The chief economist of HSBC. Stephen D. King, says we're in for a dose of reality - the best days are no longer ahead of us. Growth-driven prosperity, as most of us have known it our entire lives, has run its course.
From the end of World War II to the brief interlude of prosperity after the cold war, politicians could console themselves with the thought that rapid economic growth would eventually rescue them from short-term fiscal transgressions. The miracle of rising living standards encouraged rich countries increasingly to live beyond their means, happy in the belief that healthy returns on their real estate and investment portfolios would let them pay off debts, educate their children and pay for their medical care and retirement. This was, it seemed, the postwar generations’ collective destiny.
But the numbers no longer add up. Even before the Great Recession, rich countries were seeing their tax revenues weaken, social expenditures rise, government debts accumulate and creditors fret thanks to lower economic growth rates.
We are reaching end times for Western affluence. Between 2000 and 2007, ahead of the Great Recession, the United States economy grew at a meager average of about 2.4 percent a year — a full percentage point below the 3.4 percent average of the 1980s and 1990s. From 2007 to 2012, annual growth amounted to just 0.8 percent. In Europe, as is well known, the situation is even worse. Both sides of the North Atlantic have already succumbed to a Japan-style “lost decade.”
The end of the golden age cannot be explained by some technological reversal. From iPad apps to shale gas, technology continues to advance. The underlying reason for the stagnation is that a half-century of remarkable one-off developments in the industrialized world will not be repeated.
Adam Smith discerned this back in 1776 in his “Wealth of Nations”: “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 labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state.”
When the money runs out, a rising state, which Smith described as “cheerful,” gives way to a declining, “melancholy” one: promises can no longer be met, mistrust spreads and markets malfunction. Today, that’s particularly true for societies where income inequality is high and where the current generation has, in effect, borrowed from future ones.
In his “Future of an Illusion,” Sigmund Freud argued that the faithful clung to God’s existence in the absence of evidence because the alternative — an empty void — was so much worse. Modern beliefs about economic prospects are not so different. Policy makers simply pray for a strong recovery. They opt for the illusion because the reality is too bleak to bear. But as the current fiscal crisis demonstrates, facing the pain will not be easy. And the waking up from our collective illusions has barely begun.
Being the chief economist for a giant global bank, Mr. King appears to be stuck in neo-classical economics. He catagorizes 2.4% annual growth as "meager" and yearns for the heady days of 3.4% annual growth. That's the giveaway.
Let's take his ideal of 3.4% annual growth and extend it over a 50-year working (plus retirement) life. At the end of that working lifetime, the economy would have grown by a factor of 4.32 times. It would have ended 432% greater than where it stood at the outset. A full century, or two working lifetimes, it would be 27.3 times larger than Year 1. A century and a half of sustained, 3.4% annual growth would have swelled that economy to 149 times its Year 1 size. A full two centuries, four working (plus retirement) lifetimes would see that Year 1 economy increased by 801-fold. Even at economist King's 'meager' 2.4% increase, at the end of four working lifetimes the economy would have grown 114-times since Year 1.
It's not hard to realize that even the 'meager' growth of Mr. King's perception is lunacy. There are simply not enough resources on Earth to allow any country, much less America, that sort of growth. And now we not only have a massive increase in global population but a concurrent increase in per capita consumption throughout the BRIC countries and elsewhere.
Economist King is unable to contemplate the inevitability of Steady State economics or the possibility that a society could consciously embrace an economic operating system grounded in reality. He sees the end of unsustainable growth as a bad thing. He doesn't accept that quality and quantity can be decoupled or that sustainable growth in quality can be far more beneficial and enjoyable for all than unsustainable quantitative growth.