Friday, April 10, 2015

Trading away rapid income growth and low immigration in return for low inflation and a decent return on safe investments and limited redistribution

I believe that most conflicts arise between individuals or groups, not because they have radically different goals, but because they have the same goals but prioritized differently and more critically, because they are willing to accept different trade-offs among those goals. It is a variant of the old manufacturing adage, "Good, quick or cheap, pick two."

From The global secular savings stagnation glut by Ryan Avent. First laying the groundwork regarding the topic.
Secular stagnation is an old idea which received an intellectual revival in 2013, when Mr Summers, who not long before was one of Barack Obama's chief economic advisors, began to deliver speeches on the topic. It describes a world in which there are lots of savings and comparatively few attractive places to invest them. The excess of saving over investment represents a shortfall in demand, and weak demand shows up in anaemic growth figures and low inflation.

Normally a central bank would try to fix the imbalance between saving and investment by reducing interest rates (which should discourage saving and encourage borrowing). But in a weak enough economy with low enough inflation the interest rate needed to balance saving and investment might become negative—maybe even really negative. Given the difficulty of achieving a negative nominal interest rate, the central bank might find it hard to push an economy out of that sort of trap once it fell in.
There's lots of discussion as to whether secular stagnation is real, what are the causes if it is real, and what to do about it if there is agreement on the causes.

Avent makes a lot of good observations and points, but that is not what caught my eye.

His final paragraph is what attracted my attention and I think he is broadly on the mark.
What this discussion should make clear is that secular stagnation isn't much of a puzzle. Rather, it is a dilemma. The ageing societies of the rich world want rapid income growth and low inflation and a decent return on safe investments and limited redistribution and low levels of immigration. Well you can't have all of that. And what they have decided is that what they're prepared to sacrifice is the rapid income growth. In aggregate that decision looks somewhat reasonable if not entirely right. But it is a choice with pretty significant distributional consequences. And the second era of secular stagnation will come to an end when political and demographic shifts allow the losers from this arrangement to say: enough.
The crux of the issue is that we don't like the range of trade-off decisions we have to make. In a fantasy world, we can have it all and make no trade-offs. In the real world, you can have just about any one thing you want and even multiples of things, but you can't have everything. You have to prioritize and make trade-off decisions. The fact that we don't like being subject to the discipline of reality doesn't make the choices bad.

We can pretend there is something bad or unfair about the trade-off but it is better if we grow up and make the hard decisions. And most importantly do it transparently and bring everyone along with the decision-making. Instead, we tend to hide the issues and make the decisions in opaque ways that hide the consequences until it is too late to remediate them.

That old Chesterton quote from The Man Who Was Thursday comes to mind,
The poor have sometimes objected to being governed badly; the rich have always objected to being governed at all.
Accepting Avent's analysis that the rich and powerful have made the trade-off decision to accept low income growth in return for "low inflation and a decent return on safe investments and limited redistribution and low levels of immigration" (which makes perfect sense from their perspective), at some point the poor will notice that decision and begin to object to being so badly governed that their interests in rapid income growth have been discounted against the other desirable attributes. In the case of the US though, actually both rapid income growth and low immigration have both been traded away for "low inflation and a decent return on safe investments and limited redistribution."

No comments:

Post a Comment