When The Money Runs Out
By Stephen D King
With US Federal Reserve chairman Ben Bernanke already dropping hints about tapering off quantitative easing, optimists are hoping for a return to global economic growth. But what if the West instead faces a Japan-style “lost decade’?
When the Money Runs Out, by economist Stephen D King, makes the case that Britain, Europe and America may be set to trace the decline of Argentina, which went from being one of the world’s richest countries in 1900, to becoming a middle-income developing nation by the 1980s.
The problem, says King, is that, well before the crisis hit, public spending in the West had reached unsustainable levels. Worse, instead of spending on education and infrastructure, which could boost long-term growth, governments prioritised benefits, often for the middle-aged and elderly. So now, with an ageing population and a shrinking workforce, the only way to avoid stagnation is to accept substantial, immediate cuts to our standard of living. However, no one will accept such radical change – which means we are doomed to decline.
His views may be pessimistic, but they are convincing. We’ve written on many occasions about how people are underestimating the long-term ‘hidden’ costs of implicit government obligations, such as pensions. And for King, Japan provides a powerful counterexample to those who assume that governments can (or should) simply spend their way out of deep recessions – its economy has seen near-zero growth rates for two decades in the face of almost every stimulus in the book. He also notes that a lot of the growth recorded during the boom years was an illusion created by cheap credit.
However, his suggestions on how to deal with all this are less persuasive. While admitting that currency devaluation was a key reason why Asian countries bounced back from their 1998 crisis, he insists it would be a mistake for Greece or Italy to leave the euro. Instead, he says, Germany should have more power over economic policy in southern countries, in return for bigger transfer payments. That’s all very well, but it’s one thing saying that Germany should swap money for power in Europe – it’s quite another getting everyone to agree.
And a cynic might suggest that King’s decision to focus on irresponsible governments, rather than irresponsible banks, is unsurprising coming from the global head of economics at HSBC – although you could equally argue that the choice made by governments to stand behind the banks effectively makes them a part of the public sector. But whatever your take, overall, as Charles Moore notes in The Daily Telegraph, “it’s alarmingly difficult to disagree” with this book.
• When the Money Runs Out: The End of Western Affluence by Stephen D King. Published by Yale University Press (£20).