Puzzle – What puzzle?

“The Miracle Years Are Over – get used to It”

So announced Ruchir Sharma, a contributing opinion writer for the NEW YORK TIMES, in a well-argued article reprinted with only minor tweaks below

Across the world, economists have had to downgrade growth forecasts – but it’s not as bad as it sounds

Last year (2018) looked like the time when President Trump had delivered on his promises to strengthen the economy – his tax cuts appeared to juice growth above 3%, a pace the United States had not topped since 2005 – but the US Commerce Department has since revised 2018 growth downward to below 3%, even as forecasts for 2019 were also trending lower, toward 2%

And it’s not just an American story and Mr. Trump who won’t deliver on promises of 3, 4 or even 5% growth – across the world, economists have downgraded growth forecasts in most years since the global financial crisis of 2008:

  • Defying the hopeful projections, Japan has rarely grown faster than 1%
  • Europe has struggled to sustain growth faster than 1.5%
  • And no one quite knows how fast China is growing, but it’s clear that there, too, the economy is slowing.

So why is the dismal science suddenly guilty of issuing overly optimistic forecasts that set the whole world up for disappointment?

Economists keep basing forecasts on trends established during the postwar miracle years, when growth was boosted by expanding populations, rising productivity and exploding debt – but population and productivity growth had stagnated by 2008, and the financial crisis put a sudden end to the debt binge

The miracle is over

Politicians often promise to bring back a golden age, but serious economists also are encouraging a similar illusion – even during the Industrial Revolution, in the 19th century, the world economy rarely grew faster than 2.5% a year, until the post-World War II baby boom began to rapidly expand the labour force – after 1950, the combination of more workers and more output per worker lifted the pace of global growth to 4% – economists came to think 4% was “normal”

Yet by the last decade, the baby boom had faded out from Europe to Japan and China – even in the United States, younger and faster-growing than most developed countries, growth in the working-age population slowed to a mere 0.2% last year from 1.2% in the early 2000s – and because fewer workers correlates directly with slower growth, that decrease implied a 1-point drop in economic growth

Roughly, economists should have expected that United States economic growth would slow to 2% from 3% — and it has – this is the new normal for the American economy – stimulus measures like the Trump tax cuts can lift growth above this path, but at best temporarily, at the risk of higher deficits and debt

For political leaders, the new age of slow growth is not a problem to solve – it’s a reality they need to accept and explain to the public – especially because it’s just not that bad:

  • When populations are growing slowly, the economy doesn’t need to grow as fast to keep incomes high
  • In the United States this decade, growth in GDP per capita has slowed much more gradually than the overall economy, by half a point, to an average of 1.4%
  • Although Mr. Trump likes to boast about how well the United States is doing against developed rivals, Europe has been growing just as fast in per capita terms this decade
  • And Japan has been growing slightly faster
  • In a rich country, that is fast enough to satisfy most people
  • Indeed, surveys show that Americans have rarely been more confident about the economy.

Slower growth in the working-age population also means less competition for jobs worldwide, which goes a long way to explaining why unemployment is now at record lows not only in the United States but also in the UK, Germany and Japan – surely that’s not a bad thing

Whatever politicians tell the public, their attempts to bring back the miracle years are ill-advised – growth in the economy is driven by growth in the number of workers and in output per worker, or productivity – but since the postwar surges of 1950s and 60s, productivity growth has slowed, also defying government efforts to lift it

For a time, the global economy kept motoring along anyway, fueled by a surge in debt – in the 1980s, central banks began winning the war on inflation, which allowed them to drop interest rates sharply – lower borrowing costs unleashed a worldwide binge that saw debt surging from 100% of global GDP in the late 1980s to 300% by 2008

Then the global financial crisis hit, ruining many private borrowers and lenders, many of whom are still wary of taking on new debt – and after growing faster than the economy for three decades, debt growth in many countries, including the United States, has fallen back in line with economic growth – even China, the one major country that dodged the crisis and experienced a surge in lending after 2008, is now reluctant to build on the mountain of debt that already weighs down its economy

So the postwar miracle is over – economic growth is weighed down by the baby bust and the debt hangover – yet because economists continue to base forecasts on miracle rates of growth — 4% for the world, 3% for the United States — policymakers keep fighting to hit these targets – this is very risky

There are growing calls from economists on both the right and the left to lower interest rates, or increase government spending, to boost growth even if that risks higher inflation – at the Federal Reserve, too, there is an emerging view that letting inflation rise above 2%, long considered a red line, may not be unwise

The underlying assumption seems to be that policymakers must take action because 2% GDP growth is intolerably slow

But must they?

The confidence surveys suggest Americans are quite content with record-low unemployment, benign inflation and 1.4% growth in GDP per capita – why then the rush to pump more money into the economy which risks rekindling its debt problems and inflation?

The world does not need more debt and more inflation to counter trends of declining population growth and high indebtedness

Instead, economists need to adjust their forecasts and politicians need to rethink their polices to match this reality, because trying to recreate a bygone golden age is a shaky way to build the future

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