The term “stagnation” often arises in discussions of
current economic issues. The “experts”
expected the sharp decline in economic activity caused by the Great Recession to
be followed by a rapid recovery in economic growth as indicated by the Gross Domestic
Product (GDP). Instead, we have been
faced with nearly a decade of slower than expected growth—at least within the
club of developed nations. This
development has generated a large number of articles trying to explain why slow
growth—stagnation—is occurring. The
actual measurement of growth (GDP) has been called into question, stagnation
has been explained as a fundamental evolution of our capitalist system, and a
lack of innovation are examples of what has been discussed. Thomas Picketty, in his book Capital in the Twenty-First Century, provides another perspective.
The historical data on economic growth suggests that much
that has occurred was driven by population growth, and once that is factored
out to obtain economic growth per individual (per capita GDP), low growth rates
have been the norm not the exception. He
provided this chart.
From the dawn of the industrial age to the start of World
War I, growth (per capita GDP) in the developed countries of North America and Western
Europe never exceeded 2% over extended periods.
The unique circumstance of two world wars and the Great Depression
caused sufficient disruption and destruction that the postwar years from
roughly 1945 to 1970 had to be a period of enormous economic activity. Note, however, that during this period in the
North American countries, often referred to as the “golden era,” growth
averaged below 2.5%. Note also that
since 1970, Western Europe, thought to be shackled by an economically
inefficient social welfare system, and North America, dominated by the presumed
ideal free-market system, have been falling in economic growth rate in
lockstep. One way or another, the
developed economies are returning to the historical mean of low per capita
growth.
From this perspective, low growth can be expected for the
foreseeable future. If that is the case,
is it a disaster requiring ambitious countermeasures, or is it less of a
problem than thought?
Zachary Karabell considers the latter point of view in an
article that appeared in Foreign Affairs:
Learning to Love Stagnation.
Since GDP is an attempt to measure income, the growth
rate is taken to indicate the rate of growth of income; one then assumes that
also indicates a growth in prosperity for the population. But if the population grows by 2% and GDP
grows by 2% the economy is just keeping its head above water and, on average,
there is no gain in prosperity. The most
quoted figure for GDP is one that includes population growth, and, as indicated
by Piketty, it can be very misleading.
Karabell argues that simple GDP tallies can be misleading
in other ways. He claims that the
economics professionals focus strongly on income and measures of inflation, but
only loosely on costs and their consequences.
It is the interplay between wages and costs that is the more appropriate
measure of prosperity.
“Because GDP measures simply the
value of all the goods and services produced by a country, lower costs can
reduce it; economies that depend on high prices will contract as prices fall.
That is true both for real GDP, which adjusts for price changes and inflation,
and for nominal GDP, which does not. And this contraction alarms not only
economists….but also most government officials, whose legitimacy has become
tethered to their ability to increase GDP growth.”
There are numerous ways in which the standard GDP tally
leads to incorrect conclusions with respect to prosperity and well-being.
“But GDP growth is no longer an
especially useful way of measuring the health of modern economies. Many of the
most important developments in the modern economy contribute little to official
GDP figures. Browsing on Wikipedia, watching videos on YouTube, and searching for
information on Google add value to people’s lives, but because these are
digital goods that have zero price, official GDP figures will consistently
downplay their impact. Improvements in efficiency, which reduce costs, have a
negative impact on GDP. Consider solar panels: their installation boosts GDP
initially, but thereafter the savings in oil or gas will reduce GDP.”
“The combination of lower costs
and less growth can lead to the same endpoint as higher costs and higher
growth.”
Since GDP fails to measure prosperity or well-being in
any useful manner, the dependence on growth in GDP can therefore lead to
decision making that is not in the public interest.
“This is more than just a
problem of perspective. The view that growth is stagnating leads to a crisis
mentality that makes policymakers adopt measures designed to boost growth: stimulus
spending, tax cuts, investments in higher education. Some of these may be
beneficial, but they can also crowd out other actions that may be more
beneficial: investing in greater efficiency, developing a leaner bureaucracy,
and, above all, establishing and securing a baseline minimum standard of
living. A society that followed these steps would be better off in the long
run.”
One of the reasons for focusing on maintaining strong
growth is the fear of deflation and the feeling that there must follow a
deflationary death spiral.
“But most economists and central bankers fear deflation even more than they
fear inflation. They worry about a deflationary trap: if prices fall, people
have less incentive to spend today, as they can simply wait for cheaper prices
tomorrow. If consumers keep their wallets shut, the economy will grind to a
halt, resulting in falling prices, and the cycle continues. To make matters
worse, deflation increases the cost of debt, which can further depress
spending. And deflation is often taken as a sign that demand is weak, which in
turn is interpreted as a sign that consumers lack spending power.”
“But some of these fears are ungrounded. Although it is true that deflation
offers little relief to those in debt, it, like income, matters only to the
extent that it affects people’s affluence and quality of life. Deflation and
lower demand may hobble growth, but they do not necessarily jeopardize
prosperity. One country knows this better than most: Japan.”
Japan is the
country that Karabell turns to in order to make his case. Most economists turn to Japan to indicate an
economy where everything has gone wrong.
“For almost three decades, since
Japan’s immense property and asset bubbles burst in 1991 and growth suddenly
decelerated, pundits from across the political spectrum have used the country
as a cautionary example of what can befall economies that become ensnared in
the trap of large amounts of government debt, zero inflation, and little to no
growth. Search the Internet for “Japan syndrome” or “lost decade,” and you’ll
find scores of articles and papers addressing the country’s purported malaise
and the lessons it offers to other societies hoping to avoid its fate.”
Karabell thinks these concerns are misplaced.
“But the reality is that there is nothing really wrong with Japan. It may
have negative real interest rates, an undervalued currency, a debt-to-GDP ratio
approaching 250 percent, and an average annual GDP growth rate over the last
decade of less than one percent. Yet it is also one of the richest and most
stable countries in the world.”
“On almost every major metric that societies use to measure individual and
collective well-being, Japan ranks near the top. Life expectancy is among the
highest in the world; crime rates are among the lowest. The Japanese people
enjoy excellent health care and education. The UN Human Development Index, the
Legatum Institute’s Prosperity Index, and the Better Life Index of the
Organization for Economic Cooperation and Development all regularly give Japan
high marks. Income inequality in Japan has increased in the past decade, as it
has in much of the world, but that shift has not meaningfully eroded living
standards for the bulk of the population. What’s more, Japan’s very high level
of public debt hasn’t led to financial collapse.”
“Economic stagnation, in short,
has had little impact on the Japanese public’s high quality of life.”
Karabell provides some words of advice for policy makers
who insist on focusing on growth as the primary driver.
“Rather than start with the
assumption that growth is the only viable path to collective economic security,
policymakers must first consider what ultimate goal they are trying to reach.
Presumably, it is at least to provide all people with adequate calories,
shelter, health care, education, clothing, appliances, and some basic
opportunities to improve their station. This is hardly a new idea.”
“A world where growth is lower
but where more people than ever before have access to life’s essentials is
hardly a dire scenario. In fact, it is just the opposite. The world may be
reaching the limits of growth, but it has not begun to reach the limits of
prosperity.”
Karabell’s perspective deserves serious discussion. Japan now has a falling population. This is not a bad thing; it is a good
thing. A falling population, by
conventional economic thinking is a disastrous situation leading to all sorts
of difficulties, including slow or negative growth. The message to economists should be: “Make
yourselves useful and figure out a way for populations to decrease gracefully
with minimal economic disruption.”
Japan made a conscious decision to limit its population
growth and succeeded. China made the
same decision and is succeeding. Both
will soon have to live with falling populations. For the inhabitants of developed countries
across the globe, low fertility rates indicate that falling populations will
soon become the norm. Hopefully,
somewhere out there are a few clever economists trying to figure out how to help
make this work.
The interested reader might find these articles
informative:
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