Life is going to turn very nasty if we can’t solve the growth puzzle

My Comments: I’ve written before about income inequality and the effect it will have on society if we do not find a solution.

The ever long crisis in the Middle East arises from vast segments of the population having very little compared to a small ruling class who have a lot. Using religion as a way to remedy their poverty is all they have left in a society where democracy is essentially a sham.

The US built it’s global leadership in the 20th Century on the backs of the middle class who had a realistic expectation of rising up the economic ladder toward prosperity. That is now disappearing. Think college students borrowing money to gain an education and being saddled by crippling debt until they reach middle age.

Prosperity permeated society. The upper class paid taxes to help the lower classes because it gave them more money with which to buy stuff. Our military was second to none across the planet. Today the middle class in the United States is shrinking. The number of working poor is rising. Birth rates are declining. The 1% are favored by our leaders with tax cuts. Add the effects of a con man in the White House and things are going to get nasty.

This is a long article, written for Britain specifically, but for any of you concerned about the world your children and grandchildren will inherit, you need to pay attention and vote accordingly. Assuming there are candidates who also understand this looming problem and are willing to fight to solve it.

by Andrew Rawnsley \ November 25, 2017

One of the earliest examples of the personal computer was the LGP-30. Created in 1956, it had a tiny fraction of the processing power contained in the slim phone that I carry in my pocket. This artefact from the Jurassic era of computing was also excruciatingly expensive. Its retail cost was $47,000. That’s more than $400,000 in today’s money.

This is one way of illustrating why productivity matters so much. It is by improving the efficiency of making things that more people can have better stuff at cheaper prices. Getting more from each hour worked allows wages to rise, lifts living standards and boosts the tax take to finance additional government spending on desirable services. It is this which ultimately underwrites political promises and makes us feel we are getting better off. Absent improvements in productivity, everything else goes to pieces. Including politics. Especially politics.

Which is why it wasn’t any of the big sounding numbers in the budget that counted. The figure that really mattered was a tiny one. That number was 1.2%, which is the revised amount by which the Office for Budget Responsibility thinks productivity will grow per year. From that alarmingly small number, it projects other frighteningly small numbers. The economy will grow by less than 2% in each of the next five years. That means protracted wage stagnation. This forecast, grim as it sounds, is based on one rosy assumption, which is that Brexit has a relatively benign effect on the economy. A bad Brexit would make things considerably worse.
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These small numbers have large consequences. The period since the Great Crash of 2008 is turning into the most stagnant era for living standards since records began. If Britain is now stuck in a low-growth rut, this will be massive. It will fundamentally reshape political argument and very likely blast apart existing parties. It already is. We will be taken in directions that will be highly challenging and to places that could be extremely unpleasant. For all of the life of every adult living in Britain, there have been economic ups and downs and governments have come and gone with the booms and busts. Yet the overall picture has seemed steady. It was the shared assumption of both politicians and voters that the economy would expand at a reasonable clip over time. It was the essential foundation of the expectation that most people would be better off than their parents. The parties argued about how to divide the cake, but they shared a belief that the size of the cake would carry on growing at a respectable rate. That made the dividing business a lot easier. If the cake ceases to grow – or increases at such a glacial pace that it feels like a stop to many folk – that is going to have vast implications.

Let’s start with the least important consequence, which is what this might mean for our current rulers. It has been a rough-and-ready rule that governments improve their chances of re-election if most people feel they are becoming better off. “You’ve never had it so good”, as Harold Macmillan didn’t quite say on his way to an election victory in 1959 as an incumbent presiding over a buoyant economy. Governments struggle to retain support if voters think living standards are stalling or falling.

This rule doesn’t explain everything about election results, but it is a significant component of most. Take our two most recent contests. In 2015, David Cameron was lucky that the timing of the election coincided with a brief period when real disposable incomes were rising. It helped him to justify the pain of austerity on the grounds that a pay-off was beginning to show up in people’s pockets. The Tories improved on their performance of five years earlier and won a narrow majority. Two years on, Theresa May chanced her arm with the electorate when real disposable incomes were once again being squeezed. She tried to change the subject by making the June election about other things, notably Brexit, but that didn’t really work. The stagnation of living standards gave traction to Jeremy Corbyn’s argument that the rules of the economy are rigged in favour of the rich. The Tories lost their narrow majority.

That was not the only difference between those two elections, but it was one of the important ones. If the Tories can stretch this parliament to its full length, they will next face the voters in 2022. You wouldn’t fancy their chances if most people are feeling no better off than they do now and some feel worse off than they were at the time of the Great Crash. Put another way, if Labour were not to win the next election in those circumstances, Labour would only have itself to blame. A low-growth future will be nightmarish for governments of any complexion. It will be much harder to fulfil their promises. Every budget will be difficult. To raise the funds to meet pressure for spending on public services, taxes will have to go up – and it won’t be just “the rich” and companies paying more. Or there will have to be a moderation in expectations of what the state can deliver.

The challenges of a low-growth era will be just as sharp for Labour as for the Tories. It may be more acute for Labour with its historical impulse to promise a New Jerusalem. John McDonnell can use the growth forecasts to attack the current management, but he’d best hope that they are not accurate if he ever ends up in the Treasury with responsibility for trying to find the money to make good on all of Labour’s spending promises. The solution won’t be found on an adviser’s iPad.

In a low-growth future, there might be more of an audience for the view that we over-emphasise economic goods. If there’s not much growth to be had anyway, the Greens and those of a similar inclination could win a wider hearing for the contention that there are more important things in life. My hunch is that it will take a long time to acclimatise most citizens to the idea that growth is no longer a given.

One likely effect on political argument is that it will become more ferociously polarised, an amplification of a trend that is already evident. Desperate times breed more extreme remedies. It is no coincidence, as the old Marxists liked to say, that Brexit, Trump and other populist eruptions have occurred during the long squeeze on living standards that has followed the financial crisis. Brave politicians may try to start an adult conversation with the electorate about the hard choices that follow from low growth. The cowardly, the desperadoes and the unscrupulous will take the national conversation in darker directions. If they can no longer plausibly promise to make people better off, some pursuers of power will seek to create dividing lines around identity and nationality. That ugly trend is already manifest at home and abroad.

A more beneficial use of political energy would be to find out why growth has become so anaemic and do something about it. Politicians have been slow to come to a subject that has been troubling economists for some time. All the advanced economies are struggling with “the productivity puzzle”. The syndrome does seem especially chronic in Britain, but it is not unique to us. This is unfortunate. If other countries had cracked the problem, economists would no longer call it a “puzzle” and we could copy the solutions.

The left contends that low wages, inequality and corporate hoarding are the principal villains. The right prefers to find the fault in regulation and tax. There is merit in various arguments, even if they always seem to suit the pre-existing prejudices of those advancing them. There are some obvious things that government can try to do, such as addressing skills shortages and deficient infrastructure. There are some obvious things that government ought not to do, such as disrupting the relationship with our most important trading partners. But the fact that the “puzzle” is afflicting a wide variety of countries with different political histories suggests that there is not one simple, catch-all cause or solution.

A politically neutral explanation for low productivity growth is that humanity is simply not coming up with enough breakthrough ideas. Ever since the first clever woman lit the first fire, human progress has been powered by discovery, from seasonal crop rotation, to the steam engine, to the computer chip. Ingenious members of our species are still coming up with smart innovations, but it is argued that none of them is significant enough to trigger a new wave of growth.

Are there any sources of optimism? Some. I’ve a hunch that “driverless cars” are not the miracle solution, and my scepticism is reinforced because so many politicians are trying to get into them, but humanity hasn’t lost its talent for invention. Another hope is that economists are wrong, which they often are. One reason they could be wrong about growth prospects is because it has got harder to accurately measure productivity. They may be too pessimistic about it.

If the future is low growth, our politics will change in ways which could be very nasty. Let’s hope that the economists are wrong. Or that someone out there has a very clever idea.