. Roosevelt New Deal kind of way you would need to see a massive jump in public works spending (the lines in the chart above showing investment and compensation of employees ). But on the assumption that Syriza has defaulted on its debts, it will, at least for a time, be shut out of the capital markets, so it will be in no position to borrow to spend.

A good Keynesian like Paul Krugman would argue that 25% unemployment is incontrovertible proof of a massive gap between potential and actual economic output. In such a situation, the government should let the central bank buy its debt (through printing money), so allowing public spending to let rip. The risk that this raises inflation when you have massive underutilized resources is close to zero. But Syriza can’t do that since it doesn’t have a central bank to call its own; Syriza’s central bank, the European Central Bank, resides in Frankfurt, not in Athens. In short, it can’t print and spend.

How about redistribution? Are the Greek oligarchs quaking in their boots? Again the euro  restricts the government’s options. With no exchange controls and a common currency, the rich have maximum flexibility to flee as and when they wish.

Perhaps, this is why financial markets have reacted to the Syriza victory with such equanimity. For them, Tsipras may possibly be the Red Emperor with no clothes. Unless, of course, he drops the big one: a euro exit. Now that is what I would call a revolution.

Chart of the Day: 25 Jan 2015: Capitalism and the Asian Middle Classes

As you may have guessed, I have strong sympathies with those advocating a green agenda. Further, the existing domination of neo-liberal thought within the policy elites (almost everywhere) means that capitalism has gone global. While the planet has been a loser in this process because of the pathetic response to global warming, we must not forget that there are winners.

I’ve blogged on Branko Milanovic’s work on inequality before, but here is one of his charts again (source here; click for larger image):

Percentile of Global Income Distribution jpeg

The United States skilled working and middle class, who were the target of President Obama’s latest State of the Union Address, sit around the 80% percentile of the global income distribution. For them, life has not got better; indeed, since the end point of the data in this chart, 2008, things have got worse.

But below them lie a mass of Chinese and Indians who have done very well out of global capitalism. We may want to highlight downtrodden textile workers in Bangladesh or displaced farmers in Ethiopia, but they are a minority. In Milanovic’s words (here):

Nine out of ten people around the global median, the “winners” of globalization, are from “resurgent Asia.” They are people from rural China, including some 150 million who have seen their real incomes increase by a factor of 2.5; rural and urban Indonesia, 40 million people whose real incomes doubled; or urban India, 35 million people with increases in excess of 50 percent. There are also workers from Vietnam, Philippines and Thailand. These “winners” belong to the middle or upper parts of their own countries’ income distributions.

This process has shifted economic power eastwards. The boxes in the charts below represent the size of the economies. Note how 50 years ago China, India and Indonesia were bit players in the global economy. How the world has changed (taken from the McKinsey report “Can global growth be saved” I referenced last week; click for larger image):

Per Capital GDP jpeg

Critiques of the world economic order–with respect to sustainability or any other issue–have to recognise the fact that many, many people have done very well.

Chart of the Day, 24 January 2015: The EU, QE and an Old Age Issue

This is going to be wonkish, but it’s important–so bear with me. I’m going to talk briefly about the EU’s new turbocharged quantitative easing policy announced on Thursday, but from a very different angle from the news reports. But to start with, let’s look at a chart from Japan (click for larger image). Why? Because, demography-wise, Japan has already got to where most will soon be–or rather it is a couple of steps ahead.

Japanese Demographics jpeg

The chart is taken from a wonderful (at least for me) publication from the Japanese Ministry of Finance called “Japanese Public Finance Factsheet“. As you can see, we have two pigs making their way through the python: 6.5 million just retired baby boomers and 7.9 million second baby boomers–the offspring of the original baby boomers.

Next a crash course on the components that make up an interest rate. These include the risk free rate, expected inflation, default risk, liquidity risk and maturity risk (often called the term premium). When you buy debt in a country’s own currency, the default risk is generally minimal (the government can tax or even, ultimately, print more money to pay its debts). Moreover, government bond markets have huge volume, so your liquidity risk (your ability to sell whenever you want) is also not an issue. The maturity, or term, premium is a bit more technical, but its pretty small so I shall put it to one side.

So, simplistically, we can focus on the risk free rate and expected inflation rate when considering government debt (and the interest rates on government debt is the reference point for interest rates on all forms of debt). What’s this got to do with the above chart? A lot, because every introductory text book is based on the axiom that individuals will prefer to consume something now rather than consume it tomorrow. Put another way, the risk free rate is the price an individual (more formally individuals in aggregate) demands to defer consumption. It’s a kind of anti-hedonism bribe.

Now look at the above chart again. What do you think those just-retired baby-boomers are most worried about? I hazard a guess that it is maintaining an adequate level of consumption into old age. Do they need to be bribed? No, they are scared witless that they will be destitute in old age anyway. In particular, Japan’s government debt mountain must produce a visceral fear: the elderly know that their future spending power will be subject to continued assaults from either tax rises (such as consumption tax hikes) and/or cuts to welfare spending. They may not know when these things will happen, but they know they will happen,

How about the second generation baby boomers? While only in their 40s, they see ahead of them a huge phalanx of the elderly that will need to be supported by taxes on them. Moreover, they are working within an economy that has seen meagre growth and falling median real wages. Put bluntly, they are also scared witless about having any spending power in their old age too.

So for these key demographic cohorts in Japan, the real interest rate is likely to be zero. Indeed, I think for many it may be negative; that is, a lot of Japanese would be willing  to handover one million yen now if they were guaranteed to get 900,000  yen of  consumption (in real terms) 10 years down the road. No economics text book sees the world that way, because no economics text book takes into account the never-seen-before demographic patterns of the present day.

What happens if we introduce some inflation? This is what the Bank of Japan Governor Hiroki Kuroda has vowed to do. Indeed, he has undertaken to continue with unconventional monetary policy until 2% inflation is achieved. His aim is to force consumers into buying something now since it will cost much more in the future. And, indeed, this is what happens in the face of consumption tax hikes. However, consumption tax hikes are one-off events, and, after each hike, consumption falls back down to where it starts. So to get consumers to repeatedly bring forward consumption you need to achieve consistent and ongoing inflation.

Now if the economy were merely made up of durable goods, this strategy may work. But what goods and services are the just-retired baby boomers most worried about securing in old age. It certainly isn’t that most durable good of all, housing, they already have that need covered (and if they don’t, it’s too late now). Obviously, the biggest concerns are home care and medical expenses–and you can’t pre-consume these. Similarly, those 40-year old baby boom echoers may wish to upgrade their cars, but they are mindful of the black hole in the Japanese government’s finances–so all spending decisions will be ultra cautious.

Strangely, in the face of rising inflation expectations–and with no investment available that has a return that will match those inflation expectations–a prudent person may logically decide to cut back further on current consumption in order to have any chance of maintaining a dignified standard of living in later life. This means demand will remain flat and for some even fall, and so the expected inflation never actually makes the transition into real inflation. In short, QE does not dig the country out of a deflationary hole.

And so to Europe. From the above chart on Japanese demographics, we can extract an old age dependency ratio; that is, the number of people over 65 divided by the number of people in the working age band of 20-64. For 2014, this was estimated to be 46%, for 2025 it is projected to be 56% and for 2040 is forecast to be a pretty stunning 72% (seven elderly per 10 working age).

For Europe, I’ve constructed the following chart (click for larger image) from Eurostat data (here) concentrating on the Big Three eurozone countries and the so called PIGS (Portugal, Ireland, Greece and Spain). I’ve also thrown in the non-euro UK for good measure.

EU Dependency Ratio jpegThe ratios in Europe are calculated a little differently, since the working age population is defined as 16-64 as opposed to 20-64 for Japan. Accordingly, if you put the Eurostat numbers on a like-for-like basis with the Japanese numbers, they would be a couple of percentage points higher. However, the message is the same: Europe is on the same road as Japan, just a little behind. Moreover, some of the most economically troubled countries, such as Greece and Portugal, are furthest along that road.

My bottom line: the EU’s new monetary policy, which aims to slay deflation by dragging consumption forward, may prove as ineffective as it has in Japan. Very sensibly, many households don’t want to consumer now, because they fear they won’t be able to consumer later, in old age.

I also think these dependency charts raise some deeper questions over the nature of consumption, growth and happiness itself. Most studies of happiness show the over 60s scoring highly. Their need for so called positional goods using the sociology definition (goods that confer status) appears more muted. The advertising industry thrives on the idea that happiness is derived from both what we consume now relative to others and what we consume now relative to what we consumed in the past.

In an aged society, such constructs of happiness appear less relevant. Indeed, if the elderly can detach happiness from rising income, consumption and, by extension, economic growth, why can’t everyone? Unfortunately,the monetary authorities of both Japan and the EU don’t appear able to recognise this fact.

Chart of the Day, 21 Jan 2015: Summer’s Secular Stagnation

I’m taking my charts today from the just-published Report of the Commission on Inclusive Prosperity, chaired by Larry Summers and Ed Balls. Summers, one of the highest profile economists in the world, was in London yesterday (on the way to Davos), promoting the report itself and describing the challenge of how to combat secular stagnation. Yesterday, I listened to Summers at a lecture held at the LSE, a podcast of which can be found here.

First, a restatement of the problem. Growth has slowed in almost all advanced countries (click for larger image):

Secular Stagnation Selected Countries jpeg

And what growth there has been has gone to the rich:

Bottom 90% Income Growth jpeg

In short, for the bottom 90%, productivity and income have diverged.

Productivity and Income Growth jpeg

While admitting there are supply side factors causing the economic slowdown (such as poor demographics), Summers places most emphasis on the demand side as the root cause of the problem, particularly with repsct to investment.

Critically, the relative price of investment goods has collapsed, making investment a meagre source of effective demand. By way of example, Summers points to the behemoth of the 1970s, IBM. The computer giant of its time had a repeated need to access capital markets in order to finance its investment plans and grow. Apple, however, generates more cash than it knows what to do with. Indeed, it is a source of liquidity in the capital markets through carrying out continued share buybacks.

Similarly, Summers notes that a company used to be partly valued on how much ‘stuff’ it had on its balance sheet, but now this is almost an irrelevance. So we have a situation where Whatsapp is worth $17 billion, with minimum assets and employees, but Sony, with an army of employees and a raft of factories, is only worth $16 billion. As a result, the price of money has fallen to zero.

US Natural Rate of Interest jpeg

Summer’s prescription: if the private sector doesn’t want to invest regardless of how low interest rates go, the state should step in, taking advantage of bargain basement borrowing rates to massively upgrade its infrastructure.

I am broadly sympathetic. However, I would point out that another state suffering secular stagnation, Japan, has tried the government-financed mega infrastructure investment strategy before. Indeed, for a time, academics dubbed Japan the ‘construction state’. This frenetic activity, however, did little to raise long-term growth rates. Sometimes, when growth has gone, it’s gone.