Stephen D. King
wrote a scary article under the title: “When Wealth Disappears” and had it
published in the New York Times on October 7, 2013. He begins it like this: “As
bad as things are … they are going to get much worse for the advanced economies
in the years ahead.” That's scary, alright, but does it have to be like that?
In fact, after
describing how bad the current situation is, and what brought it to this point,
he suggests a number of steps that can be taken to repair it without promising
that a full restoration of what used to be is still possible. To buttress his
argument, he quotes Adam Smith who wrote: “It is in the progressive state,
while the society is advancing to the further acquisition, rather than when it
has acquired its full complement of riches, that the condition … of the people,
seems to be the most comfortable. It is hard in the stationary, and miserable
in the declining state.”
In fact, this quote
is the most enlightening passage in the entire King article because it
describes the workings of the engine that allowed the advanced economies to
become advanced. Sadly, the passage also tells of the reasons why those
economies cannot repeat the previous performance to now pull themselves out of
the current difficulties. The key word that Stephen King used but Adam Smith
only alluded to is “growth.” King used it as is; Smith described what role
growth plays in the economy: advancing to the further acquisition … of riches.
To explain the
nature of the current situation, King writes: “The underlying reason for the
stagnation is that [past] one-off developments will not be repeated.” He
mentions five developments that helped to advance the further acquisition of
riches, therefore contributed to growth. They are global trade, financial
innovations, the social safety net, women joining the labor force and improved
education. Of these, financial innovations – notably the spread of consumer
credit, is what led most directly to the current difficulties in my view. I see
credit as a two edged sword that can do a great deal of good but also cause a
great deal of damage.
As alluded to by
Adam Smith, the secret to having growth in an economy is consumer demand.
However, it is not good enough that the consumer wish to acquire goods or
services he cannot pay for. This difficulty was solved by giving credit to the
consumers. It meant advancing them money against existing collateral they may
have, or against future earnings if they have an income. Credit is what encouraged
people in the advanced economies to live beyond their means thus accumulate a
debt load that proved to be unsustainable. This is King's view, and it is that
of anyone who would study the current situation.
But then “We are
reaching end times for Western affluence,” says King. And that's because growth
has almost disappeared from the economies of the West. He shows how growth has
shrunk in the United States
from a rate of 3.4 percent in the 1980s to just 0.8 percent in the period 2007
to 2012. It is worse in Europe , he adds, where
they also experienced a “Japan-style lost decade.” And without growth, the debt
can only be paid at the expense of a lower standard of living.
People have
suggested that a higher rate of growth can be generated by one of two methods,
he explains. The first is to stimulate the economy by public spending and/or
doing monetary easing. The Second is to adopt a regime of austerity. Both
methods have been tried, he says, and neither has worked. He gives a brief
history of the attempts made in this regard then concludes that “The end of the
golden age cannot be explained by some technological reversal.” Yes, technology
continues to advance but that will not help because the golden age came about
as a result of the five historical one-off developments that were mentioned
above. And that is unlikely to be repeated.
In the face of all
this, reform is essential, he says. He is not too optimistic about something
meaningful being done in Europe , however. As
to the United States ,
it has the right institutions to deal with its economic problems but things
will be difficult there too. In the end, he makes “a plea for economic honesty,
to recognize that promises made during the good times can no longer be kept.”
This means, among other things, raising the retirement age and the inflow of
immigration. It also means decreasing the borrowing from abroad and the
reliance on the kind of monetary policies that create bubbles.
Then, borrowing an
idea from Sigmund Freud, he observes with some trepidation: “The waking up from
our collective illusions has barely begun.”
Well, it seems to me that the goose which used to lay the golden eggs
for us is no longer capable of laying eggs. The thing to do, therefore, is to
cook it, eat it and hatch the eggs it left behind so as to raise new geese that
will lay a new sort of eggs. They may not be golden or even silvery eggs, but
they will be of the sort that can be produced at a sustained level
indefinitely.
To do that, we must open our minds to any and every new idea. The old
style of adhering to the dogmas of one side or the other have exhausted
themselves, and they must be rejected. A renaissance in thinking and in
communication is needed to generate the economic renaissance that is so badly
needed.