Must read: Policy myopia: a ticket to dystopia
The author of When the Money Runs Out – HSBC’s chief economist – warns that the West must face up to its new economic realities
When the Money Runs Out: the End of Western Affluence,
Stephen D King,
£20, Yale University Press
The “stimulus versus austerity” debate has diverted attention away from the key long-term economic challenge facing policymakers in the West.
In the face of persistent stagnation, is it still possible for the financial and political claims made over many decades to be honoured?
What happens to pensions, healthcare, education and the value of assets if policymakers are simply unable to return GDP growth to its rates of old?
Western economies have already plodded through one lost decade. In the UK, for instance, per capita incomes rose by only four per cent in 2003-13 – the lowest increase by far in any postwar decade.
Yet many people behaved as if the good times were still rolling: fiscal spending as a share of national income surged; taxes were cut; business leaders gave themselves huge pay rises; and investors hunted ever more aggressively for yield, seemingly unaware of the associated risks.
All the while, policymakers allowed their forecasts to be infected with “optimism bias”, persistently assuming that strong growth was just around the corner.
In truth, the West’s golden age of growth – which ran from the 1950s to the end of the 20th century – has ended. This era was dominated by one-off advances: trade opened up after the protectionism of the interwar years; millions of women joined the workforce; consumer credit surged, enabling households to spend today and pay tomorrow; and higher education became an achievable ambition for the many, not only the privileged few.
Although technology remains an important economic driver, of course, it will not be enough on its own to replicate the growth seen in the postwar period.
Yet we continue to believe that, with a few adjustments to monetary policy and some fiscal stimuli here and there, we can quickly return to business as usual.
Evidence collected from hundreds of years shows that economies do sometimes hit a brick wall. From the Black Death to the French revolution to Argentina’s 20th-century financial demise, economic distress can then lead to sociopolitical upheaval.
As Adam Smith once argued, the risk is that societies then shift from “progressive” to either “dull” or “melancholy” states where trust breaks down, loss aversion sets in and entrepreneurialism dies.
The West doesn’t have to succumb to these pressures, but the risks will only increase in the absence of lasting reform.
We have to learn to live within our means, not pretend that future growth will automatically bail us out.
That entails tough choices on – among other things – public spending, banking regulation and the inter-generational divide. Otherwise, it really will be the end of western affluence.
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