Secular Stagnation … I Think

I’m not totally sure what secular stagnation means – other than growth is low and difficult to jump-start, and that is the new normal.

But I do know that large companies are not investing significantly, preferring to sit on cash-piles and pay their most senior executives enormous salaries and bonuses instead. This is because large corporations are oligopolies – pretty close to monopolies. So they have near complete control of their pricing and profit levels, which are hardly reined in at all by either the competition nor by adequate regulation. If a competitor does break rank, that competitor may well be bought out. So the large corporations are in an excellent position to milk their customers, their existing products and their productive methods for all they can. They have little or no incentive to invest in better products or services or better means of producing them. Why do that when they can give their senior executives bigger salaries and bigger bonuses instead. And it’s not even as if shareholders get a raise in dividends either, because fund managers who hold most of the shares have no real incentive to perform better – and, if they do protest at meagre dividends , they can safely be ignored: after all share prices can be kept high by the simple method of buying more of their own shares to distribute to employees, especially the most senior ones. The ‘light touch’ low regulation situation was initiated by Mrs Thatcher in the UK and Ronald Reagan in the USA. And then continued by Messrs Blair/Brown and Mr Clinton.

Free enterprise is easily corrupted into monopolies/oligopolies without adequate regulation. This kind of corporate behaviour illustrates the difference between short-term greed and long-term self-interest, because if the corporations were to be investing economies would grow more and everyone would live happier, healthier and longer lives, assuming reasonable wealth distribution, natch. (But the inequitable wealth distribution we currently have also started in the 1980s and is a linked phenomenon). Better growth and better wealth distribution would benefit the corporate execs’ descendants. But I suppose said execs are holding to the view that in the long term we are all dead, and in the short term ‘mine’s bigger than yours’ competition among the top 0.1% must be a very difficult mental habit to shake.

It is largely because of all this that productivity is so low – most especially in the UK, where it is now in a particularly abysmal state even compared with other major (G7) economies where it is none too healthy. And, of course, low productivity leads to low growth, which further inhibits investment because of lack of confidence. A viscious circle, indeed.  Employment of cheap labour from a cowed and nervous workforce has been kept up for a while, as cheaper than new plant, etc. But it now looks as if even that may be slipping, too.

Attempts to boost economies via central bank quantitative easing have not been particularly successful, as we are constantly reminded (it was well known to be a gamble from the beginning – likened to ‘pushing on a string’).

So now central banks are toying with the idea of negative interest rates – and some, including the ECB, are actually implementing it. This is also likely to prove ineffectual in its aim to boost investment and consumer spending. So some (wishful thinkers) are predicting ‘helicopter money’ as a last resort (just distributing cash to consumers to spend).

In an economy your spending is my income and my spending is your income. That’s why an economy is not like a household or a firm. So ‘Schwabian Housewife’ economics (we-must-all-live-within-our-means-and-debt-is-inherently-bad) is such total rot. It is based on a fallacy of composition (the whole is exactly like its parts: national economy=firm=household=individual), and takes no account of the ‘paradox of thrift‘ where if everyone saves and no-one spends, we are all impoverished.

The simple answer in a case like this is through what is called fiscal expansion by governments. Governments need to spend, even if it means borrowing to do so. But because of Schwabian Housewife economics this has become politically unfeasible. Most Western governments don’t even want to spend on infrastructure investment, let alone welfare, health, the military, research into carbon dioxide capture and storage, etc (etc). In the UK if the hapless Mr Osborne were to be seen contemplating anything more than a short tactical about-turn from austerity, as he did in 2011 and is now doing after his latest budget fiasco … well he couldn’t because the press would not let him. Plus, of course, the theology of shrinking the state in order to ‘unshackle’ so-called free enterprise remains a convincing-sounding argument to many like Mr Osborne, despite the fact that we have seen what unshackling free enterprise has led to so far. Obviously free enterprise has not been unshackled enough…? Ayn Rand stuff, anybody? That’s an argument like proper communism has never really been tried? Both obviously bullshit.

Of course what would really lead to fiscal expansion would be a good war. But that really would not be the kind of rescue from North Korea or Mr Putin that I would be hoping for.

 

 

 

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About DMO

Market Research Consultant View all posts by DMO

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