The need for new policies

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Summary

Video: Paul Hodges discusses the need for new economic policies

In this chapter we are going to address the biggest challenge to the acceptance of our ideas among Western economic policymakers – their belief in the life-cycle hypothesis.

This economic theory holds that we are all rational people. Therefore we will all automatically save enough money to fund our retirements.

If only real life was a simple as the equations in an economic model!

What about the effect on pensions of the recent collapse in equity and housing markets? “No problem”, say the policymakers, “all we have to do is re-inflate stock and housing markets with a few hefty doses of fiscal stimulus. This will automatically enable everyone to rebuild their savings for retirement”. Yet since 2008, $tns of quantitative easing and stimulus programmes have so far failed to achieve this objective.

We are going to argue that people are far from rational, making life very difficult for policymakers and economists who like nice, neat models to explain where things are going.

We shall also examine:

  • How the size and rewards of the financial industry have become way out of line with the needs of society, and are distorting Western economies. The industry needs to be reformed and we will make some suggestions on how this can be done.
  • How governments need to support a rejuvenation of manufacturing industry. This will help the middle and working classes, who have seen their incomes stagnate, find both financially rewarding and meaningful work. This rejuvenation needs to involve more government support for R&D, for instance, for education and for vibrant new business clusters. But this will only work if the right products are made, and at the right cost, which we shall discuss from a policy perspective. It will be about encouraging the development of the products of the future which will tap in to our megatrends – carbon footprint, demographics and food and water scarcity.
  • How China’s highly ambitious 12th Five-Year-Plan, which we first outlined in chapter 6, is at risk of failure. The plan defines a clear path towards a new, sustainable growth model. But the reforms will only work if China becomes more open, and, dare we say it, more democratic – perhaps the biggest of all the policy challenges. The very fact that we worried about mentioning the “D” word is, in itself, a problem.