Not much in the markets today to draw our attention. Other than another pronouncement by the Fed that it will remain “highly accommodative” for the so-called “foreseeable future.”
Then whither our thoughts? How about to the end of the world as we know it? This from The Wall Street Journal:
That HSBC group chief economist Stephen King shares a name with a famous writer of scary stories is a coincidence that he may tire of hearing.
But it’s fair to say that with his latest book, When the Money Runs Out: The End of Western Affluence, he is dabbling in the financial equivalent of the horror genre. Perhaps even scarier, his is the stuff of nonfiction.
Mr. King’s thesis – outlined in an interview at The Wall Street Journal – is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the US, we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year.
Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already.”
Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the US, Europe and Japan with long-term debts.
Is that so? Probably.
No one knows what the future has in store, but a wise man hopes for the best and prepares for the worst. Slower rates of growth are not the worst thing the future can send our way… but they pose a big challenge.
For most of our lives, economic growth has been a given. We depended on it to bring us more stuff. More jobs. More government spending. And to make us richer.
The Law of Declining Marginal Utility
The Journal article does not mention two other reasons rapid economic growth may be a thing of the past, not the future. One has been discussed here. The other is obvious.
As to the first, almost everything in nature is subject to the law of declining marginal utility. You get one ice cream sundae for dessert. You like it. You order another and probably get less satisfaction from it. The third begins to make you sick.
Likewise, by the 1970s, mature economies – the US, Europe and Japan – were already reaching the point of declining marginal utility in energy. They still liked it. But they weren’t getting the sugar high that it used to give them.
In addition to the factors mentioned by the Journal, it was fossil fuels that gave the developed economies such a big leap forward in the postwar years. Energy use went up; GDP growth rose too. But then, in the 1980s and 1990s, energy use began to level off and even fall – especially in Europe.
GDP growth rates declined as well. Because the returns on energy investments no longer paid off the way they had before. People already had automobiles, trucks, machines, appliances – all the paraphernalia of modern life. They could get little real growth by adding more.
That’s why the shale oil discoveries in the US are important to the energy industry, but probably not for the rest of the economy. The US never lacked energy; it just can’t use more of it effectively.
As to the second missing issue, demographics, we won’t be the first to notice that the social welfare systems of all mature democracies depend on growth.
One generation – richer and more numerous than the one before it – has to pay the cost of supporting parents. Health care and pensions have become the top items on government budgets… and the most resistant to cuts.
Those systems, private and public (they include corporate health and pension plans as well as national ones) are now threatened by declining birth rates, resulting in what Ed Hadas calls “zombie economics”:
Zombies are neither really alive nor fully dead. Moviegoers know that, but the idea is also useful in demographics and economics.
Although economic zombification receives little attention, its effects could be as important as monetary policy, fiscal deficits and structural reforms.
The demographic trends are well-known. For the past three or four decades in most developed economies, the number of children born has been too low, often by a wide margin, to keep the population constant. Japan is the leader in this decline. Indeed, the zombification of the Japanese population could well be the most dramatic such shift in history, at least during a period of peace, prosperity and good health.
Of course, Tokyo and Osaka are not actually filled with walking, flesh-eating corpses. But as in a horror film, the nation’s life force is waning. Over the last decade, the number of Japanese people aged between 20 and 25 years old has declined by 22%. Since there is almost no immigration, the demographic future is easy to predict: another 22% drop over the next 20 years.
By comparison, the euro zone decline looks modest: a 5% fall in the size of the 20-25 age group in the past decade. Some parts of Europe have relatively high birth rates, and immigration keeps the numbers up. Still, the region overall can look forward to almost certain demographic decay.
The United States has resisted the zombie curse. The number of 20-25 year olds is 12% higher now than a decade ago. A dip is likely in the next few years, thanks to the lingering effect of the sharp decline in family size after the post-World War II baby boom. But thereafter, the native-born young population should stay almost stable. With immigration, it will probably keep rising, although more slowly than in the past.
Economic zombification does not necessarily make people poorer. Wealth depends on the productivity of the economy, not the number of people or their ages. But it does have consequences.
The most obvious is much slower recorded GDP growth. The decline is larger than simple comparisons of total populations or workforces would suggest. In zombification, the young people who would join the economy if the birth rate were at or above the replacement level go missing. It is a significant gap, because young adults start new households.
Household formation requires a lot more than clothes and bedding. In developed economies, new families need houses, cars and the other infrastructure which makes modern life so comfortable: power stations, cables, roads, computer servers and airports.
Infrastructure requires capital investment, so family-starters are the most GDP-intensive portion of the population.
Net Negative for Society
We wish Hadas had not used the term “zombies” to describe slow-growing economies. “Zombification,” properly used, refers to the way in which, over time, more and more people figure out how to get something for nothing.
People become “educators” and never teach a single student. They go on “disability.” They turn whole industries – defense, health, finance – into vast wealth transfer schemes that produce little or no net benefit for the people they are supposed to serve. In short, zombies consume more than they produce; they are a net negative for society.
But Hadas is right about the effects of lower birthrates. They also lower “growth.” And without substantial growth, life as we have known it will come to an end. Stocks will fall, creditors (bondholders, for example) won’t be paid, and governments must cut back on their expenses… or go broke.
Trouble is, the people whose benefits would have to be cut are also the voters. The zombies are now in control… of the major industries… and of the government itself. What will happen when the government can no longer give the zombies what it has promised them?
Plato guessed. From Classical Wisdom Weekly:
In book VIII of The Republic… democratic leaders will realize that they are only easily supported when there is a war that the people can rally behind. And so the democratic leaders will unnecessarily become involved in violent affairs, creating wars to distract the people.
To ensure their power, the leaders will create laws to bolster their position. The rulers will impose heavy taxes against the commoners to ensure they are unable or unwilling to fight back… And any who do oppose the leaders will be labeled as an enemy and persecuted as a spy.