HSBC’s Stephen King is rare for an economist. Not only is he able to write well (in a style that most graduates would be able to understand), but he is also an incredibly nice man. His book, ‘When the Money Runs Out’, due to be published this Saturday, is a must-read for all UK policymakers, if only to show them the consequences of prolonged economic stagnation. That’s why the CPS is pleased to be hosting a book launch here for Stephen to elucidate his argument on the 4th of June.
The book is perhaps not as doom-and-gloom as the title suggests. Yet it is a warning. The central thesis suggests that the premise from which we have based all of our projections (and our ability to keep funding entitlements), that we will return to fairly robust trend growth, may well prove to be false. If so, we won’t be able to fulfil the promises we have made to ourselves.
Whilst not directly trying to answer as to why trend growth may have fallen (though lip service is paid to the high debt burdens, Gordon’s thesis about innovative slowdown and the demographic effects of an ageing population), King’s book reflects solemnly on the consequences for societies which experience economic stagnation. In environments where growth is stagnant, policies create readily identifiable winners and losers. As Adam Smith wrote in regards to his stationary state, this leads to loss of trust between different groups. Without this trust, it is much more difficult for markets to work effectively, or indeed for governments to pursue the sorts of supply-side policies which ultimately enhance productive potential. In short, stagnation becomes self-reinforcing, as the lack of trust erodes entrepreneurialism and initiative.
Throughout, King uses historical example to back up this thesis. King cites Argentina as an example of what happens when countries make poor political choices in the face of economic hardship. He shows that countries lose trust of their creditors and electorates, and Argentina demonstrates that economic failure can lead to poorly functioning political institutions and undermine the contract between state and society. In King’s eyes, this ultimately leads to decades of relative decline. He does, however, show an example of a country that persevered through (quite severe) economic hardship and came out more productive on the other side - South Korea, which had the political will to make the necessary sacrifices to guarantee future prosperity.
He is also refreshingly critical of the idea that just one more heave on the fiscal or monetary ropes would propel us into self-sustaining prosperity, citing the fact that stimulus after the 2001 recession was at least in part responsible for creating the conditions for the financial crisis. Whilst monetary and fiscal stimulus no doubt helped to prevent a more severe downturn after 2008, politicians and central bankers are now increasingly reliant on the same medicine, risking us turning into ‘stimulus junkies’. Central banks globally are becoming increasingly politicised after an age in which almost all economists believed that ‘independence’ was key to good policy.
What can be done? Since the key theme through King’s book is lack of trust, he focuses on areas where he thinks trust has been diminished (in macroeconomic policy and banking). These also happen to be the areas where he is an expert. Several of the solutions seem to be pushing at the door of conventional wisdom. There’s a nominal GDP target for central banks (justified as a micro, not a macro, argument and related to trust - with the need for certainty of nominal growth at a certain pace to avoid good debts turning bad and, hence, the terrible uncertainty of default) but King is clear about the limits of monetary policy, explaining that it is increasing the volume of nominal output which is ultimately most desirable, and this is most easily delivered through reforms encouraging hard work, innovation, technological advance etc., not something that monetary policy can easily fix. Perhaps more problematically politically he argues for more free movement of people and the need for fiscal union in the Eurozone (which this reviewer believes is unworkable in practice).
But there are some other novel thoughts which policymakers must think about. First, King explains how many of the world’s current problems are due to structural imbalances and that creditors buying up excess foreign assets can be a big problem. Ratings agencies could start scoring risks of major creditors as well as major debtors. And debt restructuring across the highly indebted nations, particularly in Europe, will ultimately be necessary. Second, King highlights how today’s current high debts, particularly with the coming demographics, risk creating a generational divide. As I mentioned in my Cambridge debate (video below), our generation is likely going to have to pay twice: for the pay-as-you-go benefits promised to our parents, and for our own private provision given the inevitable need to alleviate the strain on the public finances with more personal saving. In this context, it’s important not to over-pamper a growing non-working retired population, who will be a larger proportion of the electorate. Perhaps a fiscal constitution which prevents the increasingly powerful non-working population from imposing policies on the rest of us is in order.
The book could have gone further in two areas. First, it would have added to the book if Stephen had sought to explain why he thought the potential growth rate of the economy had fallen. Is it merely the effects of the banking crash or high debts? Or was the pre-financial crisis credit boom masking an underlying malaise beforehand? He indicates the latter, but doesn’t explain why this malaise might have occurred. Without knowing his view here, it’s difficult to judge whether his solutions are up to the task.
And though King rightly highlighted the ratchet effect of government spending, particularly in the realm of the welfare state, he did not perhaps go into as much detail as he might have done on the future of entitlements and the relative desirability of the social provision of our promises. The closest he got was to state the need for continual austerity, bar recession periods. But, the truth is, after a while salami slicing runs thin. That's when strategic questions over the role of the state have to be answered. Unless we get substantial growth, more and more resources are going to be sucked into entitlements, so questioning what it is sustainable for the state to do and its links with the health of the economy is surely one of the biggest questions of our age.
Overall though, this is nit-picking. The book’s central message is clear: economic stagnation leads to instability and a self-reinforcing erosion of trust, and there are severe limits to using stabilising macroeconomic policies as a remedy. The message that I took away was a need for institutional changes in macroeconomic policy and banking to restore trust, alongside attempted supply-side and structural measures to raise underlying trend growth, and for more decisions to be made considering the intergenerational consequences of high debts and entitlement liabilities. This is surely a message all politicians should listen to.