The New Wealth of Nations by Surjit S. Bhalla

Author:Surjit S. Bhalla
Language: eng
Format: epub
Publisher: S&S India
Published: 2017-11-25T05:00:00+00:00

Source: World Economic Outlook, IMF (2017); Barro-Lee (2015); author computations.

The results: the explainer with the lowest statistical significance (actually none at all) is fiscal deficits—this much-touted Keynesian variable, and the subject of hundreds of learned articles, explains precious little about the great inflation decline.

The demographic variables are significant, especially the dependency ratio. By itself, this explains about 36 per cent of the median inflation between 1984 and 2016. By itself, the elderly variable is also statistically significant, but can explain only 17 per cent of the variation. The less said about the presumed association between median fiscal deficits and median CPI inflation in the AEs, the better. There’s no explanation whatsoever in a standalone model. The USSL supply gap is very significant, and it alone explains 74 per cent of the variation. All the variables added up explain an additional 6 per cent to 80 per cent—that is the amount of extra information which we can learn from demography.

Figure 7.3 plots the model predicted median inflation in developed economies on the basis of the college supply gap and a time trend. Note the closeness of the relationship between the two, and note how exogenous (another favourite word of economists loosely meaning ‘out of the system’) the USSL measure is. Monetarism, Keynesianism, inflation targeting, fiscal deficits— none of the traditional arguments work.

The uncertain future

As of today, what we do know is that labour earnings in the West have been relatively flat over the last twenty years. What about the next twenty? This is where forecasts become tricky, especially given the uncertain future. More seriously, because of education and technological advances, and the strong interdependence between the two, extrapolating from the past may not be as accurate. Artificial intelligence, robots, 3D printing—name it what you will, that will be an important part of society and bring about non-linear changes.

Barro-Lee provide estimates of college graduates for 2030, but these may not turn out to be accurate. Even the limited expansion of college graduates in the AEs may not take place. There is a double whammy here for the West (and likely for the East as well)—costs of college education have increased, and are increasing, at a faster pace than inflation. At the same time, the returns, in the form of income growth, are declining. Add a third facet—jobs will become scarcer. This mix suggests a ‘correction’ in the college market— less students, less expansion, and the net result might be both an increase in earnings for those with jobs, and a decline in overall employment of college graduates in the world.

It is likely, therefore, that societies will have to revisit the basic income concept, for e.g., a guaranteed minimum income for all, a subject we take up in some detail in Chapter 10.

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