Inside Story

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“As things currently stand, the entire Swiss government nominal bond yield curve is in negative territory,” said Reserve Bank governor Philip Lowe on 29 October. “Most of the German, Dutch, French and Japanese yield curves are also in negative territory. The Swiss government, for example, can borrow for thirty years at an interest rate of −0.2 per cent. If it were to issue a zero coupon security at this yield, it would mean that the buyer would give the Swiss government 106 Swiss francs today and receive back just 100 Swiss francs in thirty years’ time, with no other payments between now and then. That is remarkable.”

Central bankers rarely overstate their point. When Lowe says this situation is remarkable, what he really means is impossible.

Orthodox economics has hit the wall. The accepted creed, developed in recent decades, has shrunk the toolkit of economic managers to one all-purpose instrument: money. And one all-purpose trade: central banking. Lowe’s evident frustration parallels that of others who have grave doubts about the state of economics.

Lowe was giving the Sir Leslie Melville address, named for a Reserve Bank board member whose opinions were influential in shaping the bank’s charter, and who advocated that central banks should take a “full employment approach.” Lowe quoted Melville’s description of a world with negative interest rates in the Economic Record of 1938: “Roads would be levelled and straightened regardless of cost. In some places mountains would be dug away and valleys filled to provide residential and agricultural land. Deserts would be watered, beaches would be built in places accessible to cities and provided with artificial sea and sunlight.” In other words, impossible.

Yet here we are. And it matters because we are entitled to expect that the people who go about managing the world’s money, banking and economies know what they’re doing. The evidence — plain as day — is that they don’t. Our navigators have sailed us off the map.

So it’s hardly surprising that people are asking fundamental questions. Questions that go beyond notions of full employment and towards the phrase Lowe uses: economic welfare.

Mariana Mazzucato’s The Value of Everything, published last year, questioned our estimations of economic worth. Her seminal work offers one central reason for the impossible situation we find ourselves in: we’ve been sloppy in judging fundamentals. Mazzucato’s core argument is that we blur the lines, elevating the status of fake value, especially in the finance sector, while allowing important — even vital — activity to be neglected.

Now a journalist, Binyamin Appelbaum, offers a study of the pathology in the body economic in which one diagnostic stands out. The median income of Americans in 2017 was slightly less than it was forty years earlier, yet the US economy had grown threefold.

Appelbaum’s The Economists’ Hour traces the rise of political confidence in economists, and how some of them converted that confidence into a certainty based on a particular, narrow formulation of the discipline. Most striking is how economic arguments won despite their proponents lacking any particular evidence. Inevitably, the resulting dodgy policies reinforced vested interests and gave comfort to squeamish politicians. And so here we are. Off the map.

While Appelbaum’s book, like Mazzucato’s, might find favour with partisans in contemporary debates, neither is a reliable tribal ally. Appelbaum’s review of policy evolution makes plain the frailty of “reform” prescriptions offered by all sides of politics. Indeed, his strong message is that overconfident individuals holding hard to dogma have been surprisingly influential — which may be why moderation went out of fashion.

So where are we? And does it matter?

Philip Lowe’s speech included a graph showing a spike in bond trading on negative returns. It could be read like a bushfire warning: free money — fuel for dumb choices — has been stacking up around the world. This is the end point of the long progression laid out by Appelbaum, in which dogmatic certainty has narrowed policy goals to the point at which the broad issue of economic welfare is effectively excluded. Divided communities are living an illusion fed by free money.

In Australia — and much of the developed world — a bulge of baby boomers is rolling through the outlook, shaping and reshaping the dynamics. Right now that demographic is starting to retire, lining up Western economies for ageing effects that will bring dramatic change.

Solutions that work in years ahead won’t be able to rely on Keynes or Friedman or any of the go-to versions of theory that characterise economic debate. In many countries, the core driver of growth — population — is slowing or in decline. The emergence of India, China, Indonesia and Brazil, ideally alongside social and economic improvement in Africa, is changing economic assumptions. Climate threats impose new demands on investment and industry structures. Technology is changing many forms of work. And work, in too many cases, is not rewarding. On top of this mix, global interaction is now wired into the way the human world works: the transmission of big influences is virtually automatic.

The question posed by Mazzucato and now Appelbaum is simple: are our institutions up for this challenge?

Going back to Appelbaum’s data, we find that the social tension arising from uneven distribution of economic welfare is not solely a function of public policy choices. Technology is commoditising labour, raising barriers for those without the skills and education to adjust to change. A recent Brookings Institution study found that an estimated fifty-three million people — 44 per cent of all American workers aged eighteen to sixty-four — are low-wage workers. Their median hourly wage is US$10.22 and their median annual earnings are US$17,950. And for most of them a change in job would be for the worse.

Increasingly, the politics of our time is about reaction — reaction to policy outcomes that leave people at risk, scared or simply resentful. Paradoxically, many of the nations struggling with the politics of change are enjoying unprecedented levels of economic welfare in aggregate. In most cases, the challenge for leading institutions is not to sustain economic welfare in total but to deliver confidence and welfare to the typical citizen.

Appelbaum’s work is a very good guide to how the world’s most influential economic institutions steered us to where we are. Mazzucato offers a healthy way back onto the map. •