top of page
  • Writer's pictureMarco Annunziata

Out with the old

In some countries, at the end of the year people discard things that are old, ugly, broken, useless, out of fashion. In some cases they literally toss them out the window. So they can start the new year afresh, unburdened. It’s a tradition, a cleansing ritual.

This New Year’s Eve, let’s toss out a few catchy nonsensical economic concepts. They are old, ugly, broken, useless and should at long last be ruled out of fashion:

Escape velocity, and its companion stall speed. This is the hilariously absurd idea that an economy is like an airplane: unless it reaches a high enough speed, it will crash. (It will also crash if your cellphone is on, and you will only be able to use your laptop once the economy has reached a cruising altitude of about $35,000 of per capita income…).

In 2012, economists worried that the US economy was unable to reach ‘escape velocity’. GDP growth of 2% was ‘stall speed’; unless we could accelerate to 3–3 ½ %, a recession was imminent. They expressed the same concern in 2013; in 2014; in 2015; in 2016; …in 2017. And here we are: the economy has grown at a steady clip for the last seven years, averaging about 2%. No recession. The stock market has rocketed into the stratosphere. Economists are shocked. Shocked.

Let’s throw escape velocity and stall speed out the window and see if they fly.

Secular stagnation. Secular stagnation is a zombie theory believed dead in the 1930s but resurrected by Harvard’s Larry Summer in a 2013 speech. In a nutshell: people save too much and consume and invest too little; the economy stagnates. This is happening for structural reasons: demographics, inequality, accumulation of assets by central banks and sovereign wealth funds, tighter credit standards — it will not go away by itself. Central banks are powerless: excess savings are so large that you need deeply negative real interest rates to reduce them. The solution: governments should spend more and more, running up more debt to stimulate demand. (In case you are wondering, Larry Summers is still sticking to his guns on secular stagnation — though he seems less enthusiastic about the new US Administration’s plans to embrace his fiscal stimulus idea.)

Such a well-structured and elegantly articulated hypothesis, why throw it away? First, because the argument rests on global trends, and there is no global secular stagnation. Global growth averaged 3.5% between 1980 and 2007; in this recovery, 2010–17, it actually grew faster, at 3.8%. Advanced economies decelerated (from about 3% to about 2%) but emerging markets made up for it (from 4 ½ % to 5 ½ %), generating plenty of investment opportunities. Second, because some of the best post-crisis growth stories among advanced economies have come from countries that focused on reforms rather than on government spending (Spain, pre-Brexit Britain).

Boosting government spending is the easy answer, not the right answer. Let’s toss it out.

New normal. If Secular Stagnation is a zombie, the New Normal is a goblin: it comes in many guises. The best-known version, put forward in 2009 by fund manager Bill Gross, argues that interest rates will forever be low, because economies will grow at a slower pace, people will save more and consume less, companies will make less profits, governments will regulate more. Since ‘New Normal’ is beautifully generic, it has surfaced in different guises; whatever your question, the answer can be ‘this is the New Normal, it will be like this for as far as the eye can see’.

The New Normal should go the way of Secular Stagnation, for many of the same reasons: the world economy grows at a robust pace, profits have risen, and some governments are deregulating (The US, and even France!).

We should toss them both out for the same reason we tossed out “The Great Moderation” at the end of 2007: ‘this time’ is never different.

UBI. Universal Basic Income. Because robots and Artificial Intelligence (AI) are about to take all the jobs, yielding infinite productivity (high output with zero labor input), every citizen should be provided with a basic income that allows her/him to pursue their dreams and ambitions, or play videogames. Otherwise we face an imminent dystopia of mass unemployment and civil unrest.

The reality is (1) employment is higher than ever — we all slave away with pitifully low productivity while the AI overlords play chess and Go; (2) we don’t have the money to fund UBI — no country does; (3) we will have even less money if we pay people not to work.

Discussing UBI today is like agonizing on how we will handle waste disposal as our Mars colony grows beyond one billion people. At some point it might become a relevant concern; for now, we have more urgent priorities.

You will hear that experiments of UBI have already proved successful. But in all these experiments the income is either targeted to a small section of the population (hence not ‘universal’) or so low that the recipients still need to work (hence not ‘basic’). Universal basic income is where you give every single person in the country the ‘cruising altitude’ $35,000. Show me an example — and get me a passport…

On December 31st, toss them all out. You will feel a lot better, you will think a lot clearer. Out with the old! Happy Holidays!

21 views0 comments

Recent Posts

See All


bottom of page