THERE is a view, rather fashionable in economics at the moment, that the Western economies are facing long-term stagnation. The reason cited by the pessimists is that – in their view – technological innovation and progress have ground to a halt.
The argument generally goes something like this: the real, massive innovations – plumbing, the telegram, the telephone, the internal combustion engine, radio and TV, central heating, penicillin and antibiotics, to name but a few – have already all happened.
The internet and mobiles are great but the economic gain from their adoption hasn’t been as great as moving from couriers on horsebacks to the telephone, or from horses and carts to proper motorcars – or so the argument goes. We are also told that our current technological breakthroughs have become trivial, with consumers irrationally obsessed with the minute changes in functionality between the iPhone 4 and the iPhone 5.
There is, of course, some truth in all of this but the case is grossly exaggerated. There are diminishing returns to most human endeavours but the digital revolution is continuing to shake-up the global economy, and there are lots more genuine breakthroughs on the way, from self-driving cars to ubiquitous drones and personalised, genetics-based medicine.
So Mark Carney was right to mercilessly tear that claim apart in his speech last night at the Economic Club of New York. As he wryly put it, with Twitter in his sights, “It seems unlikely that communicating in 140 characters – useful discipline though that is – represents the apex of human progress.” There is a long and misplaced history of pessimism in economics, including the work of Thomas Malthus, Alvin Hansen and now Robert Gordon, the top recent proponent of the view that the West is facing a permanent slowdown.
Gordon’s argument is sophisticated, even if in my view too pessimistic. But Hansen’s was less so: In his laughably misguided 1938 book Full Recovery or Stagnation?, Hansen decried what he deemed to be the secular stagnation that he thought had set in to the economy. Yet as Carney pointed out last night, the US economy is now more than 13 times larger than when Hansen first formulated his ideas.
But whereas we will doubtless do well in the long-term, I’m much more worried than Carney about the medium-term. I actually do believe that the UK has suffered from a supply-side shock which has reduced sustainable growth but that this is being masked by the imbalanced boomlet we are currently enjoying. This argument has nothing to do with the nonsensical secular stagnation arguments.
The issue is that while actual growth is strong, sustainable growth isn’t. The point is not to downplay the positive news on GDP and jobs; and of course the recovery could conceivably rebalance itself next year. But a more likely scenario is that it will be fuelled by a gradual return of consumer credit, and that private secured and unsecured debt will start to climb as a share of GDP and relative to average incomes once again. We will end up with the wrong sort of growth, a noughties-lite outcome complete with crazed house prices and consumers spending money they hope to earn in the future.
Eventually, the disconnect between the economy’s weak supply-side capacity and strong demand will lead to trouble. That said, our weaker sustainable trend growth is not a given. The rate can be increased again – and in fact, it is already starting to climb. Lower public spending as a share of GDP will help, and there have been a few helpful supply-side tax changes. Eventually, zombie firms will be liquidated; the banking system has already drastically improved. The coalition’s main job ought to be to speed up the improvement in UK Plc’s supply-side. Eventually, the economy will be saved by technology – but that happy prospect cannot excuse inaction today.
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