As has always happened throughout the history of mankind, the solution to our woes will not come from economists, but from engineers. As I am writing these words, in research laboratories and innovative businesses, the next technological revolution, which will dramatically boost our productivity, and hence growth, is being nurtured. It may be in the domain of 3D printing; it may be in nanotechnology, quantum computing, genetic engineering or a new, environmentally safe nuclear energy. We do not know yet what, when and how. But we can safely bet it will.
(Speech at the Athens “Battle of Ideas” panel discussion on the subject “Is anti-austerity pro-growth”, organized by the Institute of Ideas in London, and the Hellenic American Union in Athens, October 5th, 2012).
The choice of words dictates our attitudes towards the concepts that these words represent. “Austerity” is a repulsive word; it connotes “discipline”; which connotes “punishment”; which connotes “pain”. No wonder dismal economists and politicians use it to call for anti-austerity, which, by argumentum a contrario, must necessarily be a pleasant thing.
In fact “austerity” is another one of these symbolic words used by economists to denote something much more mundane and very specific: nothing more and nothing less than for a government to keep public spending within the limits of sustainability. Even worse: when government spending is solely based on taxes, being but a mere redistribution of income among citizens, it has but a marginal effect on overall growth. What the proponents of anti-austerity really mean is not public spending per se, but rather public spending beyond tax revenues. In other words, fiscal deficit and the resulting public debt.
So this new slogan that has recently emerged as a war-cry in our battles against the crisis – “anti-austerity is pro growth!” – is just a rewording of a very old question: “are public deficits a growth instrument?” This is a very old and very heated debate between opposing clans of economists and politicians. Both sides put forward plausible arguments and seemingly valid theories. As a matter of fact the anti-austerity camp apparently has empirical data to corroborate the growth effect of public deficits. The New Deal, as well as the several decades since the second World-War, when European states achieved high rates of growth with more or less substantial deficits and sustainable debt. So much, that we almost empirically learned to accept deficit and debt as a natural law of governance, and generation after generation became conveniently comfortable with the idea of sustaining our welfare states through public deficits.
In my business with government statistics, I learned, often in a hard, humiliating way, that correlation is not causality. Was it deficits that brought growth, or rather that growth allowed our governments to have deficits? Is growth only “endogenous”, i.e. controllable through monetary policy techniques, tips and tricks, or rather “exogenous”, i.e. primarily constrained by uncontrollable factors of an historic scale?
I will leave the answer to this theoretical puzzle to theorists. What I have learned though, in my other business as a businessman, is that financial leverage – because this is exactly what governments do with deficits, betting on growth – is a risky bet that in the long term works only when a person, a household, a business or a government can sustainably outgrow their debt. When you borrow from future income you must be able to grow richer faster than your own debt grows. Or, more technically: the growth rate must – in the long term – be higher than the interest rate.
It is now outrageously obvious that the war-cry against austerity cunningly reverses the causality. The question of interest should not be if deficits stimulate growth or not, but rather if reasonably foreseeable growth allows for deficits. The subject of the discourse should not be if “anti-austerity is pro-growth” but if “anti-growth is pro-austerity”. In other words, can we achieve growth rates, which in the long term will be substantially higher than the interest rates at which investors will be willing to lend our governments?
Again, the choice of words dictates our attitudes towards the concepts that these words represent. Growth is a lovely word. Plants and kids grow. In fact growth is another one of these poetic words that economists and politicians use for mundane, tangible things. Growth is just the increase in the total value of goods and services produced and of the total income distributed within an economy. The fact that we measure this value, the Gross Domestic Product (GDP), in monetary terms by adding-up incomes or expenditures (to which government expenditure, is by the way, directly added, regardless of their real value) is an accounting convention. The essence of growth is an increase in the real value of real products and services by all of us. Thus, growth overwhelmingly depends on the size of the economically active population and their real productivity.
We live on the verge between two distinct historical eras. Fundamental factors of a massive, global scale have been reversed and made our convenient assumptions no more valid. As usually happens in history with these things, the change was so slow that we hardly perceived it as it happened. This is why we still hold dear our assumptions. But the cumulative effect of this slow change has accrued to such a scale, that we can no more pretend to ignore it. Demography, technology and climate change, by directly affecting economically active population and its productivity beyond our control, severely limit our growth potential and subsequently our ability to leverage our economies.
Demography has always been the silent force in economics. Demographic trends have a glacier-like stubbornness. They are slow and their effects need decades to materialize into perceivable change, but being in fact the aggregate of the individual behavior of millions of persons, they prove to be immune to short-term policies. It is a law of human nature that fertility, i.e. the number of children per woman, diminishes rapidly with rising income and corresponding rising standards of living. No subsidies, no favorable tax policies, no clever social engineering can reverse this trend. Moreover, our life expectancies have dramatically increased, while recent revolutionary developments in medical technology will increase them even more; at the same time, ever increasing education and specialization requirements delay the entry of the ever less numerous young in the work-force.
These demographic trends leave even less economically active people producing enough to support even more pensioners at an even higher cost, limiting western countries solvency, mincreasing interest rates for sovereign debt, but also simultaneously restricting foreseeable growth rates, since the active population, i.e. the one in charge of growth, is bound to age and shrink. The entry of women in this economically active population – a factor that has sustained growth in the past, not only due to mere numbers, but also due to improving the quality of the work-force – has almost reached a ceiling in most western societies. Immigration on the other hand, once thought of as a promising and sustainable solution, has proved to have severe political and cultural limits.
Enters Technology. In previous technological revolutions, jobs destroyed by technological innovation were compensated by jobs created in other economy sectors, to support increased demand at the newly lowered cost. This resulted in a gradual migration of the work-force from agriculture and industry to services. Our economies needed less of those more productive farmers and industrial workers, but more clerks, salesmen, educators and public servants. Industrial automation resulted in upward social mobility.
However, as the information technology revolution of our days proceeds – to a point of maturity that nobody refers to it as a revolution anymore – it sheds jobs of modern information blue-collar workers at an unprecedented rate. These jobs are now only replaced either by more demanding high-level creative jobs – for which they are not qualified enough – or by more menial not automated jobs – which they are not keen to accept, since this would actually reverse the positive social mobility of their fathers’ generation.
Services automation results in these middle-class service workers, with middle level qualifications crowding for even less administrative and clerical jobs. This trend, by inherently increasing pay gaps as well as social inequality, will prove to be the hottest political problem in the immediate future (the risk of political instability, or the fear thereof, is also accounted for in sovereign debt’s interest rates). But it will also have a significant impact on foreseeable growth rates: our economies will have to sustain ever higher levels of stubborn structural unemployment.
Finally, we have to face the existential drama of the planet. Climate change, not only inherently limits allowable growth – there is a direct proportional correlation between growth and energy consumption – but furthermore, for fair political reasons, the cost of environmental protection and emissions’ control policies falls unevenly mainly on western economies, inhibiting their growth potential. Subsidies for still economically not viable renewable energy forms, cost of CO2 emissions penalizing energy prices, costs incurred by environmental regulations, decommissioning of nuclear energy plants, are factors that severely restrict the growth potential of our western economies. Out of a sound sense of responsibility for the future of the planet, our democratic societies have taken the political decision for self-inflicted economic restraint, at a growth cost.
Due to these factors, which lie beyond the control of our governments and immune to the effects of monetary or fiscal tricks, unless something fundamentally changes, western economies must be prepared for anaemic growth rates in the long term. Moreover, markets, with their crowdsourced wisdom, perceive this long term risk and increase interest rates for economies that are ill-prepared and not bold enough to face this challenging future. Even if Keynesian counter-cyclical fiscal stimuli succeed in sustaining growth in the short-term, this will not be enough to restore confidence, and thus solvency, in the long term horizon of sovereign lending.
I am sorry for the bad news. We can only succeed but anaemic growth in the long term, due to fundamental factors of historic magnitude; these growth rates will not be sufficient to compensate interest rates (which will be rising in response, in a vicious circle of insolvency), in order to allow our governments to outgrow their debts and continue to leverage our economies through fiscal deficits. Anti-growth is pro-austerity. q.e.d.
But I also have good news. As has always happened throughout the history of mankind, the solution to our woes will not come from economists, but from engineers. GDP and its growth is a function of active population, but also of productivity. As I am writing these words, in research laboratories and innovative businesses the next technological revolution, which will dramatically boost our productivity, and hence growth, is being nurtured. It may be in the domain of 3D printing, which may revolutionize manufacturing and logistics by making expensive transport and inventories of goods obsolete; it may be in nanotechnology, quantum computing, genetic engineering or a new, environmentally safe nuclear energy. We do not know yet what, when and how. But we can safely bet it will.
We must adapt to low growth by self-inflicted austerity. But we must fight against it with the only weapon we know: technological innovation. And do not forget that knowledge and innovation can only be born in free minds, interacting in free markets and living in free societies.