Why you should care
Because they were ahead of the curve, but few wanted to listen.
The author is managing director at Parthenon-EY and head of the Singapore office. His views do not represent those of Parthenon-EY.
The island of Lindau, a tiny teardrop of land afloat in the Bodensee, feels a bit improbable. It is located at the southernmost point of Germany, a country that sits at Europe’s economic and physical heart and is bordered by nine countries and the ice-cold Baltic Sea. Stranger still is what happens to Lindau every summer: For a week the island becomes a kind of university, one where all the teachers are Nobel Laureates, and students from around the world gather (for free, no less — quite radical given the accelerating cost of education). The conference, sponsored by the Foundation Lindau Nobel Laureate Meetings, aims to deepen the role of science in society.
A couple of years ago, during a balmy August, I attended the meetings dedicated to the economic sciences — and it was in the lecture hall that things really heated up. In August 2014, conventional wisdom had it that the economy was strong. The S&P 500, along with every major stock market in the world, had been rising almost every month for two years. Gold prices were in a ditch. The ingenuity of central banks and quantitative easing — a technical way of saying we printed a lot of money — had powered us out of the Great Recession.
And here we were in Lindau, listening to one Economics Nobel Laureate after another tell us that in the face of success, we were headed for defeat.
Christopher Sims, who won the prize in 2011, explained that we were at “zero lower bound,” meaning that central banks were running into a liquidity trap — and running out of room to do much more. Vernon Smith, the 2002 laureate, recalled the day the banks came to repossess his family farm during the Great Depression — “Good riddance, I say”— and went on to explain why our solutions to the Great Recession worried him: Unlike in the Great Depression, he said, we had not cleaned up the balance sheet. Edmund Phelps, the 2006 laureate, presented data to show that global productivity growth had halved — even as borrowing was on the rise. The conference theme fell somewhere between “we have yet to pay the piper” and “the other shoe is going to drop.”
Fifteen Nobel Laureates can’t be wrong, I thought, and the next week I brought up their views at a dinner of CEOs. Not a single one bit. The senior-most executive quickly responded, “Where were those guys when the recession came? It pays the bills to be a harbinger of doom when you missed the last downturn.” There was not enough appetite at the table to digest that Vernon Smith was in The Wall Street Journal in 2006 predicting the housing bubble. We moved to the dessert course, and to another topic.
The past year and a half have vindicated the economists. Since the heady summer of 2014, economic sentiment has shifted from confidence to confusion. In the past 12 months, U.S. stock markets have registered two falls of 10 percent, and then swiftly recovered. Global economic growth has been so anemic that paying down the debt we accumulated to drive us out of the Great Recession could take a whole generation. The Economist has twice featured cover stories warning that we are not ready for another recession and, as per Sims’ warning, that we lack the macroeconomic tools to further stimulate growth. The Financial Times has suggested the improbably named “helicopter drop” as a stimulus tool.
Unlikely events (like the subprime housing crisis) force unprecedented measures (like quantitative easing) that have unforeseen consequences (like zero lower bound). So where to from here? Are we in for a generation of grindingly slow growth while we pay off the debt of the Great Recession? It would not be the first time — it took England almost a century to pay off the debt of the Napoleonic Wars, and even that was possible only due to its economically successful venture into colonialism. What will happen if we keep accumulating debt to drive growth? The optimistic view is that debt will finance a breakthrough in human productivity — e.g., driverless cars — which will solve the equation. The pessimistic view is that inflation, potentially brought on by negative events such as war, will reduce the debt to a manageable level.
Sitting on the very last spot of Germany, on the island of Lindau in the Bodensee, is a lighthouse. Perhaps, like the Lindau lighthouse, the wisdom of the Economics Nobel Laureates could help us navigate this journey safely.