The economist Stephen D. King has described what might be the most frightening insight of the year.
King lays out his financial nightmare in a new book, When the Money Runs Out: The End of Western Affluence. And it’s counterintuitive to what President Obama and House Republicans, among others, have long been saying about political gridlock.
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Most Americans hear those voices and assume that dysfunction in Washington has severely weakened the economy. King flips this script – showing that it’s actually the other way around. The weak economy causes much of the political friction, the head of global economics for HSBC bank writes. Without faster growth, it becomes harder to build enough political will to address entitlement spending and avoid what happens when the money runs out, he argues.
It’s tough to find the same major bumps in productivity that lifted gross domestic product in the last century. Incomes almost tripled in the U.K. by the time King – born in 1963 – turned 40, but they’ve largely flat-lined over the past decade as an entire generation born after World War II heads toward retirement.
Here’s what the trajectory of the U.S. (not to mention most of Europe) looks like if we continue down the current path: Higher taxes, futile stimulus programs, runaway entitlement spending, paralyzing income inequality, and a creaking economic engine that no longer delivers much growth.
Amazingly, King’s argument is almost as old as the concept of economics itself. Adam Smith warned in his groundbreaking 1776 book The Wealth of Nations about the “stationary state” and its “declining melancholy.”
The Fiscal Times chatted with King about what this all means:
The Fiscal Times (JB): The 2014 budget and the debt ceiling are hot issues. Are our political leaders talking about the problems your book outlines about low growth?
Stephen D. King (SDK): The majority of policy makers tend to simply hope that there is a strong recovery over the next year or so. They've been assuming this for quite a number of years, so what you have is a growing gap between political hope and economic reality.
JB: Of course, some politicians will say that they’re just basing numbers on what the Congressional Budget Office, the Office of Management and Budget in the White House, or even the Federal Reserve are projecting.
SDK: The CBO is particularly optimistic about growth over the course of the next ten years, particularly between 2014 and 2018, suggesting that the growth might get up to somewhere between 3.5 to 4 percent per year. They also effectively assume in those longer term projections that the U.S. delivers a faster rate of productivity growth over the following 10 years than it's really experienced at any point over the last fifty or sixty years.
JB: Why aren’t we getting the big growth we used to have?
SDK: It's typically interpreted as being a short-run fixable problem – that there must be some kind of magic bullet that can be fired that will deliver a decent recovery in economic activities.
My argument is very different. It suggests that we went through this unusual golden age from, really, the 1950s through the end of the 20th century. There were a series of one-off effects that temporarily lifted the growth rate from what might be the longer term steady-state growth rate.
One of those effects includes the extraordinary opening up of world trade. The second factor is the much greater opportunities for women in the workforce. Back in the 1950s very few of them were employed, and when they were, I it was often in relatively unproductive jobs, given their skill sets.
The third change is education. We've gone from a tremendous shortage of graduates to a situation whereby graduates these days are not guaranteed the high-paying jobs they would have enjoyed back in the 1950s.
Access to consumer credit was also a huge driver of growth, particularly in the U.S. from the 1950s to the end of the 20th century. It's difficult to see how credit can grow quite as much in the future.
JB: You say that stagnant economies create this impediment for needed political reforms. How do you break that cycle?
SDK: In Adam Smith’s dull and melancholy states, which we describe today as being periods of stagnation and contraction, there is a risk that the necessary reforms that you need to create a more entrepreneurial society are precisely the ones you can't deliver because people don't trust you to do it.
Each vested interest believes the reforms are going to damage their particular lifestyle, and therefore there is tremendous resistance. The consequence is that growth rate remains weak, and the promises we made to ourselves become in more danger of being broken. That only increases the level of mistrust. You get caught in a vicious circle that is very difficult to break.
JB: Given the demands on Medicare and Social Security, you talk about the need to sign a new “intergenerational social contract.” If I’m a baby boomer in my 60s, why would I be excited about this?
SDK: The problem is that the boomers are in the majority. People over 50 are very good at voting in elections. There’s a very heavy skew toward that group of society making choices that might suit them, even though it comes at a cost to others.
Also, if you continue down this current route, the danger, ultimately, is that the tax burden on the young will become quite excessive. The young, of course, can vote with their feet and go to other jurisdictions. Then the region is forced convert its infrastructure away from schools and in to old people's homes. You're basically locking in a long-term problem.
The way to persuade the boomers that change is required depends on whether they recognize how vulnerable they will be without young people. No matter how much savings they've got, if there isn't enough production their savings will eventually be made worthless, either because when it comes to try to liquidate a particular asset, there is no one to sell it to.
These are potentially tricky political choices, but they are ultimately necessary.
JB: Was it hard to write this book? Did you have to take breaks and surround yourself with scented candles?
SDK: It wasn't too hard. One thing I enjoyed was looking at the historical parallels. I have this strong view that economists don't really know their history at all.
JB: What gives you optimism?
SDK: Technology will deliver higher living standards. My concern is that the gains in living standards are not sufficient to the promises we made ourselves.
Secondly, for all of the difficulties in the book, there are lots of things one can do that have nothing to do with the plain vanilla, nuts and bolts of economics. There are lots of aspects of happiness that don’t deal with the generation of income. In my spare time, for example, I try to play the piano. It gives me huge pleasure, but I don't think there is any impact on national income. If anything, I think there is a negative impact because my wife has to listen to it from time to time.