If you divide history up into separate decades or eras – arbitrary, of course – the average growth rate of similar economies differs greatly between them. For example, growth was 1-3 percentage points slower in all of the major western economies in 1973-1995 as compared with 1950-1973. If this doesn’t sound much, remember the power of cumulative arithmetic: at 2% a year growth, real incomes double after 34 years, compared to just 23 years at 3% a year growth. Stephen King starts his terrific new book When The Money Runs Out: The End of Western Affluence by suggesting that the west is currently in one of the eras of structural slow growth – and goes on to argue that there are good reasons to expect this to last for a long time. So he also starts out by picking an argument with all those economists and commentators who present the debate as a cyclical one, i.e. asking how can policymakers correct for the downturn and get things back to trend? King is neither an Austerian nor a Stimulard: “Both sides believe in economic recovery. Each happens to think that the opposing view is totally wrong.”
This gets the book off to a good start, as far as I’m concerned. Whenever I’ve voiced, far more tentatively than it does, some consternation at the current macro debate, I’ve been shouted down by people on each side who tell me that I’m just wrong, and the data prove for a fact that their view is correct. What’s more, certainty is popular – wouldn’t we all love things to get back to the way they were pre-crisis?
A second point the book makes early on is that, precisely because of the stagnation, “Economic policy is no longer for the technocrats. It has become inherently political.” Again, I wholly agree. Structural slowdowns in growth will not end without structural economic reforms, and that’s economics jargon for difficult political choices. The historical episodes described in the book, some well-known, others less so, help shed light on the type of political dilemmas facing western economies now.
The first chapter looks at the roots of the current stagnation, and finds them in the common presumption that economic growth could be taken for granted. Some of the examples are staggering – for example, I learned that by the end of the 1980s it was not uncommon for Japanese homebuyers to take out 100 year mortgages, thus explicitly living on their children’s incomes. In all the western economies, future generations have been defrauded in more and less overt ways – and again, I wholeheartedly agree (this was a theme of The Economics of Enough). The debt overhang consists not just of financial instruments but also political promises that might not be achievable.
The book’s subsequent chapters set the policy response to the current crisis alongside a number of historical examples. King notes that the large economic stimulus, mainly through monetary policy, has meant growth post-2008 hasn’t been as bad as it might otherwise have been. But he’s sceptical about ongoing quantitative easing on the present massive scale. “If QE fails to deliver a lasting recovery in economic activity, it shifts from being part of the solution to becoming part of the problem.” And he argues that the impact of QE on growth is unpredictable, with a larger impact on the distribution of economic activity than on its level.
King picks a particular argument with Paul Krugman, which (I know from my own modest experience of mildly criticising Krugman’s messianic certainty) will bring much ire down on his head. He believes Krugman is overly obsessed with parallels between the present and the 1930s (End This Depression Now!), overlooking some important differences. King points out that the value of national income in the US declined in the 1930s – there was deflation. Now, the volume of US GDP has fallen short of expectations, but the value has not, and fears of deflation proved unfounded. No doubt the Krugmanites would explain that this is due to the fact of stimulus policies. The book’s counterargument is that inflation has run ahead of expectations for some years, pre-dating the crisis, and is due to a progressive deterioration of the economy’s supply potential. “In any case, the ammunition available to Roosevelt no longer exists,” he adds; FDR inherited a healthy fiscal position, and under him the budget deficit peaked at 9% of GDP, in contrast to the large pre-crisis deficits in the US and many other countries.
King’s conclusions are gloomy – the title of the penultimate chapter is ‘Dystopia’. Trust in banks, politicians, foreigners, business and more has declined. There are strains between haves and have-nots, between old and young, between regions. (I’ve written about declining trust in an essay for the OECD ahead of its annual Forum later this month.) There is an entitlement culture, including elites like bankers, which prevents fiscal reform. Globalization may be going into reverse. We are far from hyperinflation, but higher inflation can co-exist with stagnation, as it did in the 1970s. Political extremism may be on the rise.
Can anything be done? A brief final chapter is called ‘Avoiding Dystopia’. The key challenges are addressing the global savings imbalances that lay at the root of the crisis, creating something close enough to fiscal union for the Eurozone to work, bring down high levels of government debt over time with a lasting and credible commitment to lower government spending relative to revenues, find mechanisms to take account of the interests of future generations (in ageing societies where pensioners are the most likely to vote), and unwind QE and put in place a new and credible monetary framework such as nominal GDP targeting. Oh, and sort out the banks’ balance sheets and regulatory regime, fix the education system, and reform the economics profession. If anything, seeing written down the scale all of these challenges is even more depressing than the ‘Dystopia’ chapter.
I’ve got no doubt that even my setting down a description of a book that isn’t avidly anti-austerity will bring down on this post the wrath of the Krugmanites and Stimulards. But I’d urge both teams, both Austerians and Stimulards, to be a tiny bit open-minded and read the book. Look at the past history of growth: there is no guarantee that it must recover to 2% or more a year. Is it not possible that it’s more important for policymakers to address the underlying structural challenges? I fear that unless attention moves away from the Punch and Judy act of so much macro debate, we’re bound to face a long era of economic stagnation.