Many of us are content to live with quite modest spending. In fact, in a world of low and uncertain returns on our wealth, such moderation is the key to a comfortable retirement. However, we might be partly to blame for low global growth, as a new paper by Gilles Saint-Paul of the Paris School of Economics explains.
It’s possible, he shows, for economies to fall into “satiation traps”, in which economic growth is low simply because consumers are content with their present level of spending and don’t want to spend more.
In itself, this is not a new idea. It echoes the underconsumptionist theories of 19th century economists such as Thomas Malthus. And it’s consistent with a prophecy made by Maynard Keynes in 1930. A hundred years hence, he said, we’ll have “freedom from pressing economic cares” and our problem will be how to occupy our leisure time.
In such a world economic growth comes not from us buying more of the same stuff, but from new products coming onto the market. I suspect this has been the case since the 1990s: consumer spending has been powered by new products such as laptops, tablets, games consoles, smartphones and flatscreen TVs.
But, says Professor Saint-Paul, innovation can dry up because the profits from innovative activity are small. Yale University’s William Nordhaus has shown that companies capture “only a miniscule fraction of the social returns from technological advances”. It might be no accident that the tech crash of the early 2000s led to long-term stagnation, because it reminded potential entrepreneurs of this unhappy fact.
A combination of satiated consumers and slowdown in new products can give us what we have in the west: sustained slow growth.
You might object that talk of satiated consumers is inconsistent with the fact that millions are “just about managing” and others aren’t even doing that. Not so. What matters isn’t what people want but what they want when backed by the ability to pay. Some people can’t spend more but others won’t spend more.
This problem is exacerbated by high house prices and rents: these in effect transfer income from young people who aren’t satiated to older ones who are. (Others might add that it’s also exacerbated by inequality.)
Of course, it’s not just people like us who aren’t spending who are contributing to secular stagnation. Corporate capital spending has been weak for years, for many reasons – one of which is that barriers to competition are preventing companies from investing more to compete away the high profits earned by successful companies with the result that monopoly power is becoming more entrenched.
All of this brings into question some longstanding presumptions we’ve had about economics – that growth is normal and inevitable, that consumers are insatiable and that competition erodes profits. This perhaps justifies us having cautious portfolios and big holdings of cash and gilts, but also helps explain why low interest rates haven’t stimulated spending very much.
