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This develops the role of the economist as barrister, as a storyteller. Different economists should present different views of the world and engage in healthy debate. At any time, there is an inheritance of physical and human capital, along with social capital. This defines the boundaries of what can be done. Instead of making hard decisions over allocating those resources, policy makers have tended to congratulate themselves for policies that postponed the reckoning. This includes monetary policy that always found reasons to keep interest rates low, and pandemic policies that were debt-funded and hugely wasteful. More importantly, those policies have left us not only with extremely high national debt, but with a social and cultural gap facing the ‘pandemic generation’.

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An overlooked feature of monetary policy over the last decades is not just that interest rates became low, but that they were consistently declining. Since asset prices are proportionate to the cost of financing (a low interest rate raises asset prices), this made investing a one-way bet. Take housing as an example – the constantly falling interest rate meant that house prices were constantly being bid up. We argue that interest rates should remain at the current 5% (a historically normal rate) to keep asset prices in check. The monetary and fiscal authorities should use policies to raise inflation to bring asset prices back into alignment with wages and goods prices.

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Economics for Generational Survival
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Generation Z has grown up with a global financial crisis, a pandemic, the climate emergency, growing autocracy and wars. Survival, not just equity, is at stake.

As debate rages about how to ensure a fairer and sustainable society, this book challenges short-sighted economic policies, asking where we want to be in 20 years’ time and how we might get there.

Offering fresh, and sometimes counter intuitive, thinking on a range of economic issues including monetary policy, housing and university funding, it argues in favour of policy guardrails to protect the future, higher interest rates, and a burst of inflation. Robots and AI should be seen as positive replacements for population growth.

This is an original, readable and entertaining take on how we can change course before it is too late.

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The low and decreasing interest rates of the last few decades have led to a consumption boom. We distinguish between the discount rate (how future consumption is weighted against consumption today) and the interest rate. For given preferences for consumption over time, a low interest rate can cause borrowing against the future. The fact that the US and UK money supply has exploded suggests that policy was causing the low interest rates – rather than a hypothetical ‘global savings glut’ or ‘secular stagnation’. We consider how inflation can be an imperfect ‘canary in the mine’ and the extraordinarily high money supply is an inflation accident waiting to happen. While the central banks can use their policy tool of paying interest on financial institution deposits with them, this is extremely costly to them, with the deficit being made up by more government borrowing.

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In recent decades, wages have been relatively stagnant, while asset prices have exploded. Monetary policy was ‘run hot’ in part to support the labour market. Other policies, however, support the gig economy and the decline in unions, thereby lowering bargaining power of workers and, consequently, their wages. We argue in favour of the ‘long-term relationship’ model for the workplace. For government support, high-quality universal services in health and in education are the best way to achieve equity and support the least well-off. We argue against working tax credits and other subsidies to poorly paid jobs.

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The most common concern on generational equity lies in the housing market. Low interest rates have driven prices up to extremely high price to income ratios. Since house prices are determined by the stock of housing, rather than by the proportionately small amount of new building, programmes to subsidize home-buyers and house building have little positive effect on affordability. The nature of housing tenure (ownership versus renting) is often over-emphasized at the expense of the quality of housing provision and security of occupancy. Politically, it is unlikely that the government or the central banks will take the actions needed to bring house prices down, given the entrenched interests of homeowners. We argue for keeping interest rates at 5% and engineering wage and price inflation to lower the house price to income ratio and restore affordability for newer generations.

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Generation Z could be characterized as the ‘unlucky generation’. They have faced the dot-com bubble, the financial crisis and the pandemic. Overriding all is the climate emergency. This chapter sets the stage on the policy issues facing the future. We go over some of the literature of generational equity, the non-sustainability of current policies and the challenges facing Generation Z.

It concludes with the plan of the book and summaries of the different chapters.

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The characteristics of Generation Z will play a major role in the future. The generation has grown up under the ‘greed is good’ societal norm. Yet, by all accounts, this is a generation of individualism and political activism. The vaccine response to the pandemic showed that technology remains the way out of the climate emergency and other imbalances in the world. Shifts in policy, reflected in the Paris Agreement on climate and in subsequent international agreements on (for example) raising corporate taxes, are taking effect. There is a backlash, and calls to slow down the move to net zero, but these are political battles to be won. The successes of the past decades, such as decline in population growth rates, provide a basis for optimism.

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We look at the allocation of goods across generations, telling the Robinson Crusoe story (commonly used as a base model by economists) in novel ways. For someone shipwrecked on an island, with some initial resources salvaged from his ship and with natural resources, what consumption and investment strategy should they pursue? Even on his own, Crusoe needs to balance his expectations of rescue with his resources, and may choose consumption such that he faces personal extinction if unlucky. With others on the island, balancing the interests of each needs to be considered, but if Crusoe is making the decisions, he may well sacrifice the others. By analogy, well-off individuals in the current society may think they can protect their progeny from the effects of climate change and oppose policy to reach net zero.

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World population has tripled over the last 70 years, putting burdens on resources. We contrast China – with its one-child policy – with India, which has had dramatic population growth and a relatively poor performance in GDP per capita. We argue that population growth is not needed to pay future pensions if there is sufficient investment. The policy choices of the last decades have destroyed the traditional relationship between corporate profits and investment. An example is making legal a company’s purchase of its own shares in both the UK and the US in the early 1980s.

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