The end of growth?
Further to my previous post, is there another similarity between now and the 1970s - that the causes of rapid economic growth in previous years are fading away?I mean, one reason why growth slowed in the 1970s was that a couple of the impetuses behind fast non-inflationary growth in the 50s and 60s - post-war rebuilding and the spread of some big technical advances - became weaker. Similarly, four possible forces behind economic growth since the mid-80s might also now be fading:1. Credit liberalization in the 80s led to a rise in the ratio of consumer debt to incomes. You can think of this as a long one-off adjustment, which is now most over. 2. In the 90s and early 00s, the risk premia on real capital assets declined, thanks to lower inflation, the absence of worker militancy and macroeconomic stability. This caused a rise in capitalists’ confidence and in capital spending, which was partly one-off. With the re-emergence of economic volatility, this process has stopped.3. In the 90s and early 00s, technical change in IT and telephony created investment opportunities that have now been mostly exploited.4. We’ve seen the best of the positive supply shock resulting from the supply of cheap goods from the far east. Even before the crisis began, the inflation rate for non-energy industrial goods was turning less negative; it was minus 0.8% in the 12 months to December 2007, against more than minus 2% for 1999-2005.These weakening forces gel well with two broad facts. First, the trade-off between unemployment and inflation (in the US) and between unemployment and the trade gap (in the UK) has worsened. This is consistent with a deterioration in the ability of economies to deliver non-inflationary growth. Secondly, even before the crisis, consumer spending was falling relative to wealth, and capital spending was low relative to profits. Both are consistent with forward-looking agents taking a dim view of future growth prospects. Maybe they were right.