by Viva Avasthi
I submitted this essay last month as my entry for the
Royal Economic Society's Young Economist of the Year essay competition. I was delighted that the judges (a panel of teachers initially, and then Sir Charles Bean, RES President; Stephanie Flanders from JP Morgan; and Professor Tim Besley of the London School of Economics) thought it deserving of joint third place. I am now sharing it with you and hope that you enjoy reading it. Clicking on each graph will allow you to see it more clearly.
Since submitting the essay, reading
this and
this provided me with further insights into the 'secular stagnation' argument and other ways in which it might potentially be flawed. Please refer back to this when you reach the relevant point in the essay.
I have marked that point with **
In hindsight, perhaps I didn't give enough credit to the ability of technological developments to boost growth, particularly considering how badly the impacts of growth in that sector are reflected in GDP... Unfortunately, the word limit (and the limited amount of time I had to write the essay after exams had finished!) prevented me from exploring a lot of ideas in as great a depth as I would have liked.
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31/07/14
The future: a murky blur of possibilities, problems, and potential shifts in paradigms. Attempting to make sense of our collective experiences in the past and present to make informed predictions about the future is one of the difficult tasks faced by economists across the world. At present the key question haunting economists and leaders of the advanced economies is the one which this essay attempts to answer.
Setting the stage for analysis
Since we are constrained by the word limit, let’s consider the advanced economies to be the US, UK and European economies. Most notably, Japan has been omitted. Several key reasons for this must be condensed into the following: Japan is structurally quite different from the other economies since it has a far stronger manufacturing sector, far better standards of education, and a greater social cohesion. Its prospects seem much brighter than the rest of the advanced economies’ for these reasons. Thus (perhaps rather controversially!) it was felt that there was no need for it to be included in this analysis.
Traditionally, economic stagnation is considered a prolonged period of little or no growth in the economy, often with annual GDP growth of less than 2-3%. High unemployment is generally perceived to accompany this low growth. However, perhaps such GDP growth benchmarks become redundant when one considers that ‘normal’ growth might not actually be normal at all. Pre-crisis levels of GDP growth can be described as being not normal for the entire period between today and the 1980s because of the existence of various bubbles providing artificial boosts and drags on GDP. Even before then, we were living in a world boosted by the massive demand created in the aftermath of the world wars, and so it would be irrelevant to compare the growth levels of today to those of that time. So perhaps measuring economic stagnation by looking at GDP growth alone doesn’t make much sense.
To measure economic stagnation we must consider what we value as important for an economy: growth levels in themselves, or standards of living, equality and sustainability of growth? A better measure of economic stagnation than GDP growth may be real median income levels. With 95% of the increase in American income since 2009 having gone to the top 1% (Saez and Piketty, 2012), it is clear that just looking at GDP growth can cause issues, since the sort of growth occurring does not benefit the economy as a whole. More suitable measures, perhaps, are unemployment levels (accounting for those who have given up actively seeking work), investment levels and productivity levels.
