Why Economies Don’t Grow
By Shlomo Maital
Michael Spence is a Nobel Laureate in Economics, pioneer in the economics of information, and has recently published an article explaining why Western economies simply don’t grow. He notes that there are five reasons. He also notes that growth forecasts have consistently been overoptimistic, ruining whatever little credibility remains for economists. I think his insights help us understand better our current state of stagnation in much of the Western world.
- Too little fiscal policy: Traditionally governments evaluate debt by looking at the debt/GDP ratio. They have slashed spending as a result. But they would do better, as economist Frank Newman argues in Freedom from National Debt, to look at the aggregate balance sheet, because “a productive public sector investment can more than pay for itself”. In other words: If governments spend wisely, the resulting assets more than pay off the resulting debt. Simple? Obvious? But…alas, overlooked.
- The impact of fiscal policy (“multipliers”) is much higher than previously thought, because there is so much excess capacity (i.e. idle labor and capital) lying around.
- Capital markets are disconnected from GDP. Because central banks have printed so much money, and because the money found its way into bond and stock markets, asset prices have risen a lot… but, not because the underlying economy is strong. This has simply created a lot of wealth for a few millionaires or billionaires, but hasn’t helped ordinary people, and hasn’t helped the economy.
- Governments have been badly led and run, and greatly favoured the wealthy, who buy influence with political contributions.
- Incomes in the bottom 75% of the distribution have stagnated, leading to a lack of aggregate demand. This drop has been “greater than expected”.
These five factors are chronic, and may last longer than we thought. Spence thinks we need to redistribute income and expand public services. We need to invest in key areas, like education, health care and infrastructure.
Under economic stagnation, isn’t this solution obvious? Apparently, not to many economists and political leaders. I wish more of them would read Spence’s short piece carefully.