Why the best solution to sluggish growth may be to get used to it.
Stellar GDP gains missing for decades
At risk of sounding jejune, a lot has happened in the past 60 years or so, economically speaking. The globalization of production and trade, the abandonment of the gold standard, the dawn of the Information Age, the rise of China as a manufacturing superpower — obviously, the list goes on and on. Many of us were raised believing, and many still believe, that the march of human innovation is unstoppable, and that each iteration of it has the potential to usher in a new era of growth and prosperity. If there is such a thing as “animal spirits,” for investors as for others who get up every day and go to work, surely the dream of progress is the great motivator.
And yet — well, what’s happened to progress? We’re used to hearing that economic growth across the developed world has been pretty blah since the Great Recession: the average annual GDP growth rate for the Organization for Economic Development and Co- operation countries since 2010 will probably come in at around 2.1 per cent by the end of this year. But it was
hardly stellar in the 10- year period before 2008, either, or during the 1990s. Or the 1980s. You have to go back to the ’ 70s to see average annual GDP growth approaching four per cent, and back to the ’ 60s for average growth above five (5.4 per cent from 1961 to 1969, according to the OECD).
Clearly, despite Donald Trump blaming the U. S. Federal Reserve and chair Jerome Powell’s allegedly poor putting skills for growth that won’t come close to the President’s once- promised four or five per cent, the slowing trend in the U.S. and elsewhere in the developed world is a long- term phenomenon. And today, equity market jitters and bond markets that have pushed yields on long-term bonds to historic lows are signalling that a sharper slowdown, perhaps even a recession, is coming.
Yet by some measures, economies are doing well: inflation is low, employment rates are high, interest rates are accommodative. So why are we growing so slowly?
Back in 2013, and again earlier this year, economist Lawrence Summers recoined a term that was first floated during the Great Depression: secular stagnation — an extended period of low or no economic growth. To grossly oversimplify Summers’ view, the problem is a lack of demand. One big reason is that populations in the developed world are getting older. Now, there’s nothing wrong with older people, but they tend to buy and produce less stuff. They also tend not to work as much, or as productively. A shrinking labour force means that the private sector has less opportunity to put money to work to enhance productivity; instead, it saves ( or buys back shares, for instance).
We can gut- check this against some data. For instance, annual domestic demand growth in OECD countries in the 1960s averaged 5.5 per cent; in this decade, it will average less than two per cent. That decline in demand growth has coincided with a sharp increase in the proportion of the elderly in developed economies — in the Group of Seven, it has doubled since the early ’ 60s. It has also coincided with a decline in fertility rates, from an OECD average of 3.2 children per woman in 1961 to 1.7 children per woman in 2017.
These are big, structural changes. One solution to an aging population and shrinking workforce is just to import more humans. But in developed countries, the rise of populism and concerns over in- migration run counter to what the economy needs — namely, more young people capable of working. But that, at least for now, seems to be the way of the world.
In the face of such forces, low or even negative real interest rates, which are what we have now, might be necessary to sustain demand, but they are probably not sufficient. Summers points out that the secular stagnation otherwise known as the Great Depression ended largely because governments spent heavily on the Second World War — during it, on the military and after, on rebuilding their economies. Thankfully, he doesn’t advocate another global conflict, but does suggest that monetary stimulus can’t fight the burden of secular stagnation alone: governments will have to spend, big- time, to create demand.
True, the debate over what governments should do might end up being relevant only in academic circles, since very few western politicians are likely to get elected these days on a platform of massive government spending, especially in the absence of a clear and present crisis. Yet stimulus might come from elsewhere. China, for instance, spent massively during the Great Recession — in some ways, it helped to pull the global economy out of crisis. Today, while its economy is slowing down, it is still a nation of savers, who have a lot of money to be freed up as China transforms from an export and credit economy to a consumption-based one. As well, other big saving nations — notably Germany and Japan — might be forced to spend more to revive demand.
All of this, of course, falls within the category of “might.” Governments might borrow more. The Information Age looks like something of a bust from a growth perspective so far, but it might just need more time to reveal its great productivity- enhancing benefits. Or it might be economists just don’t measure productivity right. A great cultural shift might inspire everyone to have more babies. Or a world war might be around the corner (heaven forbid).
Nothing lasts forever. But the next time you hear a policy- maker or a politician bemoaning sluggish economic growth, the most practical, though depressing, advice might be to just get used to it.
And yet — well, what’s happened to progress?