Low growth rates are the 'new normal'
While we have the dubious pleasure of ringside seats at the demise of large parts of the global economy, try this thought on for size. The developed world's present path of low and struggling growth might be the much hyped "new normal" growth rate.
While we have the dubious pleasure of ringside seats at the demise of large parts of the global economy, try this thought on for size. The developed world's present path of low and struggling growth might be the much hyped "new normal" growth rate.At a annual growth rate of 1.3 per cent for the US, it's a shocking thought, no?Admittedly, not as shocking as the fresh recession that is in the minds of some. But the idea that the developed world might limp along at Japanese-style low (or no) growth rates for years to come is a repudiation of both the US's rampant capitalism and Europe's hidebound social democracy.Such an anaemic growth rate is hardly the way to recover on either side of the Atlantic. After all, the US has averaged 3.25 per cent gross domestic product growth since the late 1940s. So why should the "new" growth rate be significantly lower?Yet this idea is not drawn from the texts of rabid low-growth activists waving placards against globalisation. The prediction of a steady-state growth rate for developed economies sits at the heart of neo-classical economics.Under what is known as the Solow model, it is predicted every developed economy will reach a steady state of growth.The model explicitly recognises that the growth rates of less-developed economies will be higher than, and therefore converge on, the living standards achieved by more developed countries.The model has been used to explain why galloping growth rates seen in the past in places such as Singapore and Taiwan (and now in China and India) eventually taper off as those societies reach developed status.The same kind of thinking has been used to explain Japan's stalled growth path: essentially, Japan moved rapidly from developing status to a point where no amount of investment made it grow any faster.Assumptions for this kind of growth to occur, by the way, are robust institutions, free markets and global trade.But let's consider what a steady-state growth rate might look like for a developed country such as the United States.Under the model, the key determinants of steady-state growth rates are increases in productivity through technology and the rate of growth of the labour force. (The model states that increases in investment in a developed economy are not the major determinants of increasing the growth rate.)In 2000 we might have thought abundant investment in new technologies would allow sustained productivity improvements in the US and therefore a sustainably higher growth rate. In 2007 we might have thought the new financial wizardry had markedly improved productivity in the US, and therefore would also lead to a sustainably increased growth rate. To lapse into the vernacular for a moment, what a lot of frogshit both those supposed productivity growth improvements turned out to be.Neither of those supposed boons to growth turned out to be real - a fact pointed out by the recessions shortly after the dotcom and financial sectors melted down in 2000 and 2007 respectively.So if the growth rates achieved by the US before 2000 and 2007 were fictitious, what does the real "steady state" growth rate for the US look like?I don't know, but if you are subtracting dotcom froth and financial fiction from the recorded results, it is probably considerably less than the previous average.In fact, it may be close to what is being achieved now.Don't expect me to be the sole bearer of bad tidings. Commentators in the US are a wake-up call to the fictions of past booms.Writing in the recent New Yorker issue marking the 10th anniversary of the September 11 attacks on the World Trade Centre, the journalist George Packer reflected on the US after the economic crash of 2008."In the years after Katrina, Americans began to see that the same unstable combination of hoopla and neglect that had characterised the war on terror also characterised the decade's supposed economic boom. While the media were riveted by the spectacle of celebrity wealth, large areas of the country were - like Surry County - left to rot."The boom had been built on sand: housing speculation, overvalued stocks, reckless deregulation, irresponsible deficits. When the foundation started to crumble with the first wave of mortgage defaults, in 2007, the scale of the destruction became the latest of the decade's surprises. Hardly anyone saw how far the economy would fall hardly anyone imagined how many people it would take on the way down."Even the economic advisers of the next Administration badly misjudged the crisis. The trillions of dollars spent and, often, misspent on wars and domestic bureaucracies were no longer available to fill the hole left by the implosion of the private economy. Reborn champions of austerity pointed to the deficits in order to make the case that the country couldn't afford to spend its way back to health."And, like the [World Trade Centre] attacks that were supposed to change everything, the recession ... inspired very little change in economic policy. Without effective leadership, the country blindly reverted to the status quo ante, with the same few people making a lot of money, if a little less than before, and the same people doing badly, if a little worse."From our relatively comfortable ringside seat, insulated by China's galloping growth, a clear-eyed application of the theories offree market champions would suggest we are witnessing a new low growth rate for the world's biggest economies.