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 But in a post-growth world, these orthodoxies look redundant and out of date.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.