The Western world has experienced extraordinary economic progress throughout the last six decades, and extended continuous economic growth has become accepted as ‘the norm’. But such an era of continuously rising living standards is a historical anomaly, and the current stagnation of Western economies threatens to reach crisis proportions in the not-so-distant future.
That is the assessment of Stephen D. King, HSBC’s chief global economist, in his latest book: When the Money Runs Out: The End of Western Affluence.
King gives a chilling assessment of where the economy, and more, stands in the West today. And it is much more than just the economy that is at stake. It's not just the end of an age of affluence, he argues. The lessons of history offer compelling evidence that political and social upheaval are often born of economic stagnation.
Western society has made promises to itself that are only achievable through ongoing economic expansion. The future benefits expected – such as pensions, healthcare and social security, for example – may be larger than tomorrow's resources. And when that point is reached, which promises will be broken and who will lose out, asks King.
He addresses the lessons from history with a multifaceted plan that involves painful, but necessary, steps toward a stable and just economic future.
It is not a comfortable read, and the headings of the book’s chapters alone – The Pain of Stagnation, From Economic Disappointment to Political Instability and Dystopia – are enough to fill the reader with dread.
As The Economist writes: “The title, as the author quickly admits, is ‘a turn of phrase', not the literal truth … paper money never actually runs out’. But Mr King does believe that the ability of the developed world to generate significant economic growth, and thus wealth, has declined. As he points out, in the first four decades of his own life, real British incomes per head almost tripled; in his fifth decade, they rose just 4%.”
The problem is that people in the rich world have grown accustomed to rising standards of living, and governments have promised them benefits that may soon not be affordable.
As some countries are struggling to pay those benefits and service debts they owe to foreign bondholders, they “are strongly incentivised to defraud their international creditors if the alternative is to damage the interests of voters,” King writes.
Governments and central banks have reacted to the post-2007 debt crisis by letting budget deficits soar and allowing interest rates to drop to nearly zero.
This might have prevented the recession from turning into a repeat of the Great Depression. But in the process, the role of central banks has become highly political, with some people better off and others poorer.
King worries that developed countries have become stimulus “junkies”, fondly believing that, with the right policies, the old rates of growth can resume. But persistently low interest rates are a sign of economic failure rather than a harbinger of future recovery.
Not even the rise of emerging economies is as helpful as it used to be, since their need for raw materials drives up commodity prices and acts as a tax on Western consumers.
In a stagnant economy, people may resist the reforms needed to allow growth to return. Entrepreneurial spirit vanishes, replaced by a desire only to protect existing income and wealth.
One class may turn against another. After 30 years of dramatic increases in income inequality in the Western world, economic stagnation threatens to destabilise an already tense relationship between rich and poor.
This may already be happening with the rise of fringe parties in Europe. The danger is a retreat to the nationalist and protectionist policies and resultant global conflict seen during the first half of the 20th century.
And, there are no easy solutions. The free movement of labour and a fiscal union of the eurozone, to allow workers and resources to move where they are needed, is part of the solution.
Other elements of the solution include:
Countries should commit to reducing their budget deficits over the medium term, but with the ability to opt out of this commitment when their economies tip into recession; and
Central banks should target the level of economic output (nominal gross domestic product) rather than inflation, which may help to restore confidence, “even if the increase resulted more from higher inflation than from a higher volume of activity”, writes King.
There is plenty of room to argue with the author about the political feasibility or practicality of his suggestions, but the book does provide some very useful insights into the daunting economic challenges presently confronting the so-called developed world.
When the Money Runs Out: The End of Western Affluence (ISBN 030019750, 9780300197952) is published by Yale University Press and the print edition is available at $20 and Kindle edition at $18.20 from Amazon.com.