At present, the world is facing a recession which began as long back as 1908. Most economists would argue that this qualifies to be the first “Great Depression” since the 1930s. What is, however, more puzzling is why this recession shows no signs of petering out: so far economists seem to have had the answer to such global demand recessions—Keynesianism. So why is that not working now?
While no accepted definition of a recession exists, we now recognise some important symptoms: a persistent decline in both output and prices over a period of three or more quarters. Producers are stuck with unsold stocks and let go of people who then cut back on expenditure and so on. This actually happened in the 1930s. However, as Keynes had pointed out, the answer to such “bad days” is not “tightening your belt” by cutting expenditures and saving for a rainy day but exactly the opposite: pump priming the economy mainly by government use of fiscal policy which cuts taxes and raises public expenditure to put more money in the hands of the people. This actually worked wonders in the 1930s. The now famous: “New Deal” associated with President Roosevelt did precisely this and by the end of the 1930s recession had ended.
This was also attempted in 2008. Keynesian pump priming measures were taken with a US government stimulus of about $1 trillion and reduction of trade surpluses by China in particular. While the US stimulus was made up of direct government expenditure on infrastructure, health, etc, China’s trade surplus as a ratio of its GDP declined from 7% in 2008 to about 2% by 2011, which implied that China was attempting to put some of its excess reserves to work in increasing world demand. India, too, effected some major fiscal pump priming measures like cuts in excise duties and other tax rates. Yet, almost a decade down the line, the global economy is still not out of the woods. Barring the US, developed countries of the EU, Japan, etc, are all in trouble. One feature of the decades after 1980 has been the increasing wage inequality in all countries, developed and less developed. Politically, this has thrown up a Trump presidency in the US while disgruntled middle class workers voted for a UK exit from the EU. What is even more surprising is that most commentators now seem to feel the answer lies in growth of emerging economies and, in particular, the large ones like India and China. So what went wrong with the Keynesian prescription?
One answer is given in terms of technology. It is argued that technology has displaced unskilled workers, and hence job creation envisaged by Keynes has not taken place. However, while the technology argument may explain growing inequality it does not explain why total income growth has also slowed down. Recently, some authors have argued that the problem is the changing demographics. It is argued that only countries which have a reasonable growth of working class population have seen positive GDP growth in recent years so that growth of labour force becomes a necessary ( though not sufficient) condition for growth of incomes. Yet, these authors are unable to argue analytically how the demographics story takes away from the Keynesian argument. That demographics are turning against developed countries is undeniable. In recent years, the growth rate of the working population has declined from over 1% to less than half a percent even for countries like India and China. For countries like Japan, the working population is in fact declining. Similarly, overall population growth rates are falling below the replacement level for most developed countries. So how can one relate the technology-demographics argument to Keynes and the continuing recession?
To understand this consider a feature of technology. What technology does is to produce more and more output with the same inputs—productivity increase. In economics, capital and labour are treated asymmetrically. While capital and technology combine with labour to produce output it is only labour which constitutes demand in the Keynesian sense: robots do not need to eat food or buy TVs! In addition, Keynes did not incorporate the role of time in consumption. While increased consumption needs income it also needs time. Consider electronics. The number and types of new products created is increasing exponentially: TVs, phones, washing machines etc. Yet, to consume these products an individual also needs time which is fixed at 24 hours a in a day. It is not surprising that in developed countries many of the initial technological innovations were time (and labour) saving: from smart homes and refrigerators to convergence of TVs and other visual media. This is where demographics comes in. As populations peter out (total and working), time becomes a constraint on consumption particularly in developed countries. Yet, technology continues to throw up new products at an exponential rate.
This is where emerging countries come in. Large, young and still growing populations allow for a multiplication of time. As my income grows many irksome tasks can be “outsourced” to the large army of unemployed. While the limits to such “outsourcing of time” has been reached in most developed countries, this is not so in large developing economies like India.
So, global demand is likely to be constrained by demand growth in large emerging economies. However, this demand growth will depend on how technology and production also shifts to these countries.
-Manoj Pant is professor, Economics, SIS, JNU