Are the pundits of capitalism having second thoughts? Economists forecast the end of growth // Satyajit Das: High economic growth could be over, and it may have benefits
Unlimited GDP growth is over as we enter a new age of resource scarcity - we must transition to a new economy
The last few weeks has seen bad news for the global economy, with the US and Europe facing growth slowdowns, and even much vaunted economic powerhouses Brazil, Russia, India and China faltering unexpectedly. While mainstream economists continue to predict an ongoing 'recovery', other leading experts point to the end of growth as we know it for the foreseeable future. Earlier this month, the International Monetary Fund (IMF) slashed its quarterly forecasts for global GDP growth from 3.3% to 3.1%, and revised down growth estimates for other major powers. The US forecast was downgraded from 1.9% to 1.7%, and Europe is expected to contract 0.6% rather than the originally estimated 0.3%. The IMF also downgraded growth forecasts for 2014.
Against this background, evidence has emerged that the era of booming economic growth is over, and that we are entering an age of permanently slow growth - at best. A new paper in the journal International Productivity Monitor finds that underlying the US recession is a long-term decline in productivity growth, interrupted briefly by the "dot.com revolution" for eight years, followed by a slump "to 1.47 in the past eight years." Study author US economist Prof Robert J Gordon of Northeastern University concludes:
"... we face a significant possibility that the disposable income growth for the bottom 99% of the income distribution could be as low as 0.5% per year, or perhaps even 0.2%."
This conclusion complements Gordon's previous prediction last year that by 2100, the US economy would return to an annual growth rate of 0.2%. He describes the second industrial revolution as the core driver behind rocketing growth experienced over the last 250 years, noting that the main factor behind the continuing slump since 1970 - escalating over "the last eight years", was a lack of sufficient industrial innovation capable of fundamentally "changing labour productivity or the standard of living."
He argued:
"Future growth in real GDP per capita will be slower than in any extended period since the late 19th century."
The "headwinds" holding growth back include key economic issues such as "rising inequality", the "end of the 'demographic dividend'", the "overhang of consumer and government debt", as well as "the consequences of environmental regulations and taxes that will make growth harder to achieve than a century ago."
While Prof Gordon has his naysayers, his outlook is surprisingly corroborated by other experts. HSBC Group chief economist Stephen D. King's new book, When the Money Runs Out: The End of Western Affluence, portends how the age of high economic growth will never return, largely due to the "exhaustion of various one-off productivity gains that boosted growth after World War II" and "a tripling in rates of consumer credit founded on an unsustainable increase in housing prices", among other factors. King disagrees with Gordon's worst-case scenarios, but agrees that the dividends that made high growth possible in the past appear largely "unrepeatable." Last month, King and HSBC also slashed their global growth forecasts for 2013 from 2.2% to 2.0%, which they explained was due to unexpected slowdowns in emerging markets... read more:
Growth is not a given. In a deliberately provocative 2012 National Bureau of Economic Research paper entitled Is US Economic Growth Over? Faltering Innovation Confronts The Six Headwinds, the economist Robert Gordon found that prior to 1750 there was little or no economic growth (as measured by increases in gross domestic product per capita). It took some five centuries (from 1300 to 1800) for the standard of living to double in terms of income per capita. Between 1800 and 1900, it doubled again. The 20th century saw rapid improvements in living standards, which increased by between five or six times. Living standards doubled between 1929 and 1957 (28 years) and again between 1957 and 1988 (31 years).
Other measures show similar trends. Between 1500 and 1820, economic production increased by less than 2 per cent per century. Between 1820 and 1900, economic production roughly doubled. Between 1901 and 2000, economic production increased by a factor of something like four times. Professor Gordon argues that growth and improvements in living standards will slow, possibly to 0.2 per cent, well below even the modest 1.8 per cent between 1987 and 2007. Over the last 30 years, a significant proportion of economic growth and the wealth created relied on borrowed money and speculation. But this process requires ever-increasing levels of debt. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth, an increase from around $1 to $2 of credit for every $1 of growth a decade ago.
The ability to maintain high rates of economic growth through additional debt is now questionable. Growth was also based on policies that led to the unsustainable degradation of the environment. It was based upon the uneconomic, profligate use of mispriced non-renewable natural resources, such as oil and water. There are striking similarities between the problems of the financial system, irreversible environmental damage and shortages of vital resources like oil, food and water. In each area, society borrowed from and pushed problems into the future. Short-term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.
Another common theme in the parallel crises in finance, environment and management of scarce resources is mis-pricing. In the period leading up to the global financial crisis, risk, especially the ability of individuals and firms to repay borrowings, was under-priced. The true cost of polluting the environment or consuming certain resources has also been under-priced. In the early 20th century, the German economist EF Schumacher observed that human beings had begun living off capital: "Mankind has existed for many thousands of years and has always lived off income. Only in the last hundred years has man forcibly broken into nature's larder and is now emptying it out at breathtaking speed which increase from year to year." That observation is now just as true about the economic and financial system as it is about the environment.
Government intervention can cushion some of the costs of the crisis but cannot solve the fundamental problems. It is not self-evident that growth can be conjured up policy diktat. If government deficit spending, low interest rates and policies to supply unlimited amounts of cash to the financial system were universal economic cures, then Japan's economic problems would have been solved many years ago. The lack of easy policy options means that the world faces an unknown period of low, below trend growth.
The simultaneous end of financially engineered growth, environmental issues and the scarcity of essential resources threatens the end of an unprecedented period of growth and expansion. But it was an unsustainable world of Ponzi Prosperity where the wealth was based on either borrowing from or pushing problems further into the future. Arthur Miller wrote that "an era can be said to end when its basic illusions are exhausted". The central illusion of the age of capital – unbounded economic growth– may be ending.
Satyajit Das is a former banker and the author of 'Traders, Guns & Money' and 'Extreme Money'
