Sleepwalking Into Managed Decline

Looming global recession has encouraged a typical response of returning to normal, whether that be in the form austerity measures to keep national debt-to-GDP at “reasonable levels” and increasing interest rates to control inflation or introducing pro-growth measures to reduce cyclical turbulence. Similarly to the 2008 crisis, a prescribed toolkit is being used with similar expectations of potential success. However, there appears to be little questioning of the assumptions which suggest the global economy (and advanced economies in particular) can return to historical growth levels (including the meagre growth of the 2010s).

Structural conditions in the global economy don’t match these assumptions. The lasting effects of coronavirus shutdowns and the growing shortage of goods and inputs have created an inflationary base for a majority of consumer and intermediary products. The Russian invasion of Ukraine and partial de-dollarisation of oil amongst OPEC members have pushed natural gas prices and limited global accessibility to international supplies. Europe is restricted in the gas it can import as supplies from North Sea and the Norwegian shelf are at a higher base price due to scarcity and US supplies from fracking are similarly restricted in their potential for price reduction[1]. Even as those prices begin to fall, they are still sticking around a higher baseline than the previous decade of prices[2].

Similar supply constraints exist in other gas products like heating fuels and related goods like fertilisers and pesticides. These supply constraints are not just a result of shortages either, but of concentrated production sites. Overreliance on agricultural processing in China and concentration of low-wage manufacturing facilities in East and Southeast Asia make supply chains stickier as products move more slowly through the completion process. There is no move in advanced countries to correct this though, with industrial policies either focusing on high-end manufacturing requirements, like end-user battery production or automotive manufactures in gigafactories, or maintaining a reliance on service and administrative industries to be the majority employers.

Constraints are also coming from meteorological and virological events. Errant weather patterns like heatwaves within Northern Atlantic climates reduce crop counts and grasslands, thus reducing vegetable harvests and cattle numbers as neither can be sustainably managed except through increased fertiliser use (thus depleting soil nutrition) and the buying in of feed respectively. Virological events like the spread of avian flu have also added to this problem, raising the cost of eggs and bird meat. Scarcity is non-negotiable here.

Longer term trends only suggest these are events more likely to occur. The warming up of Northern climates increases the potential for subtropical diseases to spread more easily (as in malarial fever in British marshlands from mosquitoes) and inhibits wider land usage as drier summers lead to rainier autumns and winters, potentially requiring new flood plains and drainage requirements. Trends around urbanisation exacerbate all these issues as cities and suburbs are huge resource sinks for food and energy, particularly as advanced economies move to the electrification of cars and greater strain on public transport for inter and intra-city travel.

All of this places into question the power of market forces as determinants for economic distribution and growth. Market pricing mechanisms are being severely distorted by supply shortages and a sticky trading environment. Inflationary pressures are forcing industrial relations towards strong antagonism as conflicts over sectoral distribution of income[3] mean greater demands for inflation-matching pay increases. Market forces are politicised as the necessity to cap prices on goods (food, energy, transport) with limited elasticity of demand mean increasing levels of public and private debt.

The levels of indebtedness already seen are historically contiguous with the past two decades though. Household debt[4] and private debt-to-GDP have skyrocketed across the OECD[5] for the past two to three decades. In the UK, private debt as a percentage of GDP has shot up since the late 1990s[6]. Concomitantly household savings have stagnated[7] (only increasing slightly in 2020 due to the effect of coronavirus on consumption patterns). This suggests a substantial inelasticity in the capacity for households to either shift their consumption or defer current spending. With the collapse in asset values in 2008-2009 and the reduction in house ownership amongst younger demographics, there is no longer the fallback of increasing house prices to make up for income shortfalls and a lack of savings.

Potential for sustained economic growth is then called into question. While there are now calls from across the political spectrum for a focus on growth as a way out of the upcoming recession, none of them meaningfully tackle what such growth looks like. In these discussions there is a focus on deregulation, particularly for small businesses. There is no doubt red tape and regulatory arbitrage that is unnecessary, as in some HSE requirements that don’t make distinctions in safety protocols between different workplaces, but how far does such reform go. One author suggests two areas to encourage growth in the UK, childcare reform and planning deregulation[8]. Neither tackle the structural constraints of a British economy highly concentrated on the service and tertiary sectors which are limited in the extent that they can increase productivity or sustain wage growth. And neither tackle the strength of vested interests in limiting such reforms. Even tepid reforms to planning laws have met huge pushback which means successive governments have not tackled housing shortages since the 1980s.

The British economy, across its public and private spheres, contains a large administrative sector that contributes to the UK’s productivity puzzle and requires regular injections of funding to preserve a diminishing status quo. The NHS and infrastructure services are exemplars. This administrative metastasisation effects other advanced economies too as deindustrialisation means office work is the only substantive form of employment outside of trades. Beyond this the economy is short-termist and temporary as service sectors roles are reliant on fixed-term contracts and variable hours. Administrative growth also breeds interest group formation, as professional service organisations encourage employment conditions and codes of conduct that limit labour market entry and encourages sectoralism[9].

Growth is thus limited in a straitjacket. And where so-called pro-growth reform has been attempted, as in the Truss government, market forces have reacted negatively, hampering the potential for higher borrowing and deregulatory policy to impact GDP. These same market forces are also reliant on asset price growth (particularly in housing) as a condition of financial flows[10]. This then also pits homeowners against would-be-homeowners as the asset value must remain high to prevent negative equity. The Truss experiment exposed the fundamental limits of sovereignty, as the potential for a government to borrow further in the expectation of future growth was curtailed by financial markets and the Bank of England.

A paradoxical situation emerges where the market is sovereign yet market forces are themselves restricted and fluctuated by climatic, virological and sectoral bottlenecks. What this means functionally is a managed decline amongst advanced nations. However, as politics and markets deny the growing reality of stagnation as a continuum that will envelop pricing mechanisms and growth potential, decline will be side-lined and portrayed as a temporary phenomenon. In this situation, the degree to which decline remains manageable becomes contentious.











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