The current double-barreled problem of recession/inflation {RI) has short-run and long-run causes.
Both causes have deep roots. Both will be with us for a long time. But the bad thing is that we will get a one-two punch.
Just about the time the short-run RI cause (excess demand from too much money/too few goods) matures and in the best of all worlds (we should be so lucky) matures out as surplus money is gradually absorbed by real growth, the second punch comes in.
The entire trading world, East and West, China and America, North and (the South American part of) the South will be hit by the sucker punch of the demographic blackjack that is already swinging our way.
The problem is the long-run, supply-side, real cost of production, labor shortage, factor-side, out-of-gas, power-failure, hardly-anybody-sees-it-coming, slowdown-style RI: It is too few goods made by high-wage, recently “developed” people.
They are folks who in the years just after World War II were plentiful, hard-working, low-wage, quite productive people who lived in places like China, where government policy was “export-led growth.”
That policy made possible the industrialization of China (and the rest of Asia). The “magic” of the policy process was the stimulation of a flow of high-quality, low-cost goods that emerged from the East and then went West.
Priced at bargain rates, the Eastern products out-competed, and indeed often drove out of the market, the old-line industrial producers in America and Europe.
This was a mixed blessing for the West, as it forced Western evolutionary development into a hothouse of post-industrial growth – from banking to high tech – that set the stage for today’s complex situation, where China/Asia is now able to take over even those new occupations, for example finance and artificial intelligence.
All these complicated shifts in the distribution of industrial and economic energy and innovation could possibly be managed smoothly except for the fact that one essential earning asset (or factor of production, to use Econ-talk) is no longer being added to the system at the postwar rate.
Human capital, brain capital, low-cost, under-utilized yet highly productive, innovative – to use a very old-fashioned word, manpower – isn’t growing fast enough to keep the international cost of production (of everything) as low as it was between 1945 and the turn of the current century.
The two-fisted slugger who will hit us with RI is a Frankenstein monster who already walks among us.
On every continent save Africa, we, humanity, are not making – have not been making for some time – enough babies. There is already a shortage that cannot, at least not on a generational time scale, get fixed.
In theory the short-run RI problem, self-inflicted by politics, has a potential, albeit unlikely, “cure.” Political leaders must become rational, prudent, and financially responsible.
But baby-making is not controlled by central bankers.
A fertility rate of 2.1 children per woman will yield a stable total population. The World Fact Book, available at the Central Intelligence Agency’s and the World Bank’s websites, shows the following national fertility rates: China 1.45; USA 1.84; UK 1.63; Germany 1.58; Japan 1.39; France 2.02; Canada 1.57; Brazil 1.75; Mexico 1.75; India 2.07; Russia 1.6; Poland 1.41; Australia 1.73; and Hong Kong 1.73.
An exception to the rule is sub-Saharan Africa, where numbers range from 2.17 in South Africa to 4.32 in the Republic of the Congo. But world investment rates in these countries, necessary if total factor (land, labor and capital) productivity is to take up the slack produced by labor scarcity elsewhere, is not adequate to the task, nor is the level of social and political stability.
The relative, near-universal good times that followed upon the end of WW2 (good compared with the state of things between 1938 and 1945), especially including the miracle of modern China/Asia, was a special time in human history, not likely to happen again.
The world was transformed in those years. The future, and the likely path of economic problems and solutions to current problems, will not be so dramatic, at least not for a generation or two.
The question therefore is: Does humanity have the patience, the endurance, the wisdom, to be satisfied with growth and general human welfare rates that are moderate, measured and more typical of ages past? (It is statistically arguable that per capita human welfare improved only marginally in Europe between the fall of Rome and the Industrial Revolution.)
Human progress since the Industrial Revolution has progressed at a modest but more or less regular rate.
Asia has been more mature about this than has the West, and so its ups and downs, at least compared with Western cycles induced by war, urgent impatience, scapegoating and national rivalry, means that the boom-and-bust long-run history (in contrast with, for example, the line from ancient Persia to the Greeks to the Romans, to the Dark Ages, to the Industrial Revolution) has featured fewer “earthquakes” than in the West.
Let us hope the world at large learns to imitate the best examples from the East, on a planet-wide basis, of such restraint and resigned acceptance of destiny.
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has served as visiting professor at the Board of Governors of the US Federal Reserve system, at the US Congress and as the chairman of the North American Studies program at McGill University and a professor in that university’s Economics Department.