Is Stephen King’s End of Western Affluence theory too pessimistic?

A friend emailed me “When Wealth Disappears,” a nytimes op-ed by Stephen King, chief economist as HSBC and the author of When the Money Runs Out: The End of Western Affluence. The guy starts out by pointing out the obvious: old established governments such as the U.S. and its counterparts in Western Europe are spending way more than they can ever hope to take in via tax revenues. He says that profligate spending worked out okay in the past because of five factors that generate crazy amounts of GDP growth: (1) globalization of trade, (2) financial innovation, (3) social safety nets that encouraged consumers to spend rather than save, (4) women entering the labor force, (5) increasing percentage of people going to college.

Is the guy too pessimistic?

On globalization of trade, Apple was able to Fedex an iPad directly from the factory in China to my parent’s house in Bethesda, Maryland. However, for a smaller enterprise there remain substantial obstacles to working with people in India and similar foreign nations. Improved telecommunications and video conferencing systems should help here.

On financial innovation, one the one hand you’d think that that Collapse of 2008 shows that it would be nice to have our finance industry be a lot less innovative. But on the other hand, the fact that it costs us more than 8 percent of GDP (source) indicates that there is a lot of room for cost reduction here. For example, shouldn’t it be possible to match savers and borrowers in the home mortgage market for a lot less than we are currently spending?

Regarding social safety nets… if the government runs out of money and people need to work in order to pay rent, buy food, obtain health care, wouldn’t that motivate a huge number of people to go back to work? CNN says that the employment rate right now is near a 30-year low.

Women entering the labor force… that does seem as though it was a one-time event. On the other hand, if cities and states run out of cash to pay retired 50-year-old government workers their pensions there will be a lot of able-bodied middle-aged folks reentering the work force.

As far as the quality of education goes, the people most likely to celebrate the value of a college education are those who haven’t been in a classroom lately! Books such as Higher Education and Academically Adrift: Limited Learning on College Campuses show that there is a huge amount of room for improvement in what gets delivered during four expensive years.

What if Americans simply pushed themselves to be better workers, e.g., by showing up on time every day, being more organized, answering customer inquiries faster and more reliably, following up? Couldn’t we get a lot of GDP growth out of that?

9 thoughts on “Is Stephen King’s End of Western Affluence theory too pessimistic?

  1. Is employment rate calculated by the CNN as people paying taxes? I ask because in many places people do work cash in hand, do not pay taxes and are thus classified as unemployed, while possibly running thriving businesses.

  2. phil,

    why do americans need to push themselves to be better workers? Hasn’t there been large productivity gains in all over the economy _in the US_ over several past decades? Consequently, shouldn’t americans be as affluent, if not more, with less work? Perhaps Karl Marx was right after all – it appears we are seeing productivity gains being absorbed by owners who are not workers and destruction of the middle class in the US.

  3. anon: Americans don’t “need” to push themselves. In fact, with various government programs, such as SSDI, pensions for 50-year-old former government workers, etc., many of us don’t need to work at all. I was just saying that there is potentially room for economic growth in excess of what this guy King predicts. Look at for example. This guy who runs a 500,000-worker temp agency says “‘First you need integrity; second, a strong work ethic; and, third, you have to be able to pass a drug test.’ If an applicant can meet those minimal qualifications, he says, ‘I guarantee I can find employers tomorrow who will hire you.'”

    [Separately, a “productivity” improvement does not mean that anyone is working harder. It primarily relates to capital investment. If there is a fully automated integrated circuit factory turning out $2 billion in devices every year and one worker sitting in a control room watching monitors, that one worker will be the most productive person ever, even if he/she never has to intervene.]

  4. Not sure if you are joking here, but isn’t the employment rate low because there are no jobs for unskilled workers? Not because they are choosing to mooch off the social safety net?

  5. Jimbo: I am not sure how many jobs there are for unskilled workers. Bob Funk, the guy quoted in the Wall Street Journal, runs Express Employment Services, places 500,000 workers per year, and says that there are enough jobs for 100 percent of unskilled workers who meet his three criteria (integrity, work ethic, clean drug test). I don’t have any basis for disagreeing with him.

    Anecdotally, the friends of mine who have tried to hire low-skill workers have found it difficult to hire anyone without paying roughly double the minimum wage and and putting a lot of effort into screening out the unreliable. Separately, at least in Cambridge, Massachusetts, I know a fair number of families and individuals who have spent years living in public housing, getting free health care, using food stamps, etc. They don’t talk about trying to get jobs and I am not sure why they would want to (e.g., some of them occupy apartments in luxury buildings that retail for over $4000 per month).

  6. Agree. All of these remain terribly inefficient, including this strange phenomenon of early retirement – why should retirement ages be dropping when lifespans keep rising?

    As far as globalization & small biz go, I was just talking to a guy (a retired engineer) who builds lots of electronics projects, and tries to sell some of them. He says parts from China (identical he is pretty sure) cost 1% in modest quantities from China, compared to what they cost here. My wife is just starting to explore sourcing beads from China for her Etsy business. I think globalization still has a long way to go!

    And the financial industry and education, don’t even get me started… I can hardly wait for these industries to get thoroughly disrupted!!

  7. Perhaps rethink of affluence is in order. Many poor people in the US today have better material wealth and healthcare than a king had, 500 years ago. Perhaps there is some point at which we should be satisfied with what we have, in terms of material wealth? Perhaps increase in free time, time with friends and family, and other happiness factors should be given more weight.

  8. Want some pessimism? Try “Average is Over.” Better hope your kids learn to read early and make it to the top 15%. I can’t fault the guy’s analysis and it’s grim as hell.

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