Walker's World: That gloomy Summers

By MARTIN WALKER, UPI Editor Emeritus  |  Dec. 9, 2013 at 6:26 AM
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PARIS, Dec. 9 (UPI) -- Larry Summers, one of the most gifted economists of his generation, at the last research conference of the International Monetary Fund tossed an intellectual hand grenade into the room.

The world is in a period of "secular stagnation," he suggested. The era of fast growth and globalization in the 60 years from 1945-2005 was over. The current phase of low growth was the new normal. Savings were high but investment was low because businesses saw no point in building new facilities when there was little demand for their products.

The European, U.S., Japanese, British and other central banks had pumped unprecedented amounts of new liquidity into the system to fend off depression and to spur new growth. Despite the injection of more than $10 trillion, enough to make a corpse jump off the deathbed and dance, the response was sluggish, the recovery feeble.

This isn't just a rich world problem. The BRICs are crumbling. Brazil's economy has suddenly started to shrink. Russia is stagnating. India is down to 4 percent growth and China won't see double-digit growth again.

Unemployment remains stubbornly high, particularly in Europe and among young people.

Even a country that is doing relatively well like Britain, which could record 3 percent growth this year, has yet to get back to the output levels of 2007. The cumulative loss of output means that for Britain the recession of the last seven years has been worse that the Great Depression of the 1930s.

There are some underlying factors that support the Summers hypothesis that this anemic performance of the global economy is going to last for a long time. Above all, the great demographic surge is over except for sub-Saharan Africa. In 1926, there were 2 billion humans alive, a number that surged to 4 billion in 1974 and to 7.12 billion today.

This population explosion was the locomotive of growth. The workforce exploded and so did consumer demand. But we are unlikely to see any such surge again. China's workforce is already starting to shrink.

We shall not need so many new houses nor new schools and colleges. The cult of youth that took hold in the 1960s, when 40 percent of the world's population was under the age of 18 will soon give way to the cult of age. In 1998 for the first time the number of people in the Group of Seven countries over the age of 60 was larger than those under the age of 16. That will happen to China before this decade is out.

The Bank of International Settlements in a fascinating research paper last year suggested a dramatic slump in property prices. With large numbers of baby boomers dying off and a smaller number of descendants in the market to buy their houses, the BIS thought the overall drop in average property values could be as much as 30 percent by the late 2030s. (Some desirable locations, naturally, will be spared such a fall and could even rise in value).

Summers concluded that governments should now, when interest rates are low and money can be cheaply borrowed, invest heavily in useful infrastructure like mass transit, maintenance of roads and bridges, telecommunications and broadband.

Where renewable energy makes sense (which solar power seldom does northern Europe) governments might want to invest there. One hopes they learn their lessons from the embarrassing $1 billion-plus losses like the bankruptcy filings of Nordic Wind, Solyndra and Thompson River Power.

The extraordinary pace of urbanization in the fast-developing world imposes one dramatic priority. Unless very large sums are invested in sewage and water treatment systems for cities like Lagos, Nairobi, Mumbai, Kinshasa, Karachi and so on, we can expect epidemics of cholera and typhoid.

But look on the bright side: Extraordinary new technologies are coming from the laboratories into the market, from 3-D printing to genetic medicines, from super-efficient transmission lines to robotics. New technologies create new businesses and new demand.

There is one crucial area to watch. Fusion power could be closer than we think. In September the National Ignition Facility at the Livermore lab in California succeeded for the first time in getting more energy out of a hydrogen isotope than the 192 beams from the world's most powerful lasers were pumping in. And at the Max Planck institute in Garching, Germany, scientists pumped 13 megawatts into a magnetic chamber and held the magnetic field stable for 6 seconds. Hitherto, nobody had stabilized the field for more than a few milliseconds.

At Cadarache in southern France, the International Thermo-nuclear Experimental Reactor is being built and is scheduled to be operational by 2020. Building on the work from Livermore and Garching and elsewhere, this international science project, financed by Europe, the United States, Russia, China, India and Japan, s designed to be the first fusion reactor, delivering 500 megawatts of power from 50 megawatts of input.

If it works as expected, it means unlimited cheap energy. And that will present us with a whole new set of challenges and opportunities.

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