A Poorer Future

The current global economic dislocation has been happening for almost
two years now with nothing resembling an end in sight. Sure we have
pulled out of the nosedive, but as of yet there is no sign of a return
to normal rates of growth and employment. Our political leaders can’t
even seem to agree on how to move forward in the short term, much less
over the long run. It seems like they are hoping that once the current
crisis is over, the other problems will attend to themselves, or at
least they will become the problem of some future administration. This
concerns me for one major reason. It is likely that the rich world will
be poorer for the foreseeable future than we are today.
 
I see four major drivers of this decline – two internal to the
developed world, and two external: 
 
The first is the massive debts which have been accumulated in an effort
to prevent a second great depression. While these are small in
comparison to other government obligations, they increase with each year
that the global economy stagnates or grows at a low rate. Automatic
stabilizers in Europe and bailouts in both Europe and America will
continue to add to the public debt burden. Governments will have to
raise taxes or reduce benefits in order to manage this additional debt,
which will lead to reduced wealth which can be devoted to consumption or
other necessary expenditures. This will have to be addressed at a time
when government in the developed world should be saving for what will
become the other two drivers of declining wealth in the west: the
retirement of the baby boomers and spending to deal with climate
change.
 
The second driver of decline will be the state’s obligation to the
baby boomers. With the cost of medical treatment increasing at the same
time as people are living longer, the burden on the state increases from
both of those factors. While it is possible to mitigate the worst
outcome in this area, it will require a reduction of services provided,
as well as an extension of the average time of employment for workers.
While this does not directly reduce the income of citizens it will
certainly have a negative impact on quality of life and people will
certainly not feel as wealth as they once did. Reductions in government
spending on pensions and other services for retirees would however have
a noticeable and direct impact on feelings of wealth.
 
As to external influences, a large driver will be climate change and
the costs necessary in order to alter our energy infrastructure. Costs
will need to be borne no matter if the choice is to do something,
nothing, or some middle ground regarding climate change. It will require
a massive expenditure of resources to transition our infrastructure away
from one based on fossil fuels, or alternatively to deal with the
consequences of global warming as they happen. Attempting to address
climate change is likely to increase the cost of nearly everything, and
until alternatives are available and commercialized this cost will be
paid by nearly every consumer. On the other hand if nothing is done, the
costs will simply be more hidden, and perhaps distributed somewhat
differently. Strengthening flood defences, increased insurance premiums,
fluctuations in the cost of food due to changes in weather patters, the
list could go on, but all of these will impose costs on society that
will have to be paid.
 
A second external factor is inflation driven by the rise of the
developing world. Over the coming decades a great many people in the
developing world will hopefully be brought out of poverty and put on
course to something resembling a western middle class lifestyle. As we
saw in the summer of 2008 rapid growth of developing economies drove
resource prices to new highs. While there have been many explanations
for this, I am convinced that the prices we saw that summer were the
result of supply constraints rather than simply speculation. Once the
world economy begins to grow again we will encounter rapidly climbing
commodity prices which will reduce the real gains from economic growth.
Even with recovery it is unlikely that wages will be able to purchase as
much as they were before the crisis.
 
On their own each of these issues is difficult to address, and dealing
with them will require both solidarity within nations as well as
cooperation amongst them. This is difficult at the best of times. It
seems nearly impossible in the dire circumstances in which we now find
ourselves. If these issues are not addressed, not only will future
generations be poorer for having to pay for the costs of addressing
these problems, they will be additionally poorer for having to pay the
extra costs associated with not addressing the issues sooner rather than
later.
 
This leads me to a final related concern: the stability of our
political system. If these costs must be borne by citizens, but
politicians are not willing to deal with them, or even discuss them in
an open or honest manner, what remains of our trust in governance
institutions? If our trust in these erodes or collapses at the
international, or even more frighteningly the national level, what does
that mean for western society, or the world more generally? If our
political leaders do not begin to address these issues in a serious and
focused manner, it might not take much longer to find out.