We have had a “natural rate” of economic growth of around 3% for a couple of hundred years. There have of course been peaks and troughs, but the trend has been consistent. If anyone wants to quibble with the precise 3% figure, that does not affect my argument.
With the economy stagnant following a stark decline, there is much discussion how to “kick start” economic growth gain, either by tax cuts or higher public spending. The terms of so-called debate have been very limited, taking it for granted that substantial growth will resume again as soon as we get the engine turning.
But of course, that is not necessarily true. Civilisations do go into absolute economic decline. Never forget Ozymandias.
There are reasons to imagine life may never be normal again. We have lost a great deal of our manufacturing base. The presumption is that it is fine for low earning manufacturing to be carried out in the BRICs, while we get much higher margins for providing banking, insurance, design and marketing services.
But why should that last for ever? The banking crash was a result of the fact that so much of the financial services sector, on which we depend so heavily, has no more relationship to the real economy than the passing of cash inside a casino. It is a miracle of the brutality of power that taxpayers were made without violent revolution to give up much of their individual wealth to bail out rich bankers. The incredible pain of this is what we are just beginning to suffer, because our pockets are being lightened very very substantially but regularly, spread over a long period.
The banks have not really been reformed and western taxpayers actually no longer have the cash or credit to bail them out on that scale again. The house of cards could tumble any moment, and the Euro crisis and dollar deficit impasse are winds buffeting that card house.
But the Euro crisis and US deficit struggle are much more important than their immediate effects. The brinkmanship in the US will be resolved and, even if the US defaults, the immediate fallout will not be Armageddon. The real damage is already done. The BRICs nations have been reminded forcefully that they are supplying their goods in unbelievable quantities to the west, in return for bits of paper of extremely dubious value. The medium term consequences of the banking crisis and the currency crises will be drastic indeed. Do not expect the BRICs to put up with this forever. It is not going to take them long to work out they can do their own banking, trade in their own currency, finance their own research and marketing, and insure themselves. Then what will we do? Staff call centres for them?
The same is true of commodity suppliers, who are also wondering right now about the value of the bits of paper they receive in exchange. Watch gold mining shares.
Commodity supply is the other reason we cannot automatically expect to resume economic growth. We already face huge upward demand pressure on commodity prices, particularly from China. It is a truism that mineral resources are finite. There is a whole lot of mystic nonsense talked about “Peak oil”. The simple truth is that of course oil is a finite resource, and of course at some time production will go down. What is nore relevant is that, thanks largely to China, we have already passed the point when growth in supply of oil will ever exceed growth in demand. Rising commodity prices will also hamper UK economic growth in the medium term.
The little argument between Balls and Osborne over whether tax cuts, or lower or higher public spending, will make a difference, is largely irrelevant. The world has changed. Everyone seems to accept we will be in economic decline relative to emerging economies. They have to get into their heads that we could be in absolute economic decline – permanently.