new economics

“And the day came when the risk to remain tight in a bud was more painful than the risk it took to blossom.”     – Anais Nin

At least the CBC has come clean – we really don’t understand the economy anymore. Since the Great Financial Crisis (GFC) in 2008, developed economies have applied a variety of increasingly unorthodox monetary policies to get us back to the type of economy we expect: growing at 2.5-3% per year, and subject to a business cycle driven by investment and inventory fluctuations.

But we haven’t returned to anything we understand: growth in the developed world continues to be anemic; debt levels are rising to dangerous heights; and unorthodox monetary policies have reached unthinkable levels of unorthodoxy, with USD12Tr in sovereign bonds now in negative interest rate territory, meaning that you lend the government money, and you also pay them for the privilege.

The mainstream economic press in Canada is finally starting to talk about these issues. As a recent article in the CBC puts it: “Economics 101 is obsolete in many ways… The great recession changed a lot of things.”1) See Peter Armstrong, ‘It’s not working’: Why the old economic rules don’t add up any more. Accessed September 15, 2016.

So where is the new thinking? Following academic economics over the last 8 years, we have hoped that we would see some innovative thinking that refreshes our economic approach. Sadly, this is not emerging. Basically, the economic model we built for the post-world-war-2 order was based on a demographic dividend we did not recognize – the classic ‘he was born on 3rd base but thought he hit a triple’ syndrome. When young families are forming – increasing demand for housing, cars, and furniture – productivity is growing, so it’s not a huge surprise that the economy in the developed world did well in the 1950s-1980s.

But what happens when the population is aging and shrinking (which is true in Europe and Japan, and would be true if not for immigration – with its own set of problems – in US, UK, Canada, and Australia). We don’t know.

But here are a few thoughts:

  • Since the population of earth has to stabilize at some point (and we hope at a point that is sustainable), the economy has to function without a growing population. Indeed, for an individual country, it has to function even if the population is shrinking.
  • As GDP is poorly correlated with well-being, the GDP measure has to be either scrapped or modified as the main measure of the performance of an economy. Nevin and Neill put forward individual Flourishing as the objective by which we should measure that performance.2)See the article, Flourishing.
  • We will take a huge step forward if we have a deeper understanding of individual risk and the relationship between lifetime Flourishing, working life, and pension and savings behaviour. As discussed elsewhere on this site, given the tremendous increase in life expectancy, and the individual uncertainty in length of life, it is impossible for the individual to manage their own lifetime risk.3)See Who Can Manage Their Own Lifetime Risk: Return of the 6-Million-Dollar Man. This inability reduces individual consumption in later life, having a negative impact.

Overall, the Economics profession has learned little from the Great Financial Crisis (GFC) and in fact does not seem to have learned much from slowing growth, reduced productivity improvements, and stagnant (or declining) median incomes in many developed countries. And if that profession does have a small and growing outcry for new metrics of success – an outcry for which Nevin and Neill hope to become a still more radical voice – they are not crying out in a away that is eliciting effective change from policy makers.

We are always talking about innovation these days… so let’s see more from economists and legislators.

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