Best Business Books 2016: Economy
The Crisis Is Over:
Welcome to the New Crisis
It’s been quite a decade for the global economy. The popping of
the American housing bubble in 2006, the subprime mortgage financial crisis and
its spread to Wall Street in 2007–08, the collapse of the world economy into
the first global recession in decades in 2008–09, the knock-on eurozone
financial crisis that began in 2010, and a slow, often faltering recovery —
it’s been a tumultuous 10 years. And the period has produced a bumper crop of
excellent economics books by academics, journalists, and practitioners who have
attempted to grapple with the extraordinary macroeconomic disaster. They have
examined why it happened, how to fix it, what it means, and how to avoid a
recurrence of anything even remotely as hellish.
But we may have arrived at
a crossroads. Recently, Martin Wolf’s The Shifts and the Shocks: What
We’ve Learned — and Have Still to Learn — from the Financial Crisis (one
of s+b’s top economics books of 2015) and Barry Eichengreen’s Hall
of Mirrors: The Great Depression, the Great Recession, and the Uses — and
Misuses — of History (which received a highly favorable review
in s+b) put a capstone on the intellectual structure of analysis on
the crisis. And this year, in my view at least, the most compelling books on
economics are widening the lens. Only one of the three, Adair Turner’s Between
Debt and the Devil: Money, Credit, and Fixing Global Finance, deals with
the 2006–10 period. The others take a broader view. Robert J. Gordon’s The
Rise and Fall of American Growth: The U.S. Standard of Living since the Civil
War tries to make sense of the economy not in a five-year period in
the recent past but over the entire 150-year sweep starting in 1865. Jacob S.
Hacker and Paul Pierson’s American Amnesia: How the War on Government
Led Us to Forget What Made America Prosper argues powerfully that the
voluntary donning of ideological blinders has made U.S. economic policy lousy
and the country’s political economy so badly dysfunctional.
In The Rise and Fall of American Growth, Robert
J. Gordon, a professor of economics at Northwestern University and one of our
greatest economic historians, paints a pessimistic picture. It’s unappreciated
that for much of history, growth in economic frontiers — what we would call
development markets — was actually quite low. The era of modern economic growth
got started only in 1870, with the simultaneous advent of the iron-hulled
screw-propelled oceangoing steamship, the submarine telegraph cable, and the
industrial research lab. It was then that the pace of growth kicked up a notch
to a steady, long-term per capita economic growth rate of 2 percent per year.
That may not sound like much. But it meant that in an average year, the share
of the average household’s resources that was needed to acquire what that
household had acquired the previous year shrank by one-fiftieth. With a 2
percent growth rate, well-being rises faster, because the resources released by
that growth for other purposes can be spent acquiring not just more of the same
but all of the new goods and services that are the fruits of ongoing invention
and innovation. Over time, as this growth compounds, it leads to enormous
increases in economic output and standard of living.
But Gordon, whose pessimism is driven by data, believes this era
of growth has come to an end: In the coming decades, frontier economies will
see a measured pace of growth of only 1 percent per year. Why? Between 1850 and
1950, we saw the invention of life-changing technologies such as jet aircraft,
telephones, indoor plumbing, gas cooking and heating, electric refrigerators,
streetcars, automobiles, radio and television, antibiotics, and
steel-and-concrete construction. Between 1950 and 2015, we saw the widespread
diffusion of those technologies — and the coming of computers, mobile phones,
and the Internet. But what comes next? Gordon says: less. You can only
industrialize your society once, after all. And that slows down the pace of
innovation. In addition, economies today face significant headwinds that they didn’t
face in the past: an aging population, an average education level that has hit
a ceiling, rising income inequality and wealth inequality, and struggles to
continue to run pay-as-you-go social insurance. Add it up, Gordon says, and for
the first time, an American generation faces the possibility of not living
better than its parents did.
Now there still are techno-optimists, those who point to the
immense value creation emanating from Silicon Valley as proof that we may be in
the second inning of the ball game rather than the ninth. I certainly want to
be a techno-optimist. But Gordon’s exhaustive research program — this highly
readable book checks in at 784 pages — has knocked me back on my intellectual
heels. After one plows through this volume, the boulder one must roll uphill to
make the case for techno-optimism is considerably heavier.
The Devil We Sort of Know
Over the last several
years, it has often seemed as if the financial world has been turned upside
down, what with negative interest rates, bailouts of huge banks, and a
widespread shift from optimism to pessimism. Just as Robert Gordon wants to
upend the conventional wisdom about growth, Adair Turner wants us to shift our
thinking about debt 180 degrees. As head of the U.K. Financial Services Authority,
Turner had a front-row seat at the first great global financial crisis of the
21st century. And Between Debt and the Devil has, at its core,
an argument that I trace to an economist who had a front-row seat at the
greatest global financial crisis of the 20th century. Taking a page from John
Maynard Keynes, Turner in effect argues that we are approaching the age of the
“euthanasia of the rentier.”
What does this mean? In the past, the world was poor enough,
economic growth was fast enough, and the capital requirements of enterprise
were high enough that the world was genuinely short of savings. As a result,
society found that the promotion of enterprise required more than those who
brought to the table labor, skills, knowledge, drive, technology, and a
willingness to experiment and bear risk. But to get the capital that would turn
these ingredients into growth, society also needed to induce those who would
otherwise consume resources to delay consumption and deploy their capital. Thus
the simple commitment of one’s current purchasing power to an enterprise could
command a healthy return, and one could live well as a rentier off the coupons
from bonds and debt that were safe stores of value. On the plus side, this form
of economic organization did induce people to mobilize savings and resources
for the enormous capital investments needed for economic growth. On the minus
side, this form of economic organization would inevitably lead to episodes in
which debt securities that had been widely believed to be safe turned out not
to be so — and there would then follow one hell of a mess.
Now, however, we are in an
age of what Larry Summers, the former Treasury secretary and Harvard University
president, calls secular stagnation, in which low growth, low interest rates,
and low prospects for innovation make it unattractive for people to deploy
capital. Because too much cash is chasing too few opportunities, the mere
willingness to postpone consumption no longer commands a real return, as anyone
who has tried to augment wealth without taking on risk since 2008 knows very
well. Indeed, there appears little prospect that the mere willingness to
postpone consumption will command a real return as far out into the future as
financial markets forecast. As of July 2016, some US$13 trillion in bonds
around the world were carrying negative interest rates. This
state of affairs is metaphorically killing off the rentiers.
Turner’s insight is that in such an environment, debt no longer
has a productive role to play. And yet it still carries its dangers. And so
it’s time, Turner argues, to treat debt as a form of economic pollution and tax
it. Labor and skills and knowledge should be recompensed with wages and
salaries. Technology should be recompensed with royalties and licensing fees.
Drive and willingness to experiment should be recompensed with profits and
options. And a willingness to bear risk should be recompensed with equity
returns. But, in Turner’s view, the era in which debt is good and we can look
benignly on high or increasing leverage is over — if it ever truly existed.
Turner concludes that we need to revise economic policy and
economic policymaking in two important directions. First, we must recognize
that we will never be able to attain the perfected economic system. We will
always face a choice of institutional imperfections. So we need much higher
capital requirements and much stronger lending standards, and we need to build
a political economy that can resist the howls of those who want to leverage up.
Second, we need to abandon the belief that public policy can be reduced to
simple and stable rules. The idea that it can be is, Turner argues, as much a
fatal conceit as the now outdated belief that central planning could do the
job.
The Decline of Pragmatism
The low yields on
government bonds reflect a high level of faith in the functioning of the
governments whose credit backs them. And yet, as political scientists Jacob S.
Hacker and Paul Pierson write in American Amnesia, that faith may
be misplaced. American Amnesia is the best business book of
the year on the economy. In part it is my favorite because its thesis runs
exactly parallel to the thesis of my own book, co-written with Stephen S.
Cohen, Concrete Economics: The Hamilton Approach to Economic Growth and
Policy. Our thesis, and theirs, is that up until 1980 it was taken for
granted in the United States that the public and private sectors were partners
in a project of equitable growth. It was never the case that the government
needed to take control. And it was never the case that what the U.S. needed was
to drown government in the bathtub and let laissez-faire rip. Rather, the
government needed to do its proper job of clearing the ground, opening up the
space, setting up the playing field and keeping it level, building the
institutions, and providing whatever support it could that would greatly add
value to private enterprise. While government does the blocking, private
enterprise takes the ball and carries it forward at great speed. This is how
the U.S. developed from a group of poor, disconnected, agrarian colonies into a
powerful, industrialized, integrated nation.
But Hacker and Pierson,
political scientists at Yale University and the University of California at
Berkeley, respectively, argue that the U.S. fell prey to a fit of amnesia. Our
political system forgot how things worked — and how they are supposed to work.
And the authors pin the blame, to a large degree, on the political right.
Sometime around 1980, American conservatism stopped seeing government as
primarily a partner to private enterprise and began seeing it exclusively as an
enemy. The conventional wisdom came to hold that the smaller the government,
featuring low taxes and fewer regulations, the faster the economic growth. This
was, moreover, not a practical judgment but an ideological imperative. The
deregulated low-tax laissez-faire market could not fail: It could only be failed.
Policies that failed to deliver results could do so only because the policies
were not extreme enough.
Hacker and Pierson tell a
compelling story of the descent of first American conservatism and then the
Republican Party from pragmatic engagement to ideological echo chamber. The
story that struck me as most worrisome was the last one they told, which concerned
the response to the 2014 Ebola virus outbreak. The U.S. government began to
organize what seemed to all specialists and all those knowledgeable about
infectious disease to be prudent and effective but not alarmist
infection-control policies. And yet, the authors note, many influential
commentators from various points of the center-right spectrum rushed to
conclude that the response couldn’t be trusted and would fail — simply because
it was being conducted by the government. “What scares me is the fact that we
can’t trust the institutions that deal with such threats, and we can’t trust
the people who run them,” said Ron Fournier, avowed centrist columnist at
the National Journal. Talk-show host Glenn Beck said he believed
the Obama administration had somehow targeted Dallas for infection because the
city leaned Republican.
I do, however, think that Hacker and Pierson miss an important
sociological cause and concomitant of the shift. They miss the Republican
Party’s transformation from a group of forward-looking enterprisers who think
they can take advantage of the creative destruction that change and economic
growth will bring to a group of backward-looking owners who believe that they
are as rich as they will ever be, and who are under threat from the creative
destruction that change and economic growth will bring.
These three books together paint a picture of the business,
economic, and political future that is much more pessimistic than the one we
were looking forward to only one short decade ago. Business in an age of slowed
growth and greater headwinds, as Robert Gordon projects, must proceed more
cautiously than business plunging into a third industrial revolution led by
information and biotechnology. Yet, as Adair Turner convincingly argues,
seeking to avoid risk and pull in one’s horns is unlikely to produce wealth in
an era in which debt is transforming from a means of mobilizing resources into
a form of economic pollution. The ideologically fettered political economy
Hacker and Pierson warn against is unlikely to enact and implement the proper
policies to cushion the blows and take advantage of whatever opportunities
remain.
That may not be the most uplifting possible set of messages to
start us off in this postcrisis era. But, as Walter Cronkite used to say:
That’s the way it is.
by J.
Bradford DeLong
http://www.strategy-business.com/article/Best-Business-Books-2016-Economy?gko=86f79&utm_source=itw&utm_medium=20161103&utm_campaign=respB
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