All around there seems to be relief at the end of the recession, but also a feeling that respite is still some way away. There’s a growing awareness that households aren’t really going to be experiencing any of the benefits either, and this surprisingly accessible IMF report describes why, in the piece Stable Disequilibrium. The thesis is that there are still serious imbalances between consumer economies in the West and producing economies mainly in Asia, and there is no theoretical or analytical understanding of why these persist. Without an operating theory of why something is happening it is difficult to formulate policy of how to address the problem. All is lost to policymakers in the fog of war:
The global economy today is in the midst of secular and structural realignments at the national, regional, and international levels as relative dominance and dynamism shift from the older advanced economies to emerging market economies. These realignments are occurring during a period that includes a highly unusual economic downturn that spawned a degree of policy experimentation in advanced economies trying to shake the recession that not long ago would have been deemed unthinkable. These developments also explain why markets have tended to fluctuate violently—as investors alternate from being risk friendly to risk averse.
The prognosis isn’t that good for Western economies. Without a working hypothesis it is difficult to see how the IMF expects their preferred second scenario to happen
There are two ways to resolve the inherent […] contradiction of a stable disequilibrium over the medium term.
The unpleasant resolution involves the advanced economies tipping once again into recession. […] The policy responses would inevitably be less effective now that central bank balance sheets have ballooned to 20 to 30 percent of GDP in the major advanced economies while deficits and debt remain high.
The better resolution is one in which policymakers are proactive and preemptive. […] In this scenario the United States regains competitiveness and growth, Europe reforms itself into a more robust and harmonious economic union, and systemically important emerging markets encourage their growing middle class to consume as well as produce. All of these developments would have to take place simultaneously
Hmm. Guess which one of those is more likely to happen? My money’s on the first rather than the second, for the simple reason that the second demands simultaneous and proactive action from governments that have been reactive until now. So we are looking at either a triple-dip recession on a bit of recovery followed by a second recession in a year or so.
In particular, the population of the West is in deep shit. It was called out in in The True Lessons of the Recession by Raghuram Rajan
For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable…
This is also shown in the flatlining improvements in living standards across the generations, highlighted in The Jinxed Generation in the FT. It shows some interesting conclusions. The generation following me (Gen Y) achieved faster career progression in material terms. I was in my mid twenties before I could afford to go on holiday abroad and I was in my thirties before I got on a passenger aircraft for the first time. This would align with the massive increase in disposable income in the 21-mid thirties. People reaching working age two decades after me had a better income boost, particularly in their 20-30 year mark, but it is possible that career progression is slower after that. My career progression roughly tripled my pay in real terms (ignoring casual jobs at the start), or doubled it from the first graduate-level job I had.
Although the FT brings out the biggest gains among the pensioner cohorts, it is grinding the jinxed generation axe somewhat, as there are also these large gains early on in people’s working lives too. Integrated over time I would say the front-end gains are larger. I am starting to wonder if this doesn’t explain some of the nutty increase in house prices. But wages aren’t increasing any more. And they probably won’t increase in real terms for a long time, because of that drag of accumulated debt, which must either be forgiven or paid down.
Nevertheless, we should beware of being trapped in hedonic adaptation. The so-called Austerity Britain of today is immeasurably richer on nearly all fronts than the Britain I grew up in. Indeed, on the measures where it is a lot poorer – the freedom of children to roam and the cohesion of society, I would venture that it is not more money that we need to improve these. It is more heart.
That is perhaps the core of a lot of our problems. We confuse quality of life with standard of living. As an individual my standard of living plunged as I started to save to retire early. Initially, my quality of life took a hit as well, as some of that spending was on distracting myself from the pressures at work and interacting with stupid objectives dreamed up to push the wage bill down. Now my standard of living is still massively lower than it was in 2007. But my quality of life has improved immeasurably, because I have the freedom of self-determination. Money isn’t the only thing that makes live worth living, and yet you’d get that impression at times when people talk about Austerity Britain.
Spending on some things improves quality of life. It is frightening just how much spending doesn’t do that, once you choose to live your own values, rather than the ones pushed by consumerism.
The next recovery whenever it shows, won’t improve most Britons’ standard of living. It still is pretty good on average compared to what it was a decade or two ago. The problem is that it’s not that good compared to five years ago, and that doesn’t feel good because the party is still a recent memory. As time goes on that memory will recede. The Kubler Ross model of grief seems to apply
- Denial – it’s not happening, we just need to remortgage, flex the credit cards
- Anger – it’s all the fault of the bankers or the 1%, string them up by the lampposts
- Bargaining – Keynes will save us now, more spending, more borrowing will fix it and make it go away
- Depression – we’re probably getting to this stage now…
- Acceptance – we have a little way to go for that, to acknowledge the good times aren’t coming back any time soon.
According to this, I’d probably agree with Monevator that we are halfway through the recession. Until acceptance is achieved, there will always be the hankering for policy to get back to where we were before, which blinds us to looking at what we have in front of us and what needs to be done to steer a straight way forward.
It’s a shame the IMF prognosis is so bad and understanding of what is going on and why is so limited. I guess on the upside personally, I will be a net buyer in my S&S ISA for the next ten years or so, and it looks like the first years of that at least will still be under a cloud. Which is a good time to buy, though it never feels that way at the time 😉