We are living in an age of entitlement. We feel entitled to consume more, live longer, have satisfying jobs, raise better children and live more fulfilling lives than previous generations. The problem is that for many of us, our economic system is failing to generate the incomes necessary to meet this sense of entitlement. Over the past few decades, the growing gap between perceived material entitlements and low income growth has been filled by debt.
History suggests the gap started emerging from the early 1970s. For much of the Western world, the post-war decades were a period of solid economic growth averaging about 3% per annum in developed economies.
These societies became conditioned to rising medium incomes that were the result of technological improvements and productivity gains that permeated the entire economy.
The average citizen could expect to live a more affluent life than his or her parents could. But from the early 1970s, something happened to this pattern. Sustained increases in national incomes, output and employment opportunities began to waver.
In the turbulent 1970s, many governments sought to protect their citizens from the harsh realities of variable economic growth through crude Keynesian demand-management policies. Governments increased their own spending, running large deficits in order to maintain employment and incomes.
By the late 1970s, many economies, including New Zealand, were mired in inflation, unemployment, low growth and high government debt.
From the 1980s, there was a lurch towards free market policies as the solution to the problem of revitalising Western economies. Governments privatised, deregulated, pursued free trade and introduced monetarist policies to control inflation.
The irony is that crude monetarism contains a similar flaw to crude Keynesian economics. It relies on debt to reactivate the economy during hard times. The way monetarism came to work was that during recessions, central banks reduced interest rates to encourage the private sector to borrow and spend. So now many Western economies are stuck in or near recession and crippled by high private debt levels. Monetarism has lost its magic, just as Keynesian economics did in the 1970s. This private debt can quickly become government debt if the financial system implodes.
So what is the core issue here?
The problem appears to relate to a slowdown in technological progress since the early 1970s. The underlying driver of economic growth for developed economies has always been technological progress in the form of inventions, innovations or improved production techniques. The post-war decades unleashed a huge wave of applications of large-scale technologies that fuelled a lengthy period of sustained growth, rising incomes and employment in much of the West. Examples include commercial air travel, containerisation, television, frozen and canned foods, domestic whiteware, mass car ownership, air conditioning, plastics and other synthetics, commercial chemicals, electronics and telecommunications.
Governments also invested in better public infrastructure and improved access to education and healthcare.
Productivity gains were widespread, lifting all incomes.
Since the 1970s, there have been large strides in technology, particularly in information technology with the internet and cellphones and satellites. But the impact of this technology on average incomes and general employment opportunities has been more muted. Compare the average number of employees at an IT firm or biotech lab to that at an appliance firm or car factory.
The adoption of free market policies led to the deregulation of financial sectors in many countries. This created an explosion in easy credit, allowing many people to ignore the harsh reality that their pay packets were not keeping up with their sense of entitlement. The housing bubble over the past decade was, and is, a further manifestation of this deception. No new productive capacity was created by this bubble.
There is a harsh reality here. Many Western societies have been living beyond their means for a long time.
Governments cannot wave a magic wand and fix it. They can adjust policies to mitigate some of the worst-case scenarios, but that is all.
Reducing large income inequalities would address an ugly symptom but not the cause. Overpaid executives and financiers are unlikely to be the source of technological progress.
There are several possible outcomes to the malaise. One is the emergence of a raft of major technological and scientific breakthroughs creating another extended period of general prosperity. The other is a reduction in the general sense of entitlement leading to less reliance on debt. This appears the more likely path at present.
• Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics texts.
