December 8, 2023

Economix Blog: Stephen King’s Economic Horror Stories

Stephen D. King, chief economist for HSBC.HSBC Stephen D. King, chief economist for HSBC.

Book Chat

Talking with authors about their work.

Stephen D. King, chief economist at HSBC, was paged at an airport a few years ago. When he showed up at the information desk, the obviously disappointed attendant said, “Oh, you’re not the Stephen King that writes books.”

“Yes, I am,” Mr. King responded, pulling a book from his bag.

The book, his first, was called “Losing Control: The Emerging Threats to Western Prosperity.” The cover showed a picture of a city on a stormy night. It looked like a bit of a horror story. Mr. King says the attendant was duly impressed.

Mr. King’s second book, “When the Money Runs Out: The End of Western Affluence,” is another attempt to scare people, and governments, into making better decisions.

My conversation with him, edited for brevity, follows.

Why are you worried about the West?

We have had a golden age of growth in the Western world, and I wonder whether that golden age was associated with a series of one-off gains that are by their nature unrepeatable. The opening of trade, within the O.E.C.D. and then between East and West, led to a one-off jump in the efficiency of resource allocation around the world. Women entered the work force. Educational attainment rose. Consumer credit, in the United States, went from 40 percent of income in the 1950s to 140 percent in 2007. But the underlying growth rate was falling even before the onset of the financial crisis.

I often ask economists where growth will come from. More finance? More health care? More housing? Economists hate this question. They basically say that the economy will figure it out.

The funny thing about the debate between proponents of stimulus and austerity is that everyone expects the same outcome. Economists always think growth is coming. But they can’t point to the source. So what if it’s not?

But there is also a long tradition of doom-saying in economics, dating back to Thomas Malthus, and so far history has been on the side of the optimists.

The difference in my book is I’m not suggesting that growth is going to come to a grinding halt. I’m simply saying that there is a gap that has opened up between the promises and entitlements and the actual pace of growth, and closing that gap is going to be a challenge. The subtitle of my book, “The End of Western Affluence,” is not suggesting that we’re going to be worse off but rather that the expectations we currently have cannot easily be met.

I’m rather different from someone like Robert Gordon, who would say that we have finished with the technology story. I think that’s far too pessimistic. I think that technology will continue to improve, and living standards will continue to rise. The problem is that they will not rise at the pace that was assumed previously. And the problem is that we have continued to make promises to ourselves that are based on the old growth rates. And the promises cannot be met if the actual growth rates are smaller than the assumed growth rates. The totality of these claims is too great in comparison to the total income.

O.K., but you’re still in the position of predicting that economic growth will disappoint expectations.

It’s very easy and natural to assume that you’re going to see a rebound. People often say today that there’s a risk of a Japan-style lost decade. If you look at the numbers over the last 10 years it already has happened. There has been a departure of hope from reality. The risk is that we end up with another lost decade. People are assuming that growth will be faster. We can assume that. But what happens if that’s wrong?

Can China save us? Is it possible that we’ll see a repeat of the virtuous cycle that followed the Western industrial revolution, where an expanding consumer class drives an era of growth?

The rise of China and India has brought huge benefits to global growth. The peculiarity is the way that that growth has been apportioned hasn’t really brought the benefits to the West that perhaps were expected. China’s income gains are up 130 percent, India is up 80 percent, the U.K. is up 4 percent. What’s surprising here is, if you’d known 10 years ago how strong China and India were going to be, you might have revised up your forecasts for the Western world. But that didn’t turn out to be justified. The West surprised to the downside. If you look at South Korea, it wasn’t until per capita incomes reached about $15,000 per year that you started to see a big shift in the types of goods and services being consumed. At that point it may well be the case that the U.S. and Europe begin to engage significantly with countries like China and India, but I personally think that’s still quite a long way – 10, 20 years’ time.

Can central banks save us?

That has been the claim that central banks have made in recent years, that we can return through monetary policy to the growth rates of old. And it has not been as successful as central banks wanted to project or as others wanted to expect. There has been a gap that has opened up between financial hope and economic reality. If you look at the performance of equity markets since 2008, it has been really very similar to what you’ve seen in previous economic cycles, but the performance of the economy has been much worse.

Is there any reason, then, to think that we don’t face another lost decade?

It’s possible. Shale and gas in the U.S. could be dramatically transformational. So far energy prices are still elevated by the standards of 10 years ago, but there might be a benefit. It’s possible that trade volumes could pick up a lot faster than I’m currently assuming. It’s possible that southern Europe may see an increase in competitiveness that may help their economies recover more strongly in the years ahead. They’re all possible, but the problem I have is if you look at the projections made by policy makers currently they don’t just say that these things are possible, they project that these things are happening. There’s an element of wishful thinking.

You argue that governments must start to prepare for slower growth in order to limit the negative consequences. Are there steps that individuals ought to take as well?

I think one thing that people should be doing is thinking carefully about how they invest their money. People tend to say I fully intend to retire at 60 or 65 and therefore I have to find an asset that will allow me to do so. But the hunt for yield that that engenders may actually cause bubbles. The reality is that there isn’t a collection of assets in general that will allow everyone to retire when they want to.

The boomers who’ve got property wealth and so on should think about how to transfer that to their children. Rather than spending all of that in their own time, they should think about the possibility that their children will need some help and possibly more help than we’ve seen in the past.

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Economix: Faith, Education and Income

In this weekend’s Times Magazine, I have a column explaining the tight link between education and income for religious groups in this country. The most educated groups, like Hindus and Jews, are the most affluent, while the least educated are the least affluent. The chart with the column has more details.

On Twitter, Matt Chingos, an education scholar and the co-author of an excellent book on college completion, asked whether the relationship depended on the exact cutoffs for income and educational attainment. It does not.

The chart in the magazine looks at the percentage of people with a four-year college degree and the percentage of people with family income of at least $75,000 a year, using data from Pew. Here are the percentages if the education cutoff is changed to at least some college (including a two-year degree) and the family income cutoff is changed to $50,000:

Here are the percentages of people with a post-graduate degree and with family income of at least $100,000 a year:

In every case, the correlation between education and income is extremely strong. As I note in the magazine, the relationship goes both ways: more affluent people tend to produce more educated children, and more educated people tend to earn much more than less educated people. It’s one more reminder that the financial value of education has never been greater.

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