WFS - age of stagnation presentation
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Could it be possible that we are entering an age of stagnation? Kate, Jason and I consider this view looking at it from three perspectives: the global environment/fiscal policy, technology, and demographics
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WFS - age of stagnation presentation
- 1. EUFO THE EUROPEAN FUTURES OBSERVATORY Jason Swanson Kate Burgess-Mac Intosh Laura Schlehuber The European Futures Observatory AN AGE OF STAGNATION? © The European Futures Observatory 2014
- 2. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 3. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
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- 6. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 7. EUFO THE EUROPEAN FUTURES OBSERVATORY Jason Swanson Kate Burgess-Mac Intosh Laura Schlehuber The European Futures Observatory AN AGE OF STAGNATION? © The European Futures Observatory 2014
- 8. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 9. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
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- 20. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 21. EUFO THE EUROPEAN FUTURES OBSERVATORY Jason Swanson Kate Burgess-Mac Intosh Laura Schlehuber The European Futures Observatory AN AGE OF STAGNATION? © The European Futures Observatory 2014
- 22. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 23. The Basic Model Restated EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014 Degree of Diffusion Time The Age of Information The Age of Scarcity Growth Phase Maturity Phase 1971 2001 2008 2030 Eruption Frenzy Crisis of Maturity Synergy Maturity Eruption Frenzy
- 24. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
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- 26. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 27. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 28. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 29. The Basic Model Restated EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014 Degree of Diffusion Time The Age of Information The Age of Scarcity Growth Phase Maturity Phase 1971 2001 2008 2030 Eruption Frenzy Crisis of Maturity Synergy Maturity Eruption Frenzy
- 30. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 31. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 32. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
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- 36. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 37. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 38. The Basic Model Restated EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014 Degree of Diffusion Time The Age of Information The Age of Scarcity Growth Phase Maturity Phase 1971 2001 2008 2030 Eruption Frenzy Crisis of Maturity Synergy Maturity Eruption Frenzy
- 39. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014 Degree of Diffusion Time The Age of Information The Age of Scarcity Growth Phase Maturity Phase 1971 2001 2008 2030 Eruption Frenzy Crisis of Maturity Synergy Maturity Eruption Frenzy
- 40. The Basic Model Restated EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014 Degree of Diffusion Time The Age of Information The Age of Scarcity Growth Phase Maturity Phase 1971 2001 2008 2030 Eruption Frenzy Crisis of Maturity Synergy Maturity Eruption Frenzy
- 41. EUFO THE EUROPEAN FUTURES OBSERVATORY Jason Swanson Kate Burgess-Mac Intosh Laura Schlehuber The European Futures Observatory AN AGE OF STAGNATION? © The European Futures Observatory 2014
- 42. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
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- 48. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 49. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 50. EUFO THE EUROPEAN FUTURES OBSERVATORY Jason Swanson Kate Burgess-Mac Intosh Laura Schlehuber The European Futures Observatory AN AGE OF STAGNATION? © The European Futures Observatory 2014
- 51. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 52. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 53. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 54. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 55. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 56. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 57. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 58. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 59. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 60. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 61. To misquote Churchill, it would be a shame to let a perfectly good recession go to waste. EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
- 62. EUFO THE EUROPEAN FUTURES OBSERVATORY Jason Swanson Kate Burgess-Mac Intosh Laura Schlehuber The European Futures Observatory AN AGE OF STAGNATION? © The European Futures Observatory 2014
- 63. Image Credits EUFO THE EUROPEAN FUTURES OBSERVATORY © The European Futures Observatory 2014
Editor's Notes
- Thank Stephen for leading us on this, thank audience, talk about how we did this as a learning op….
- Much of the policy focus since the great recession of 2008 has been aimed at trying to return the global economy to “business as usual”. It is assumed that it is both possible, and desirable to return to the pre – recession trajectory of global growth. This is despite evidence to suggest that such a growth path was leading to an imbalanced global economy that was neither sustainable from an environmental perspective nor equable from the perceptive of supporting a fair society.
- Ever since the onset of the recession, such efforts to return to business as usual have eluded policy makers. It may be that governments have been unsuccessful in their attempts, but it is also possible that the structural components of the global economy have changed in such a way that a return to the pre recession growth path is not possible.
- Global recession implies a shortfall in demand in relation to supply. It may be that demand contains a structural weakness that prevents demand from flowing into the global economy, and supply is held back because the technology implicit in labor productivity no longer is growing as fast as it used to.
- In a dynamic setting, there is a complex relationship between supply and demand. We drew these two elements together in our conclusion to suggest that the global economy is presently suffering from deficiencies in demand, but once the recovery sets in, constraints in supply will become far greater a factor in holding back economic growth..
- We have already seen 6 years of muted growth. If this situation were to last another 5 or 10 years, as we have come to believe it might, then we are truly entering into an age of stagnation
- Transition to Laura Good morning! My name is Laura Schlehuber. I am an actuarial consultant at Ernst & Young, a foresight student at the University of Houston and intern at the European Futures Observatory. My focus on this piece was thinking about an age of stagnation from an aggregate demand perspective.
- The financial crisis of 2008 and the resulting recession came as a surprise to most of us. There were visible warning signs prior to mortgages foreclosing, banks collapsing, and the number of job layoffs increasing but all the signs largely went unrecognized. Despite these warning signs, many economic forces simultaneously converged to create the greatest economic crisis since the Great Depression … and it all seemed to go unexpected until it was too late. The result, though, was an unprecedented fall in AD and an enormous amount of debt that couldn’t be easily repaid. Then, everyone had to take notice and address the now visible financial imbalances that had accumulated over decades of these actions.
- Although it’s already been five years since the crisis, we’re still feeling its effects…and we may continue to for some time to come. Economists are certainly trying to get us back to business-as-usual. However, their once-reliable forecasting systems haven’t taken us back to the pre-recession glory days of the “Great Moderation”. So, what if it can’t be fixed? Could it be possible that we are headed towards permanent stagnation?
- Well, American Economist Larry Summers certainly thinks so. During a recent conference, Summers is quoted, warning that the world was headed toward a period of “secular stagnation” saying the years of rapid growth were over as well as any economic benefits we had seen from the effects of globalization. Also, a study by Moody Britain determined that the British public has come to terms with the present-day reality of never returning to life as it once was. And what about the rest of the world? Are we finally able to embrace the reality that slow growth is the new normal due to low demand?
- Well, by looking at the effects of rebalancing on (1) debtor versus creditor nations, 2. between currency zones and 3. among households and financial institutions, we can see that the economy could certainly be moving toward an age of stagnation.
- First, we’ll take a look at the rebalancing of creditor vs debtor nations. So here’s a bit of background – in 2007, citizens started defaulting on their mortgage loans, which moved this debt burden to banks and other financial institutions. After a while, these banks were unable to absorb the weight of all of this debt and continue business-as-usual. As this pattern spread and more financial institutions took on too much debt, CENTRAL banks had to step in and bail them out before they all went bankrupt. We saw this saving from the Central banks mostly with mid and large-sized. So the loans of consumers and private financial entities passed into the hands of government as debt. Now, traditionally, when countries are debt-heavy, they turn to austerity - which includes policies such as spending cuts and tax increases – to reduce budget deficits. But these policies only decrease demand.
- So, as governments… such as the United States attempt to pay back this debt in future years, they will be unable to stimulate the economy through conventional fiscal or monetary policy…. Traditionally, monetary growth is implemented through the reduction of nominal interest rates and the devaluation of the national currency. But the nominal interest rates are at, or close to, zero already in many of the developed nations so the option to stimulate the economy by reducing the IR is …somewhat limited.
- So what do we do when traditional monetary policy doesn’t work? We move on to Quantitative easing and forward guidance policies – which most of the developed world has moved to. Quantitative easing is normally used as a last resort to stimulate the economy if interest rates are already too low. It’s when the central bank buys bonds and other assets from private financial institutions so that the central banks’ money supply increases. The other way is through Forward Guidance – which is where the government promises that, for a certain amount of time in the future, they won’t raise interest rates. Unfortunately, the use of quantitative easing and forward guidance will continue to be used but with limited impact on demand AND at the cost of significantly enlarging government balance sheets. In fact, in the US, the Federal Government balance sheet is approaching 4 trillion dollars.
- The other traditional way fiscal and monetary policy is implemented is through the devaluation of the nation’s currency. This is done in order to encourage exports thereby increasing demand. But the ability of governments to devalue their currencies depends entirely upon the willingness of other governments to allow them to do so. Competitive devaluations, with the purpose of stimulating export-led growth, can be self-defeating if all nations attempt to devalue their currencies at the same time. So far, the US has been reasonably successful in devaluing the US Dollar and the UK has been successful in devaluing the British Pound.
- But the Eurozone has not had as much luck. The nations of the Eurozone have entered into a situation where external devaluation of the Euro (or making their currency look more attractive to other countries outside the Eurozone) is no longer an option, which means that their only way forward is internal devaluation to address the imbalances within the Eurozone. So in some of the weaker Eurozone economies, such as Spain and Ireland, excessive levels of private debt had built up. In other weak economies, such as Greece and Italy, the buildup has been of public sector debt.
- Turbulence in the bond markets has led to these issues being addressed in the only way open to governments – which is internal devaluation, or, as we now know it, the policy of austerity. In the words of The Economist, “The euro area cannot enjoy real prosperity until its overhang of private debt is reduced and its young people are brought back to the labor market.” Unfortunately, this process is likely to continue to cause AD to be restrained as we move into the future.
- The last point - looking at the rebalancing of households and financial institutions. Due to the recession, households are now deeply aware of the dangers that excessive debt involves. Most households nowadays, are using the discretionary income they have to pay down their debts first – and this will probably be the case for a good amount of time in the future. As expected, this has resulted in a rise in the savings ratio. If consumers are saving…they’re not spending, which means little demand. This eventually results in reduced investments as companies delay purchasing extra goods in the face of sluggish demand.
- Coupled with this, people are still apprehensive about taking risks and investing. This apprehension, is one of the predominant “animal spirits” of this time. “Animal Spirits” is a term invented by John Maynard Keynes (CANES) and refers to the emotions and impulses that compel economic movement and can be measured in terms of consumer confidence.
- So, if our view is correct, we can expect economic growth to be stagnant from now on because aggregate demand is likely to be stagnant. We need to bear in mind a few key points. First, the effect of public mood or these “animal spirits” in relation to investment must be recognized as playing a significant and even destabilizing role in obtaining economic growth. Secondly, the ability of governments to intervene to rectify this is pretty limited because of the continuing need for fiscal austerity. Finally, all governments would like to resort to competitive devaluations so the external current account (meaning, the nation’s exports) are all likely to be kept in check. It will be only when these financial systems have been rebalanced that a longer run stability will be achieved and aggregate demand will be able to trigger a return to economic growth.
- And with that, I will pass the baton to Jason. Transition to Jason
- -Since the crash of 2008 there has been much speculation as to where future sources of economic growth might come from. Historically, one of the largest drives of growth is innovation. Keeping this in mind, as we consider images of what the world economy may look like in the future, and whether or not we may be entering in an age of stagnation, a critical question to consider is how will the pace of innovation impact upon future economic growth rates?
- If we were to take a sufficiently long perspective, there emerges quite a few long terms trends in the development of technology. These trends appear as surges of technological advancement that could be thought of as waves. These waves of technological innovation and advancement, rather than breaking and receding, act as additives to one another, giving a view of continuous progress and advancement
- We think these waves of technology innovation through the works of Knodratieff, Schumpeter, and Perez. In each of these, similar patterns of recurring events takes place that lead to a technological paradigm becoming dominant before being replaced by another. Keeping with the images of waves, it is conventional to think in terms of these paradigms in 5 waves – the industrial revelation
- The age of railways
- The age of steel and electricity
- The age of oil, automobiles and mass production
- And the information age
- If the Perez model is accurate, then we are presently in the middle of the fifth wave, at a point where the information age is starting to exhibit signs of maturity and where the sixth wave will start to gather pace. Now, an important point about the maturity phase in the Perez model is that the investment starts to level off and diminish at this point. As investment slows down the growth of labor productivity falls as well. This diminishes the contribution that rising productivity can contribute to supply, resulting in falling growth rates. There is much evidence from the developing economies to support this view. Since the onset of the great recession, investment rates , labor productivity, and economic growth rates have fallen.
- To a certain extent, this does reflect a rebalancing of household priorities towards saving cash and paying down debt rather than consumption, as well as the hoarding of cash within in the corporate sector. These trends are likely to continue for sometime as the supply of productive investment opportunities remains limited and business sentiment is one dominated by caution regarding future economic prospects.
- Eventually…. interest rates WILL rise. This will expose the vulnerability of households and businesses, and could delay the eruption of investment of the technologies of the 6th wave. At some point, the eruption of the 6th wave will take place bringing with it an economic shot in the arm, but that may not happen for years to come. In the meantime, the Perez model suggests that we ought not to give too much reliance just yet on a bout of investment led growth.
- If Perez gave us a modeling uses waves of innovation that create economic cycles, Robert Gordon proposes a similar model using Industrial Revolutions, suggesting that US economic growth is linked to periods of slow then rapid growth based on the timing of three industrial revolutions. They are Steam and Rail Roads 1750-1830
- Electricity, internal combustion engines, and petroleum from 1879-1900
- And computers, the internet, and mobile phones from 1960 till the present.
- Many of these advancements that have spurned economic growth are “one time” only advances. The fact that so many fundamental one time only inventions have already occurred limits the potential for a continuing stream of equally basic inventions
- Gordon is not alone in arguing that the pace of innovation is slowing. Jonathan Huebner in his article “ A possible declining trend in worldwide innovation” argues that innovation has been declining steadily since the industrial revolution. Huebner states that innovation is headed towards an economic limit that will be reached in 2038. Huebner examines US patent data that when normalized to total US population shows a patent peak in 1914. from 1914-1985 there is a drop of 50% of the 1914 value, the a rise through 1999, back up to 75% of the value of 1914. Huebner uses this data to argue the per capita innovation rate in the US is in decline.
- John Smart wrote a rebuttal to Huebner on his accelerating change site. Smart noted there were short comings with Huebner’s data. In regards to his patent information, Hubener stopped in 1999. Smart argues that if the 2003 data were included they would have refuted Hubener’s argument, but rather than witnessing a decline in innovation, maybe a we need a new measure? According to Smart, if we are to consider the pace of innovation, we need to look at things such as “under the hood” innovations – all the small innovations that lead to larger leaps, as well as social innovation. While human social innovation may follow political and generational cycles of advance and regrouping, technological innovation may be becoming smoother in it’s exponential growth the closer we get to the modern era.
- So back to the original question ; how will the pace of innovation impact future economic growth rates? According to Perez, we are sitting in the middle of the 5th wave. Our economy is at a turning point waiting for the 6th wave to start and provide a boost. This is naturally the point that innovation comes off and the pace of improvements in labor productivity start to lessen
- If this is the case, we can expect the contribution of improved productivity to the economy to diminish during this transition. If we then add in the analyses of Gordon and Huebner, then we can expect a slowdown or leveling off of innovation, perhaps reducing the rate of innovation until the 6th wave of technological innovation gives rise to an economic rebound. It is certainly our contention that we are entering a period of transition in the developed economies. We have had many productivity gains during the information age, but there are grounds to believe that the pace of improvement is slowing. This could be a result of structural issues rather than a temporary consequence of the recession.
- As these trends develop, the problems solved by the information age – largely those of productivity, will be less pressing and the problems the 6th wave will solve will come the fore. In the mean time, as we progress through this transition we will have to wait for technology to lead us into a period of higher economic growth.
- Transition to Kate
- Unemployment Spain and Greece – 50% SOURCE: Joel Kotkin (2012) Newsweek article Are Millenials the Screwed Generation?
- Unemployment Italy – 35% SOURCE: Joel Kotkin (2012) Newsweek article Are Millenials the Screwed Generation?
- Unemployment France – 22% United Kingdom – 22% SOURCE: Joel Kotkin (2012) Newsweek article Are Millenials the Screwed Generation?
- Unemployment United States – 12% Germany – 8% SOURCE: Joel Kotkin (2012) Newsweek article Are Millenials the Screwed Generation?
- Unemployment 75 million young people, or 6% of all 15- to 24-year olds, are unemployed SOURCE: International Labour Organisation in the Economist (April 2013) 26 million young people, those between 15 and 29 years of age, are “NEETS” – not in employment, education, or training SOURCE: Organisation for Economic Co-operation and Development (OECD) in the Economist (April 2013)
- Unemployment Between 2010 and mid-2013, Portugal, Spain, and Ireland have lost about 2% of their working-age population to areas abroad, in search of new opportunities SOURCE: Heather Stewart (2013), The Guardian
- Delaying Major Life Milestones Meek job market delaying major life milestones? - Marriage, having children Decline in marriage rates and increase in age of marriage Marriage has shifted approximately five years later over the course of 50-plus years; every ten years, the age of marriage moves to one year old SOURCE: Pew Research (2011), U.S. Birthrate Falls to a Record Low: Decline is Greatest Among Immigrants
- Delaying Major Life Milestones Meek job market delaying major life milestones? - Marriage, having children Birthrate fell to an all-time low in 2011 in the United States 2011 – 62.3 births per 1,000 women, lowest birthrate since 1920, the earliest reliable figures for this count SOURCE: Pew Research (2011), U.S. Birthrate Falls to a Record Low: Decline is Greatest Among Immigrants
- Let us just suppose there is a good likelihood that any recovery from the Great Recession will be rather subdued. If we take the view that demand will be somewhat muted as the developed economies re-balance
- if we take the view that supply will be held back by population growth in the developed economies being subdued;
- and if we admit the possibility that labour productivity will dip as we move from one technological paradigm to another;
- then two interesting questions emerge. Can we derive some benefits from this course of events? And second, what is the likely path that will lead us out of this situation?
- Ever since the Great Recession began, the policy objective has been to restore the developed economies back to where they were before it began. We could call this the policy of a return to ‘business as usual.’ Of course, this policy has not exactly worked, owing to a number of factors. As individuals and governments have striven to adjust their balance sheets by paying down their debts, spending in the global economy has relied upon the emerging nations for the growth that has been seen.
- The policy of austerity in the developed world has effectively denied governments of the ability to use fiscal policy as a means to stimulate aggregate demand. This has just left monetary policy for governments to use through the policy of QE, which has had some effect, but not as much as fiscal policy could have done. The result of this is the squeezing of living standards across the developed economies. There is a stark rise in inequality in the societies of the developed world, along with a feeling that governments are not acting in the best interests of the population they serve. Governments have responded by a more determined effort to return to the path of an ever growing economy without the effective means to achieve this.
- There is one area, however, in which the Great Recession has been quite beneficial. With the reduction of economic activity, both on an absolute level and in terms of the output gap - the gap between aggregate demand and supply in a dynamic context – the carbon intensity of economic activity in the developed world has fallen. In terms of the prospect of the onset of disruptive climate change, this is quite a beneficial side-effect of the Great Recession. It could be argued that the Great Recession provided a unique opportunity to address some of the issues around global warming and climate change.
- It can be argued that QE and austerity are, at last, starting to work. We would argue differently. Much of the recent growth in the developed world has come through the expansion of credit. Individuals and households are borrowing again to finance their lifestyles. We would argue this is not sustainable in the longer term because this is precisely the route that led us into the Great Recession to begin with. The danger point will come when the credit cycle turns, to the detriment of further economic growth.
- An alternative path, one that policy makers may eventually find through a process of trial and error, would be to restructure the economies of the developed world so they become investment-led rather than consumption-led. This investment is likely to come through a combination of public sector investment and private sector investment. If we are right, and the global economy is in a period of transition where it is moving from the information age to another technological paradigm, then it is likely that investment in the new paradigm will lead the global economy back onto the growth path.
- A recovery will not necessarily turn out to be a stable and sustainable outcome if it does not also deal with the issue of inequality and the improvement of living standards. The political climate has the potential to either speed the process of recovery or to slow it down. It is becoming evident to many that it may be necessary to implement policies of redistribution in order to speed recovery. This is not only within the nations of the developed world, but also in the relations between the developed economies and the emerging economies. The key to this is trade, but that means embracing the awkward political issue of confronting some of the vested interests in the developed world.
- To misquote Churchill, it would be a shame to let a perfectly good recession go to waste.