The Only 'Low Growth Trap' Is Ruchir Sharma's Worldview
Ruchir Sharma is the latest economist to embrace the popular notion that we – and the rest of the world – are unable to grow as we once did, and seemingly never will. Supposedly the “global economy has changed,” and because of the changes, subdued economic activity will be the structural norm going forward. That’s the bad news for the congenital cynics desperately seeking validation of their pessimism.
But before showing why Sharma will be wrong, it’s worth taking the time to explain why Sharma is wrong now. Specifically, he believes the driver of past growth rates during our supposed economic golden age (between WWII's end and 2008), rates that we can supposedly never return to again, were a function of a global economy that "was supercharged by explosive population growth, a debt boom that fueled investment and boosted productivity, and an astonishing increase in cross-border flows of goods, money and people.” He got one out of three right.
Sharma errs given his typically Keynesian presumption that the “debt boom” just happened, as opposed to it having logically been driven by a surge of production. Back to reality, people, businesses and governments (sadly) only borrow money insofar as they can exchange it for real resources of the truck, tractor, computer, desk, chair, and human labor variety. Sharma’s commentary leaves out something important; that the “debt boom” was tautologically an effect of a production boom that resulted in abundant market access to goods and services. Only the private sector can create credit through increased production. Obviously it can do so again.
Sharma also laments that “banks are not expanding their lending.” Ok, but then banks are an increasingly irrelevant source of credit. Most lending occurs well away from the anachronistic banking sector. Particularly in the U.S. More important, banks have never been very dynamic, by design. Figure that they lend out money in return for an income stream. They gain no equity from their loans. Because they don’t, and because their margins are very narrow, banks generally aim to direct their funds toward the stable and known. That’s all well and good, but surging economic growth is driven by surprise, by companies that are promising, but that also have good odds of failing.
Banks generally can’t lend toward the concepts previously described, but as evidenced by all the economic activity in Silicon Valley, there’s lots of non-bank finance focused on what’s intrepid. And that's some good news that Sharma glosses over in his thesis; that a reduction in bank lending has occurred in concert with growth in non-bank finance. Furthermore, and as will be explained in a bit, there’s no economic law that says production will forever be subdued such that lending always will be.
As for the “depopulation” that has Sharma all worked up (in his defense, birthrates inform future doom among economists in the way that earth temperatures have long fed world-is-ending gloom among scientists), there’s nothing to his argument. It’s empty. High birthrates don’t signal prosperity any more than low rates signal economic desperation.
Indeed, a look at a list of the fifteen countries with the highest rates of fertility has zero economically powerful notables, but includes lots of sadly impoverished nations like Nigeria, the Democratic Republic of Congo, Uganda, and Malawi. Yet among the bottom fifteen countries with the lowest fertility rates one can find Germany, Singapore, Hong Kong and South Korea, among others. Again, there’s nothing to the birthrate story. At best, high fertility correlates with slow growth.
Sharma does, however, have a point with his lament about reduced trade and immigration. Immigration, whereby the most important form of capital (human) migrates to where its productivity will be maximized, is crucial to economic growth. The problem today is that more and more countries want to limit the inflow of strivers who’ve exited countries that suffocated their talents. This logically softens growth as does a lack of open trade. Open trade is crucial to economic vitality for it giving workers a raise every single day, but of greatest importance, a globalized division of labor increases the odds of the individual specialization that powers productivity and rampant growth. When we’re allowed to trade freely, the odds of us doing the work that elevates our skills the most increases exponentially.
So, to the extent that global migration and exchange have been slowed by governments, these developments would logically be a source of stagnation. At the same time, Sharma perhaps forgets that the ongoing rise of automation – think robots and other labor-saving technologies – will do for the world what immigration and cross-border trade used to, all the while powering the individuals who always and everywhere comprise the economy to levels of productivity previously unseen. Figure that robots will increasingly spare precious human capital from wasted labor in favor of much more productive work. As for immigration limits, the computer and internet more and more make it possible for a computer programmer in Sausalito to work alongside a similar talent in Shanghai. Eventually we’ll all be trading together, and working together; horrid tariffs and border walls be damned. Robots, automation, computers and WiFi signal this beautiful future. Sharma is right about trade and immigration, but his pessimism blinds him to how market forces are working around ridiculous government barriers.
Beyond capital flows, Sharma’s broad argument once again isn’t very compelling. Banks represent 15% of total U.S. credit, and the number is falling. Of much greater importance, real credit dynamism occurs away from banks. And then birthrates just don’t matter. Sorry, but the ‘new normal’ is anything but. Booming economic growth is the perpetually normal state for free people, and as such the only barriers to growth are those that limit our individual freedom to produce.
Of course, it’s when we focus on that which limits individual production that we see the source of our stagnation. At the same time, we see just how simple it will be to attain stupendous growth. Just reduce the barriers to individual endeavor. In that case, income taxes penalize work. They should be lowered. Investment is the driver of increased individual productivity, so zero out the capital gains tax. Government spending extracts precious resources from the constantly experimenting private sector, so reduce it. Regulation is the obnoxious conceit that says those who didn’t rate jobs in certain industries can police those same industries all the while sensing looming trouble spots before anyone else. In short, we’re asking the impossible of regulators. If they could do what they’re charged with doing, they’d be earning billions as private investors. Regulations shrink production without doing anything to enhance markets.
Money’s sole purpose is as a measure facilitating exchange and investment. Nothing else. If every piece of paper currency in the world were vaporized today, nothing about the world’s wealth status would be different tomorrow. Cheap, unstable money has modernly reduced the trade that informs all of our work, along with the investment that boosts our productivity. Stabilize money and watch production soar. Lastly, Sharma is right about the flow of goods and people, particularly so long as technology doesn’t surmount them. So get rid of the barriers to exchange, along with the ones that limit human migration. They injure the people who aren’t allowed to maximize their talents, along with the countries that would otherwise benefit from this talent maximization.
And having removed the various barriers, watch how production surges. With an increase in production, watch how lending goes skyward to reflect the staggering increase in goods and services on offer. Economics is blindingly easy, and the irony is that the only barrier to economic growth is economists who can’t see that individual freedom is always and everywhere the driver of raging growth.
Count Ruchir Sharma as the latest economist to fall into the mythical ‘low growth’ trap. There’s no such thing. Free people grow. Period. We need fewer Sharmas and more freedom. Freedom equals growth. Always.
