Wednesday, December 16, 2015

"Goodhart-Nangle, Demographic Destiny & Varieties of Capitalism"

From Medium:
The single most interesting macroeconomic idea to come out financial markets types this year is what it’s being called Goodhart-Nangle hypothesis (after former Bank of England chief economists Charles Goodhart (who’s already got a law to this name) and fund manager Toby Nangle (who you should really be following on twitter if you’re not already)).

I’ve it up here, here & here, a version of Goodhart’s views can be found in Prospect and Nangle’s original at VoxEU (and I’d bet it’s one of very few documents published by a fund manager in 2015 that references Lenin on imperialism).

Goodhart-Nangle is an explanation of the past thirty or so years and a prediction about the future and whilst the Goodhart and the Nangle versions differ, there’s a substantial overlap.
Briefly put, the story runs as follows:
  • A combination of the demographic sweet spot (a rising proportion of the population being of working age) and globalisation (the great doubling of the global workforce available to Western capital post-1990) resulted in a global glut of labour.
  • Faced with an oversupply of workers, the relative price of labour fell pushing down the labour share of national income in the advanced economies and depressing wage growth.
  • The availability of cheap labour reduced the need for labour saving, productivity enhancing capital investment in the West.
  • Lower demand for capital (and less inflationary pressure from wages) reduced real interest rates.
The result: lower inflation, weaker wage growth, lower investment, falling real rates and rising inequality. The symptoms of what some see as secular stagnation but what are to Nangle a reflection of the fact that labour bargaining power sets the natural rate.

But demographics have turned. And Goodhart-Nangle predicts that with this turn, three multi-decade trends (weak wages, falling real rates & rising inequality could turn to).

I blogged on the turn a few weeks ago. And this is perhaps the key chart.
 Graph from the Global Monitoring Report showing the working-age share of the population starting to drop
Like I say, the most interesting theory of the year.

But is it right?...