How the West fell out of love with economic growth

From The Economist

This year has been a good one for the West. The alliance has surprised observers with its united front against Russian aggression. As authoritarian China suffers one of its weakest periods of growth since Chairman Mao, the American economy roars along. A wave of populism across rich countries, which began in 2016 with Brexit and the election of Donald Trump, looks like it may have crested.

Yet away from the world’s attention, rich democracies face a profound, slow-burning problem: weak economic growth. In the year before covid-19 advanced economies’ gdp grew by less than 2%. High-frequency measures suggest that rich-world productivity, the ultimate source of improved living standards, is at best stagnant and may be declining. Official forecasts suggest that by 2027 per-person gdp growth in the median rich country will be less than 1.5% a year. Some places, such as Canada and Switzerland, will see numbers closer to zero.

Perhaps rich countries are destined for weak growth. Many have fast-ageing populations. Once labour markets are open to women, and university education democratised, an important source of growth is exhausted. Much low-hanging technological fruit, such as the flush toilet, cars and the internet, has been plucked. This growth problem is surmountable, however. Policymakers could make it easier to trade across borders, giving globalisation a boost. They could reform planning to make it possible to build, reducing outrageous housing costs. They could welcome migrants to replace retiring workers. All of these reforms would raise the growth rate.

Growing pains

Unfortunately, economic growth has fallen out of fashion. According to our analysis of data from the Manifesto Project, which collects information on the manifestos of political parties over decades, those in the oecd, a group of mostly rich countries, are about half as focused on growth as they were in the 1980s (see chart 1). Modern politicians are less likely to extol the benefits of free markets than their predecessors, for instance. They are more likely to express anti-growth sentiments, such as positive mentions of government control over the economy.

When they do talk about growth, politicians do so in an unsophisticated manner. In 1994 a reference by Gordon Brown, Britain’s shadow chancellor, to “post neo-classical endogenous growth theory” was mocked, but it at least indicated serious engagement with the issue. Politicians such as Lyndon Johnson, Margaret Thatcher and Ronald Reagan offered policies based on a coherent theory of the relationship between individual and state. gdp’s small coterie of modern champions, such as Mr Trump and Liz Truss, offer little more than reheated Reaganism.

Apathy towards growth is not merely rhetorical. Britain hints at a wider loss of zeal. In the 1970s the average budget contained tax reforms worth 2% of gdp. By the late 2010s policies made half as much impact. A paper published in 2020 by Alberto Alesina, a late economist at Harvard University, and colleagues at the imf and Georgetown University measured the significance of structural reforms (such as changes to regulations) over time. In the 1980s and 1990s politicians in advanced economies implemented a large number, making their economies sleeker. By the 2010s, however, they had lost their oomph: reforms practically ground to a halt.

Our analysis of data from the World Bank suggests that progress has slowed still further in recent years, and may even have reversed (see chart 2). The American government introduced 12,000 new regulations in 2021, a rise on recent years. From 2010 to 2020 rich countries’ tariff restrictions imposed on imports doubled. Britain voted for and implemented Brexit. Other countries have turned against immigration. In 2007 almost 6m people, on net, migrated to rich countries. In 2019 the number was down to just 4m.

Governments have also become less friendly to new construction, whether of housing or infrastructure. A paper by Knut Are Aastveit, Bruno Albuquerque and André Anundsen, three economists, finds that American housing “supply elasticities”—ie, the extent to which construction responds to higher demand—have fallen since the housing boom of the 2000s. This is likely to reflect tougher land-use policies and more powerful nimbys. Housing construction across the rich world is about two-thirds its level in that decade.

Politicians prefer splurging the proceeds of what growth exists. Governments are spending a lot more on welfare, such as pensions and, in particular, health care. In 1979 the bottom fifth of American earners received means-tested transfers worth less than a third of their pre-tax income, according to the Congressional Budget Office. By 2018 the figure was more than two-thirds. According to a report in 2019, health spending per person in the oecd will grow at an average annual rate of 3% and reach 10% of gdp by 2030, up from 9% in 2018.

Politics is increasingly an arms race with promises of more money for health care and social protection. “Thirty or 40 years ago it was taken for granted that the elderly were not good candidates for organ transplantation, dialysis or advanced surgical procedures,” Daniel Callahan, an ethicist, has written. “That has changed.” Greater wealth has enabled this. Yet politicians rarely ask whether an extra dollar on health care is the best use of cash. Britons in their 90s receive health and social care that costs the country about £15,000 ($17,000) a year, about half Britain’s gdp per person. Must budgets rise year after year to meet growing demand, even as the price of providing that care is also likely to increase? If yes, where is the limit?

People may see spending on health care and pensions as self-evidently good. But it comes with downsides. More people work in an area where productivity gains, and therefore improvements in overall living standards, are hard to induce. Perfectly fit older people drop out of work to receive a pension. Funding this requires higher taxes or cuts elsewhere. Since the early 1980s government spending across the oecd on research and development, as a share of gdp, has fallen by about a third.

Much of the extra spending comes at times of crisis. Politicians are increasingly concerned with preventing bad things from happening to people or compensating them when they do. The enormous system of credit guarantees, eviction moratoriums and debt forgiveness introduced during the pandemic brought bankruptcies and defaults to a halt. This was radical, but also the thin end of the wedge.

In America, for instance, the federal government has assumed huge contingent liabilities. It guarantees an ever-larger quantity of people’s bank deposits; it forgives student loans; it offers a wide variety of implicit and explicit backstops to everything from airports to highways. We have previously estimated that Uncle Sam is on the hook for liabilities worth more than six times America’s gdp. This year European governments have fallen over themselves to offer financial support to households and firms during the continent’s energy crisis. Even Germany, normally Europe’s most disciplined spender, has allocated funding worth 7% of gdp for this purpose.

No one cheers when a firm goes bust or someone falls into poverty. But the bail-out state makes economies less adaptable, ultimately constraining growth by preventing resources shifting from unproductive to productive uses. Already there is evidence that fiscal help doled out during the pandemic has created more “zombie” firms—those which are going concerns, but which create little economic value. Governments’ huge implicit liabilities also mean higher spending in times of trouble, which reinforces the trend towards higher taxation.

Grey power

Why has the West turned away from growth? One possible answer relates to ageing populations. People who are not working, or are near the end of their working lives, tend to be less interested in getting richer. They will support things which directly benefit them, such as health care, but oppose those that only produce benefits after they are gone, such as immigration or homebuilding. Their turnout at elections tends to be high, so their views carry weight.

Yet Western populations have been ageing for decades, including during the reformist 1980s and 1990s. Thus the change in the environment in which policy is made may play a role. Before social media and 24-hour rolling news it was easier to implement tough reforms. The losers from a policy—a business exposed to greater competition from abroad, say—often had little choice but to suffer in silence. In 1936 Franklin Roosevelt, speaking about opponents to his New Deal, felt able to “welcome” his opponents’ hatred. Now the aggrieved have more ways to complain. As a result, policymakers have more incentive to limit the number of people who lose out, resulting in what Ben Ansell of Oxford University calls “countrywide decision by committee”.

High levels of debt have also constrained policymakers’ room for manoeuvre. Across the g7 group of rich, powerful countries, private debt has risen by the equivalent of 30 percentage points of gdp since 2000. Even small declines in cash flows could make servicing the debt harder. This means politicians quickly intervene when anything goes wrong. Their focus is keeping the show on the road—avoiding a repeat of the financial crisis of 2007-09—rather than accepting pain today as the price of a brighter future.

Quite what would push the West in a new direction is unclear. There is no sign of a shift just yet, beyond the misguided attempts of Mr Trump and Ms Truss. Would another financial crisis do the job? Will a change have to wait until the baby boomers are no longer around? Whatever the answer, until growth speeds up Western policymakers must hope their enemies continue to blunder. 

Bajwa's world view

 

Privilege doesn't start with The Rich

 Janan Ganesh in The FT 

There is a standard-issue Russian tycoon called Dimitry on board the yacht. There is a social klutz who is something in tech. There is, in a gallant stab at originality, an arms-trading couple in the November of their lives.  

When a storm sinks this ship of fools, beaching them on an island, the dominion of passengers over crew starts to flip. You see, the rich are all thumbs when it comes to survival skills. The toilet attendant can harpoon fish and make fires. (Poor people famously attend Navy Seals camp when young.) Watch her become queen of the island. Watch a male model give her some loving for extra rations.  

Triangle of Sadness, while an unworthy Palme d’Or winner, whacks the super-rich entertainingly enough. But here’s a thing. I too have a cleaner. And that puts me in a minority of the public. I dine out most nights, and with some fussiness, which further narrows the economic company that I keep. Last month, I incurred a £25 surcharge rather than keep an appointment with a Sky crew who were coming to install a dish. I couldn’t be bothered to race home from coffee with a friend and it was losable cash. 

I am just 'upper middle class'. But my life is one of late-Roman decadence next to that of the median earner. If you are a corporate lawyer (not even a partner) so is yours. If you send your children to a private school, or live in the catchment area of an acclaimed state one, so, most likely, is yours. 

Much too much is made of the super-rich. And it is made by an upper middle class that is hardly more in touch with the national average. Take it from a social climber of some aptitude. Take it from a veteran of (I reckon) each household income decile since the age of five. The inflection point on the economic scale comes much earlier than you think. Something dramatic happens between, say, £30,000 a year and £130,000: a sharper change in the texture of life than occurs between the second number and a million. The first jump affects what you can do. The second tends to affect merely how.  

The upper middle class can rent in nice districts of world-class cities. The rich can buy there. The average can do neither. The upper middle class can fly to another continent. The rich can fly business. The average must plan and economise to do either. Having passed through the same universities, the upper middle class and the rich are often of a cultural feather. Diplomat can speak unto hedgie. How often does either befriend a nongraduate Band 5 NHS nurse? Or marry one? 

The obsession with a small overclass distorts public life in all sorts of ways. One is a sort of innumerate confusion in politics. No, you won’t fund the welfare state of your dreams by squeezing plutocrats alone. (Nordic taxes ask a lot of the merely well-off.) And no, inheriting £800,000 of property isn’t normal. 

Another is bad art, the kind that fancies itself subversive but spares most of its audience. There is always a painting or video installation nowadays about the cupidity of those able to buy it. That the curator, the agent and even the front-of-house team live lives of pure exotica next to the national average gets lost in the righteous gaze up at the one per cent of the one per cent. 

This is where Triangle goes wrong. In having to reach so far up the income scale to find bad behaviour, the film achieves the opposite effect of its intended anti-elitism. It absolves everyone south of the Coutts current account income threshold.

If Ruben Östlund, the director, thinks the mistreatment of service staff is peculiar to the super-rich, I have a film proposal for him about the cafés of London. Opening scene: the press-ganging of a waitress as auxiliary childcare by yuppie parents. When the upper middle class are rude, it is precisely because they have to try to put distance between themselves and the service class. With the richest, the gap is too obvious to need underlining. At times, it seems, good manners do cost something. 

The Moral Governance of Others

Nadeem F Paracha in The Dawn

In September, 22-year-old Mahsa Amini was admonished by the Guidance Patrol for ‘improperly’ wearing her hijab. She was then allegedly beaten to death. Her death triggered an unprecedented protest movement, in which women as well as men are attacking symbols of Iran’s theocracy like never before.

The protests have evolved into an open rebellion against Iran’s morality laws and against groups that the state has employed to implement these laws.

The Guidance Patrol is the successor of the Islamic Revolution Committees that were formed in 1979 to forcibly implement ‘Islamic morality’ in public spaces — especially when wearing the hijab was made compulsory in 1983. Over the years, there have been isolated protests against this law, but nothing like what Iran is witnessing today.

The protests are challenging the whole idea of ‘moral policing’ that began to be adopted by the state in many Muslim-majority countries from 1979 onwards. After Iran, moral policing units also emerged in Saudi Arabia and, from the 1990s, in Sudan, Afghanistan, Nigeria and, in certain regions of Malaysia and Indonesia.

The state gives the units powers to check and correct ‘moral digressions’, such as ‘inappropriate’ dressing (especially by women), ‘unseemly’ interaction between men and women in public, or the exhibition of any other ‘un-Islamic’ behaviour. Moral policing outfits have often been accused of using violent methods, mostly against women.

However, as morality policing organisations are now being openly challenged in Iran, recently they were disbanded in Saudi Arabia by the crown prince Muhammad bin Salman. Their presence contradicts his reformist agenda. Also, the criticism against the tactics used by the police was intensifying. Morality policing units were also dismantled in Sudan in 2019, after the overthrow of the dictator Omar al-Bashir.

According to Amanda F. Detrick (University of Washington, 2017): “States with religious systems of government, employ morality police as a formal method of social control to expand and stabilise their rule. Morality police units enable the regime to project power into society and retain dominance by affirming religious legitimacy, suppressing dissent and enforcing socio-religious and political uniformity.”

Moral policing can also emerge as an informal method of social control. According to the French philosopher Michel Foucault, the “governance of the self” can lead to the “governance of others.” In other words, sometimes, when an individual or a group embraces an idea of morality, they may end up enforcing this idea on others. If the enforcement finds traction among a large body of people in a society, the state is likely to adopt it as policy.

For example, even though most Muslim-majority countries do not have moral policing outfits formed by the state, ever since the 1980s, vigilante groups have been known to implement ‘morality’ by force. Such enforcements have often been turned into law by governments.

In Pakistan, for years, non-state groups campaigned to oust the Ahmadiyya from the fold of Islam. At first, the state treated the campaigns as subversive. But when the campaigns began to find greater traction among the polity, especially in the Punjab, the government declared the Ahmadiyya as a non-Muslim minority.

Informal methods of social control that emerge from below have been highly successful in Pakistan. From the late 1960s, there were campaigns against nightclubs, cinemas and the sale of alcoholic beverages by right-wing vigilante groups. They were suppressed by the government. But in the late 1970s, when a government was struggling to stall a political movement against it, it suddenly agreed to close down clubs and ban alcohol. But this was a futile attempt to regain social control.

Consequently, in 1980, there were plans by the Ziaul Haq dictatorship to form state-backed moral policing units. They were to enforce gender segregation in public spaces, ‘proper’ dressing habits (especially among women), compulsory prayers in the mosques, etc. Women’s organisations saw these as a way to strengthen a myopic patriarchal ethos. Their activism deterred the dictatorship from forming moral policing squads.

However, the frequency of vigilante groups enforcing (their ideas of) morality increased. For example, a group calling itself the ‘Allah Tigers’ started to raid hotels and even homes on every New Years Eve. Technically, their actions were unlawful, but the dictatorship tolerated them and saw them as the actions of ‘common people’ who were willingly implementing the state’s ‘Islamisation’ project.

There have also been non-state groups enforcing the hijab and discouraging the celebration of events such as Valentine’s Day. Although the government and the state have not appropriated these as policy, many educational institutions have.

But formal and informal methods of social control through moral policing are not only restricted to Muslim-majority countries. Ironically, outside the myths of ancient ‘pious’ states, one of the first formal examples in this respect appeared in 19th century England.

The regular police force in 19th century England was encouraged to ‘morally regulate’ the society. To 19th century British ‘gentry’, morality was deemed a necessary part of life, in order to hold and keep social stability. The police often took action (sometimes preemptive) against alleged prostitutes, drunkenness, betting and ‘habitual’ criminals.

Nevertheless, moral policing in most Muslim and, particularly in non-Muslim regions, has largely remained informal. But it has been rather successful in influencing state institutions. For example, years of anti-abortion activism in the US finally led to an abortion ban imposed by the US Supreme Court.

Also, in many countries, non-state moral policing of content on social media and the electronic media has pushed governments to pull down websites, films and TV shows. Interestingly, informal moral policing in a non-Muslim country has been most rampant in India. Vigilante groups often emerge to enforce ‘Hindu values’. These can include action against those celebrating Valentine’s Day, to lynching those who are accused of eating beef.

Moral policing is a serious issue. Morality has mostly to do with factors rooted in religion. There may be a consensus on the more general aspects of a faith, but there are always many interpretations of various topical aspects of it. One cannot impose morality based on a single interpretation.

Instead, states need to educate citizens to embrace pluralism and tolerance and exhibit behaviour that does not create social disruption and divisions. An individual’s choices that form their moral self-governance should be respected, as long as they are not raging to turn it into the governance of others.

Raising interest rates to tame inflation will only cause more pain

Central banks are set on a path to cause recession – and marginalised people will pay the price writes Joseph Stiglitz in The Guardian

Higher interest rates will not do what people need, such as lower the price of food. 



Central banks’ unwavering determination to increase interest rates is truly remarkable. In the name of taming inflation, they have deliberately set themselves on a path to cause a recession – or to worsen it if it comes anyway. Moreover, they openly acknowledge the pain their policies will cause, even if they don’t emphasise that it is the poor and marginalised, not their friends on Wall Street, who will bear the brunt of it. And in the US, this pain will disproportionately befall people of colour.

As a new Roosevelt Institute report that I co-authored shows, any benefits from the extra interest rate-driven reduction in inflation will be minimal, compared with what would have happened anyway. Inflation already appears to be easing. It may be moderating more slowly than optimists hoped a year ago – before Russia’s war in Ukraine – but it is moderating nonetheless, and for the same reasons that optimists had outlined. For example, high auto prices, caused by a shortage of computer chips, would come down as the bottlenecks were resolved. That has been happening, and car inventories have indeed been rising.

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Optimists also expected oil prices to decrease, rather than continuing to increase; that, too, is precisely what has happened. In fact, the declining cost of renewables implies that the long-run price of oil will fall even lower than today’s price. It is a shame that we didn’t move to renewables earlier. We would have been much better insulated from the vagaries of fossil fuel prices, and far less vulnerable to the whims of petrostate dictators such as the Russian president, Vladimir Putin, and Saudi Arabia’s own leader, Crown Prince Mohammed bin Salman (widely known as MBS). We should be thankful that both men failed in their apparent attempt to influence the US 2022 midterm election by sharply cutting oil production in early October.  

Yet another reason for optimism has to do with markups – the amount by which prices exceed costs. While markups have risen slowly with the increased monopolisation of the US economy, they have soared since the onset of the Covid-19 crisis. As the economy emerges more fully from the pandemic (and, one hopes, from the war) they should decrease, thereby moderating inflation. Yes, wages have been temporarily rising faster than in the pre-pandemic period but that is a good thing. There has been a huge secular increase in inequality, which the recent decrease in workers’ real (inflation-adjusted) wages has only made worse.

The Roosevelt report also dispenses with the argument that today’s inflation is down to excessive pandemic spending, and that bringing it back down requires a long period of high unemployment. Demand-driven inflation occurs when aggregate demand exceeds potential aggregate supply. But that, for the most part, has not been happening. Instead, the pandemic gave rise to numerous sectoral supply constraints and demand shifts that – with adjustment asymmetries – became the primary drivers of price growth.

Consider, for example, that there are fewer Americans today than there were expected to be before the pandemic. Not only did Trump-era Covid-19 policies contribute to the loss of more than a million people in the US (and that is just the official figure) but immigration also declined, owing to new restrictions and a generally less welcoming, more xenophobic environment. The driver of the increase in rents was thus not a large increase in the need for housing but rather the widespread shift to remote work, which changed where people (particularly knowledge workers) wanted to live. As many professionals moved, rents and housing costs increased in some areas and fell in others. But rents where demand increased rose more than those where demand fell decreased; thus, the demand shift contributed to overall inflation. 

Let us return to the big policy question at hand. Will higher interest rates increase the supply of chips for cars, or the supply of oil (somehow persuading MBS to supply more)? Will they lower the price of food, other than by reducing global incomes so much that people pare their diets? Of course not. On the contrary, higher interest rates make it even more difficult to mobilise investments that could alleviate supply shortages. And as the Roosevelt report and my earlier Brookings Institution report with Anton Korinek show, there are many other ways that higher interest rates may exacerbate inflationary pressures.

Well-directed fiscal policies and other, more finely tuned measures have a better chance of taming today’s inflation than do blunt, potentially counterproductive monetary policies. The appropriate response to high food prices, for example, is to reverse a decades-old agricultural price-support policy that pays farmers not to produce, when they should be encouraged to produce more.

Likewise, the appropriate response to increased prices resulting from undue market power is better antitrust enforcement, and the way to respond to poor households’ higher rents is to encourage investment in new housing, whereas higher interest rates do the opposite. If there was a labour shortage (the standard sign of which is increased real wages – the opposite of what we are currently seeing), the response should involve increased provision of childcare, pro-immigration policies, and measures to boost wages and improve working conditions.

After more than a decade of ultra-low interest rates, it makes sense to “normalise” them. But raising interest rates beyond that, in a quixotic attempt to tame inflation rapidly, will not only be painful now; it will leave long-lasting scars, especially on those who are least able to bear the brunt of these ill-conceived policies. By contrast, most of the fiscal and other responses described here would yield long-term social benefits, even if inflation turned out to be more muted than anticipated.

The psychologist Abraham Maslow famously said: “To a man with a hammer, everything looks like a nail.” Just because the US Federal Reserve has a hammer, it shouldn’t go around smashing the economy.

Love Jihad is a fact: Amber Zaidi

 

Showpiece Muslim democracy Indonesia bans sex outside marriage, live-ins, tightens contraception