Accepting slow growth as the economy’s New Normal carries several serious risks
Article content
After a decade of pedestrian increases in economic output, the federal government wants Canadians to believe our economy is no longer capable of sustaining higher growth. Pessimism about long-term growth prospects is embedded in the government’s plans. The 2021 budget foresees annual growth slumping below two per cent from 2023 on, after having decelerated to 2.2 per cent in the 2010s.
Advertisement
Article content
This echoes the pessimism of subscribers to the “New Normal” doctrine that advanced nations have entered an age of chronic slow growth. The New Normal hypothesis emerged in the aftermath of the 2008 global financial crisis. Former U.S. Treasury Secretary Larry Summers coined the term for the forecast from Northwestern University’s Robert Gordon that annual per capita real GDP growth will average less than one per cent for the next several decades. Gordon, Summers and others argue slow growth will persist both because societies are aging rapidly and because the transformative technological advances of the 20th century will not be repeated. A variant on this them is French economist Thomas Piketty’s gloomy prediction that income growing more slowly than capital would drive income and wealth inequality to extreme levels, further depressing economic growth.
Advertisement
Article content
Though arguments for a New Normal may seem plausible other interpretations of the recent slowdown are more convincing. The main alternative blames much of the recent record of sub-par growth on poor policies. For example, the Bank for International Settlements has attributed the protracted slump to the dulling impact of relentless monetary and fiscal stimulus on potential growth. If policy is to blame, that’s actually encouraging: it is more easily corrected than structural forces are.
Washington Post columnist George Will argues that accepting the inevitability of slow growth simply excuses such policy failures. As he puts it, “Making slow growth normal serves the progressive program of defining economic failure down.” If slow growth is somehow inevitable, environmental policies that have strangled growth with higher taxes, regulations, and refusals to approve projects have strangled what was doomed anyway.
Advertisement
Article content
Accepting slow growth as the economy’s New Normal carries several serious risks. By encouraging governments to fixate on redistribution — in the belief that the economy has become a zero-sum game in which one group can improve its lot only at the expense of another — it becomes self-fulfilling. Former Bank of England Governor Mervyn King described the resulting vicious cycle: “With stagnation comes a breakdown of trust. One person’s gain is another’s loss. The cooperative arrangements that typically characterize a period of economic expansion begin to fall by the wayside, threatening to lock in stagnation for the long run.”
Advertisement
Article content
More broadly, pessimism has a negative impact on the psychology of a society, as seen in Argentina and Japan during their long periods of economic stagnation. King argues this broader impact on sentiment results from the fact “our societies are not geared for a world of very low growth. Our attachment to the Enlightenment idea of ongoing progress — a reflection of persistent post-war economic success — has left us with little knowledge or understanding of worlds in which rising prosperity is no longer guaranteed.”
For optimists, the idea of secular stagnation is simply over-reaction to a transitory period of poor growth interrupting a long upward trend. Past periods of stagnation also generated despondency about the future. The term “secular stagnation” was originally coined in 1938 to describe how slow economic and population growth reinforced each other. But then the economy was surged during the post-war baby boom. A similar wave of pessimism followed the sudden slowdown in the mid-1970s. Alarmist forecasts that the post-war boom was over coincided with widespread angst over rising commodity prices and stagflation. But these gloomy predictions proved unfounded when the Reagan and Thatcher revolutions re-ignited growth in the 1980s and into the 1990s.
Advertisement
Article content
Over the centuries, optimism about long-term growth has always been vindicated. As growth theorist Paul Romer has observed, “The historical pattern has been one of accelerating growth — not just sustained growth but accelerating growth.” There are few reasons to think technological innovations have been exhausted. Patricia Meredith of the University of Toronto outlines numerous technological advances in today’s world, including “robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the Internet of Things, advanced wireless technologies, 3D printing, and driverless vehicles.”
The optimistic view is that the recent slowdown reflects normal adaptation as society shifts to more powerful technologies. The seeds of faster growth have been sown but will take time to sprout and mature. As former Fed Chair Alan Greenspan observed, “The IT revolution provides a chance of extending to the service sector the sort of productivity gains that we are used to in the manufacturing sector.” Technology’s ability to boost many service industries has been on full display during the pandemic.
Advertisement
Article content
Romer explains how history has consistently surpassed gloomy expectations: “Every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered … Possibilities do not merely add up; they multiply.” When the main problem is that governments have adopted environmental and redistributive policies that hamper economic growth Canadians should not accept the inevitability of slow growth. Disruptive technological change is opening the door to higher potential growth.
Philip Cross is a senior fellow at the Macdonald-Laurier Institute.
Advertisement
Philip Cross: Poor policy is what's causing slower economic growth - Financial Post
Read More
No comments:
Post a Comment