Politicians seem to be floundering as they seek to restore growth to the Western economy. Their prescriptions swing between austerity and economic stimulus as they argue over what has gone wrong.
But in chapter 10 of our Boom, Gloom & The New Normal e-book we argue that they are on the wrong track. They are putting their trust in an outdated economic theory – the life-cycle hypothesis.
This theory holds that we are all rational beings and plan ahead to ensure we have enough money for our retirements. Policymakers therefore believe that if only they could find the right policy – spending boosts or tax cuts – then growth would magically return.
They don’t seem to have realised that most people, like most governments, have been taken by surprise by the rapid increases in life expectancy in recent years. So even if people were rational, it would have been very hard for them to have saved enough money to provide for their extra decade or more of retirement.
This inevitably means growth will be slower. The Boomers simply must spend less and save more to fund their retirement. But equally, there are opportunities to sustain growth by developing new products and services to meet the Boomers’ needs as they enter the New Old 55+ generation.
We argue that policymakers need instead to focus on these issues. They should start to debate the best mix of policies to support the need to retool Western economies, to reflect these changing demand patterns.
In addition, we look at the financial sector.
Young engineers and scientists, who would be much better employed in industry, have recently preferred to work in the financial sector where salaries have been far higher. It needs to be reformed and we suggest how this might be done.
We also explore how China’s highly ambitious 12th Five-Year-Plan is at risk of failure. A key element of the Plan is moving up the value chain. But can the right levels of creativity and innovation develop without greater political freedom and more democracy?