Rising global inequality may not just be a cyclical phenomenon; something structural could be going on. The rise of the 1 per cent might be a function of the emerging Robotic Age: there is little that can be done, now or in the near future, that can’t be done better by machines. Economic recovery, such as it is, will not generate nearly as many jobs as in the past. A percentage point of GDP growth is not the job creating machine that it used to be. Dystopian visions of the future of work see the activities of 99 per cent of us split between being either unemployed or writing apps that enable the 1 per cent to lead rich and fulfilling lives.
These fears are almost certainly exaggerated. They are close cousins to two other popular doomsday themes that are currently doing the rounds. The first is that economic growth is only about two or three hundred years old. And, in terms of the broad sweep of human history, likely to be a rather temporary affair. From the Stone Age to the dawn of the industrial revolution, per capita GDP growth was, as far as we know, nil. It was a Malthusian world: whenever growth did occur, population growth took away its (economic) benefits. Indeed, popular purveyors of gloom and doom are probably fans of Malthus who believed that the future was a horrible place to be. Malthus, of course, was dead wrong. I suspect that modern doomsayers will be just as wrong. Technological innovation is at the heart of growth and there is little evidence that we have suddenly forgotten how to do new things, or become more efficient.
The second great doomsday theme is that all forms of debt are just so high that economic growth cannot possibly take place; we need either a great sudden cleansing or a long slow workout to get debt levels down before we can even begin to think of spending - and therefore growing - again. Those who argue along these lines often have a somewhat puritanical streak: they see finance essentially as a morality play. Those of us with a more utilitarian streak point out that in the bigger scheme of things our debt levels our precisely nil and that with appropriate policies, the high debt levels of some sectors are eminently manageable.
At a macro level, this all translates into a technocratic argument about economic policy. Seeing policy through a haze of moral sentiments leads some to recoil with horror at central banks who print money. Mere technicians point out that there is a correct level of the money supply - Milton Friedman taught us this simple truth many decades ago - and, right now, that equilibrium level is a lot higher than the actual level.
Larry Summers, a controversial but brilliant US economist who nearly became the next chairman of the US Federal Reserve, recently said that the correct level US interest rates (another way of thinking about the amount of money a central bank needs to print) is currently negative. He is not alone in thinking this. I suspect the Tea Party wing of Congress thinks that interest rates should, by contrast, be at least 10 per cent. That's what you get when you detach thinking from speaking.
If the US needs negative interest rates, what does that mean for Europe, where unemployment is so much higher, growth so much weaker? Such analysis suggests that last week’s ECB interest rate cut will now have to be followed up by more unconventional monetary policies. The possibility of negative rates has been mentioned, at least in terms of some of the ECB’s operations.
What has emerged in the few days since the ECB rate cut is a focus on divergence: of both the Euro zone economy and the ECB Council. There is a growing suspicion that ECB policy has been run mostly for German economic conditions and now, somewhat belatedly, it is looking at conditions in the broader Euro zone. Let’s hope this is true. If it is, we can expect more fireworks, both economically and politically. There are many in Germany and other core countries who are already recoiling in horror at what might be about to happen.
Growth, even in Europe, can happen, if the right policies are pursued. Inequality will fall if and when growth resumes. Despite all nutty arguments to the contrary, growth is possible, provided intelligent people do sensible things. Only then will we know how much of the recent rise in income disparity was cyclical rather than structural. I think we might be pleasantly surprised.
