The Bear’s Lair: All Our Futures Depend On The Next Few Months

Crunch time is here for the Trump administration, and for us all. President Trump’s economic policies, in particular his deregulation and an ongoing rise in interest rates, will if they work as advertised produce a surge in productivity growth that will allow the United States to pay the bills coming due. If the productivity growth does not materialize, or if other less benign Trump policies pull the global economy off course, it is difficult to see how we can avoid economic collapse and universal debt default. Things could genuinely go either way.

Modern societies have tolerated an almost infinite increase in government, in particular in the welfare sector, and have paid for it through boosting productivity at a rapid clip. The exceptionally rapid increase of 2.8% annually in U.S. productivity in the post-war period of 1948-73 paid for various wars and the creation of the Great Society welfare system, which in its early years appeared actuarially sound. Even the lower 1.9% productivity growth rate from 1973 to 2010 allowed for the extension of the welfare state, an explosion of state and local government spending, and an absurd escalation of medical costs, itself exacerbated by foolish government decisions.

Only since 2011, when productivity growth has dropped to 0.6% per annum (and only 0.2% in the latest full year from 2015 to 2016), have the sums definitively failed to add up, with government debt doubling in the last 8 years and no end in sight.

Rapid productivity growth is the only factor that makes today’s bloated government accounts add up. Before the Industrial Revolution, with very low productivity growth, government’s take was more or less capped at around 10% of GDP. Governments that attempted to take more than that – for example the French ancien regime attempting to keep up with British military prowess in the eighteenth century – found themselves consigned rapidly to bankruptcy or revolution. Only during the Napoleonic Wars did Britain push government spending up to the hitherto unprecedented level of 20% of GDP without suffering bankruptcy.

That should have made it clear that the new technologies, which had enabled Britain since the 1780s to enjoy continuous economic growth at hitherto unprecedented and accelerating levels, had also enabled government to grow beyond its previous bounds. However, the fiscally cautious managers of Britain’s austere post-war period instead brought spending back in line with revenue, even including the bloated debt service requirements, and thereby paved the way for a century of small-government growth.