The growth problem
In the economic debate between left and right, there seems to be a shared presumption which I find questionable. The presumption is that if only we can get the right policies - the right fiscal policy (whatever it is), banking reform, tax and regulatory policy, whatever - then the economy will grow as normal. I doubt this, on several grounds:1. Some of the growth since the 1980s came from a rise in households’ debt-income ratios as these adjusted upwards following the relaxation of credit constraints. Although I’m not as convinced as some that consumers are over-indebted, this process is now over.2. History shows that recoveries from recessions and financial crises are often weak.3. Gravity works against the UK. We export more to Spain and Italy than we do to all four BRICs. 4. In one important respect, the economy was running out of oomph even before the crisis. In the five years to the peak in 2007Q4, real business investment grew by 4.4% a year. In the previous 20 years - which encompassed a sharp recession, remember - it averaged 5.3% a year.5. The factors behind this slowdown haven’t disappeared. These include: a realization (thanks to Nordhaus’s research) that investment in innovations is rarely profitable; the migration of low-wage projects to emerging markets; and a slowdown in the rate of monetizable innovations. The thing is, I’m not sure that there’s much that policy can do about all this. It’s not good enough to “set the private sector free” because it doesn’t want to invest anyway. And it’s not enough to fix the banking system or set up a state bank, because the problem is a lack of demand for credit, not just supply. And “confidence” is a red herring; the problem is that there is a genuine dearth of investment opportunities, not that firms are unwilling to see them.If I’m right, or even nearly so, there are implications here for both politics and the markets.For politics, it suggests the task is not (just) to promote growth - which might not be greatly possible - but to adapt to an era of slower growth. For the markets, this suggests a fundamental reason for permanently(ish) lower equity valuations: that future growth will be lower.