If you are looking for some serious pessimism try this

Two articles about a pretty bleak economic future driven by the usual combination of leftist ignorance and envy. The first is on Impoverishment: America’s New Normal. It’s not just America’s but will be shared out among the formerly first world economies of the once free-market West.

The defining American middle class is devolving toward poverty. The 1970’s brought an undeniable economic retreat: the disappearance of the traditional middle class housewife into the workplace. A declining standard of living was heralded as a feminist triumph. The linked map illustrates the accelerated middle class economic decline since the 2008 financial crash; today, 20% of American families include no workers and most Americans receive government benefits….

Rather than awaiting recovery, the people and even more, the government, need to learn again what is needed to survive in a world where others have risen up to compete. Until then, impoverishment seems likely to be the new normal for America and for similar reasons, for much of the rest of the world as well.

That was the good news story. There is then this second article. Let me start with the final para which is not as farfetched as you might like to think although it goes a step or two too far even for me. But who’s to say this is not actually possible:

For us Westerners, living standards equality with the Third World appears inevitable, probably within the next 20 years. The only question is whether emerging markets will in turn acquire Western “barnacles,” thereby reducing the entire planet’s living standards to a level at which the Industrial Revolution might just as well never have happened.

Well, we will still have our TVs and iPhones so there will be something. But it will not be the kind of flush economic security that we were all once so used to. Our political and economic understanding is so pitiful and we are driven by a short-term shallowness that is terrifying if you have the kind of vision discussed.

U.S. productivity growth declined from 2.8% per annum in the period 1948-73 to 1.8% per annum in 1974-2010 to 0.6% per annum in 2011-15 – almost entirely owing to regulation rather than to public sector bloat, which has increased only moderately since 1970. However the EPA and other big regulatory agencies date to the 1970s, and coincide eerily with the end of the post-war U.S. productivity bonanza. Monetary policy, by distorting the free market’s asset allocation process, undoubtedly bears part of the responsibility for the further post-2011 slump in productivity, but there’s no question the Obama administration’s thirst for regulation has made matters worse. Only in retrospect will we be able to allocate blame accurately between the two factors.

As well as a bloated public sector and excessive regulation, there are other ways in which rich countries increasingly diverge from the free-market ideal. Infrastructure projects’ costs are outrageous in modern Western economies, a large multiple in real terms of their costs 50 or 100 years ago.

That’s not because we have got less efficient at laying concrete or building bridges. It’s because of the tangled mass of regulations on safety, environmentalism, workforce and other matters, none of which are costed properly, each of which adds substantially to the expense and delay in building infrastructure, and the combination of which is devastating.

There’s quite a bit more which you might read for yourself. This last bit is something I also agitate about but how few now have any idea what he is even talking about.

Finally the ultra-low interest rates of the last 7 years have sapped Western savings (a tendency exacerbated by generous welfare systems). With savings inadequate, the capital endowments of Western economies have shrunk and have also been diverted into unproductive speculation and asset investment. Anyone who thinks the current level of London house prices does anything at all for the true wealth and productivity of the British economy is living in economic dreamland.

We may find it all unravelling more rapidly and more comprehensively than anyone is currently prepared to believe. And because of the way our political systems are designed, there will be not a thing anyone will be able to do.

Accommodating disruption

Craig Emerson has a column on Ideas needed for next economic growth phase. Here are, according to Emerson, “five ideas that could make a material difference to Australia’s future living standards”. He is certainly right about that, but you would think he would want to see our living standards rise rather than fall. The five:

1. A very fast train.
2. Lift the asylum seeker intake.
3. Double teachers’ salaries.
4. Increase land tax.
5. Accommodate disruptive technologies.

The support for “disruptive” technologies I find revealing. Why doesn’t he just say support the market and encourage entrepreneurial change? It’s not ideas that cause change but commercialisation of the ones that will work by the private sector. Everything else is almost inevitably waste. See the NBN and the series of Desal plants scattered around the country for recent examples.

You must control debt before it controls you

If a country goes into debt, no one gets sent to debtors’ prison, no one is declared bankrupt, the furniture is not sold off to recover the money. It’s more subtle, but in the end the country is forced to draw down on its capital and over time living standards fall. If you have debts you want to pay off you divert income into repayment and cut expenditure. One way or the other, those are the choices.

The picture below is not Australia’s debt, it is the timeline for American debt stretched out to 2024. It’s the same kind of picture we have here but in Australia we have a government that is intending to do something. And the picture comes with a story about Janet Yellen, the new Chair of the Fed in the United States.

yellin us federal debt

The only bit that is ridiculous in the story is that the timeframe is projected into the future, Fed Chair: ‘Deficits Will Rise to Unsustainable Levels’. What do they think happens when the government diverts output down various plug holes, that the entire country disappears into thin air? What happens is that over so slowly real incomes begin to fall and the communal environment begins to crumble. There will certainly still be many wealthy people, but the average will move in only one direction. Detroit becomes the national future.

In the US they pretend that time is on their side but it isn’t. Things are long past being just line ball. There will be a fall in living standards, in fact, it is already happening. The only question is whether there will be a recovery and if so when. Personally I do not see the slightest evidence of a will to change things around in the US.

But at least here we do have just that chance. We are dealing with a junior version of just this debt problem ourselves. The ALP talks about what geniuses they had been since debt-to-GDP was only about 37% when they left office. They never dwell on the figure when they came into office – ZERO – nor where debt levels are likely to go if nothing is done about the legacy they left.

This stuff is hard and generally uninteresting for most people. Just gimmee the loot or I’ll bring in the other mob who will. We here may not quite be at that stage but perhaps we are. What Janet really would like to say is what Joe Hockey’s been saying: THE HOUSE IS ON FIRE! THE HOUSE IS ON FIRE! but she can’t because she does not wish to bite the hand that fed her. But she knows. Keynesian though she is, she knows perfectly well that debt is a problem, and it is pure sophistry to argue that it’s not a problem because we owe it to ourselves. And when it comes to Australia, I can only hope that enough of us here know it as well. And looking at our own debt projections, it is certainly not an argument to say that that fire’s not all that big at the moment so why worry?