The Economics of Decline

Or, How Demagogues turn Stagnation into Depression

Here’s the fundamental logic of true leadership:

True prosperity is built not merely when the rich and privileged reach their potential. But when everyone does.

That is the great challenge of every true leader. And it’s also what demagogues don’t do.

In an Age of Rage, when the world is broken, and monsters appear to be slithering and crawling out of the cracks, demagogues position themselves as saviors. That is the foundation of their moral appeal. They contrast themselves with failed leaders, who are characterized as corrupt and irredeemable. The savior, by contrast, comes to save a fallen people — and lead them to the promised land, by protecting them from the monsters he has conjured. Alas, the promised land is an illusion. The road that demagogues take societies down is the road of ruin. He does not lead them away from the monsters. He turns them into the monsters.

The demagogue is a danger to civilized societies because he sets in motion a chain events leading, more often than not, to the ruin of a humble nation or a mighty empire alike.

In this essay, I want to focus intently on the first, formative step in the road to ruin.

To illustrate it, let us consider how American demagogues hope to save its imploding middle class. In a word, they hope to protect them. Through tariffs, trade barriers, and physical walls, they hope to keep Americans safe in an unstable world. Further, they claim that the central cause of decline and stagnation is the monsters they have conjured up — Mexicans, Muslims, foreigners, aliens.

What American demaogues today hope to do is not so different from the demagogues of history. From prehistoric China to Roman England to Weimar Germany, crumbling empires have desperately built walls — made of bricks and stones, or laws and rules. But not a wall in history has kept a crumbling empire from ruin.

Why not?

The demagogue has analyzed the cause of stagnation wrongly. Stagnation is not found in the lack of a wall. It has not occurred because people are unsafe or insecure. Rather, the opposite is true. People are insecure because their economy and society is stagnating. The true cause of stagnation is the failure of leaders to free people to realize their potential. And that is the simple reason that stagnation and decline have set in.

How is a leader to do that? By understanding this fundamental lesson. Supporting the imploding middle classes in times of stagnation has no real economic cost. In fact, not supporting them is what incurs an economic cost.

How can that be?

A stagnating world is also a world of negative interest rates. In a world of negative interest rates it makes little sense not to invest as heavily as possible. And in such a world, what the economy is shouting leaders is that it has grown dangerously imbalanced — to such a degree that the self-correcting tendencies of markets are begging leaders to redress the imbalance.

Let me explain, with an example. Imagine that I offered you a loan of $1000 — and exactly a year from now, you only had to pay me back $800. You’d be a fool not to accept my loan — because you’d make $200 for free, no matter what you did. That is the simple logic of a negative interest rate world.

That is what markets offer to governments when interest rates are negative. It is as if they are shouting: please! take this money and put it to good use! we will pay you do so!!!” But “markets” are an abstraction. The money piling up in the markets is that of the ultra wealthy. It is money that is so desperate to find a good home that it is willing to pay for the privilege.

Why is a stagnating economy, a society in decline, also one which naturally tends to produce negative interest rates? Let us think about it closely and clearly. An interest rate is simply the cost of money. When a society is stagnating, the demand for money has shrunk . That is what flat incomes effectively mean. You are withdrawing less every week from the bank, trying to save on food, rent, and transportation. At the same time, the supply of money has grown. The ultra wealthy are able to leverage their wealth to a far greater degree than the middle and poor could. The result is too much money chasing too little demand. Thus, interest rates fall until they are negative — banks will pay prime investors to borrow, simply so they can put their assets to work.

Let me put that another way, which may be easier to understand.

Negative interest rates are a natural, perhaps inevitable consequence, of skyrocketing inequality. Incomes stagnate at the bottom and in the middle. Their demand for goods and money falls. Yet at the very same time, incomes grow amongst the very top. Though their demand for goods and money rises, it cannot make up for the total demand lost to the imploded middle — even a billionaire eating the finest foods does not need to spend as much per week as million households eating humble meals.

The dynamic above contains a profound truth about decline. It is not evenly distributed. It is not everyone in society who declines equally, or even at all — and that is perhaps the greatest challenge of decline. Decline means that the masses may stagnate — precisely because the super rich are growing ultra wealthy.

Let us think more clearly about what stagnation is. It is not simply a case where a prosperous economy is struck by flood, famine, or fire. Rather, it is a singular social phenomenon where an economy is struck with a kind of cancer: it begins to eat itself from the inside out.

If middle incomes fall, then that money must go somewhere — after all, the middle is not simply burning it. Where is it going? It is not going to the bottom. Therefore, it is going to the top. The ugly truth of stagnation is very different from calamity. It means an economy where the top is effectively draining the middle and the bottom of prosperity — and thus an economy slowly grounds to a halt.

So stagnation does not just mean that wealth stops flowing through a society. Rather, it means wealth flows in precisely the wrong direction: upwards, not downwards. But the problem is that when vast surpluses wealth pile up at the top, they are certain to be misallocated to useless activities that leave everyone worse off: to make indebted people into something like the butlers, maids, and chauffeurs of the now ultra wealthy— and thus prevent them from becoming teachers, surgeons, and scientists. And because too much money in too few hands has little good place to go, interest rates soon turn negative.

Stagnation doesn’t mean that the wealth lost by the middle and poor vanishes into thin air. Rather, historically, it usually means that their wealth flows to the top. In effect, the top is siphoning off the diminishing wealth of the middle. But the problem is that too much wealth in too few hands has little productive place to go.

The super rich become the ultra wealthy. Now surpluses pile up. But where will the ultra wealthy put the new cash they are piling up? It must go somewhere. The ultra wealthy may buy fine homes in every great city, and then entire blocks. They may buy businesses, and then entire conglomerates. What now? There is only so much to invest in in an economy. And having invested in most of it, if the middle and poor are effectively their low-wage servants, who then will create new businesses, technologies, inventions, creations to invest in? Why bother creating them if incomes are falling, and no one can afford a better mousetrap in the first place? Thus, after stagnant incomes, the second great microeconomic problem of a society in decline is that investment opportunities grow scarcer — they, too, decline in both quantity and quality.

Stagnation has sucked demand out of the economy. Without demand — for new products, services, innovations, businesses— there is little reason for anyone to attempt to create, launch, produce, market them. The returns to new economic activity have shrunk to the vanishing point. A middle class forced into penury is less able to envision, create, and start up the ventures of tomorrow — when it can barely afford them to begin with. Because society has invested less and less in basic research, new breakthroughs (like great new sources of energy, infrastructure, transportation, education, healthcare) that create entire new industries to invest in dry up .Thus, new investment opportunities are thin on the ground.

So an imbalance grows. More and more idle cash seeks fewer and fewer investments. Some asset classes may boom — but that is a sign of ill health, not good health. As a simple illustration, the stock market may boom, as the wealthy invest more and more of their newfound income in stocks — but it is simply a money illusion, divorced from economic reality. That is precisely the story of America’s financial markets in the early 21st century.

But the converse is also true. A negative interest rate world is one in which markets are sending a desperate signal that too much money is chasing too few opportunities for productive investment. Someone must create useful places for that money to flow into — new investment opportunities.

That actor in an age of decline is the leader. Whether you or I are or ideologically statist or anti-statist is besides the point. Here, at this crucial juncture of history, when stagnation sets in, someone must step in to redress the imbalance between an oversupply of money and a shrinking demand for money, and the only actor capable is the leader, who holds the reins of power. I am not suggesting that institutions always do so — just that their leaders hold the responsibility to invest in times of decline.

Negative interest rates are a signal that money is bursting the very seams of its pipelines of the financial system, straining to get into the people’s wallets. But it is being stopped, thwarted, and stymied.

True prosperity is built not merely when the rich and privileged reach their potential. But when everyone does. When the person who is a driving the cars or walking the dogs of the super rich instead pursues that biomedical PhD they can and should be doing, then everyone is truly better off. Why? Because that PhD might result in a cure for cancer — which might one day save the very life of the super rich person whose dogs he or she is now walking.

True prosperity is the power to reach one’s fullest potential. Not merely because it makes the best of one — but because it makes the most of, and for, all. We are all better off when people are surgeons, engineers, doctors, teachers, creators, dreamers, artist, rebels, leaders…than when people are merely written off to be dog-walkers, manicurists, maids, butlers, chauffeurs…all including the ultra wealthy.

What is truly declining in ages of decline is human potential itself. The economy is caught in a trap. The poor and middle, now growing poorer, no longer have the means to fulfill their potential — and so everyone is worse off. The problem is easy enough to solve — it requires reversing the trap, by freeing the poor and middle to realize their potential.

That is why: building walls, whether made of brick and stone, or laws and rules, or carrots and sticks, can never get metamodern societies closer to prosperity. There are no marauders to protect people from. The problem today is not bandits and invaders — and thus the solution is not protection. The problem is stagnation — and the solution is freedom. Freedom to live up one’s potential.

I have taken you through a complicated logic. So let me try and make the above crystal clear.

Because a society in decline is also often a negative interest rate economy, the leader’s fundamental task is taking the unreasonably good bargain markets are offering. Putting the funds which have piled up to such an imbalanced degree that markets are willing pay people to take money off their hand to good use: using them to open up economic space for new investment opportunities. Investing in precisely what is stagnating: human potential. That means not just liquidity injections from central banks to household bank accounts, and cash transfers from the government to the people, but also investment by the government in infrastructure, assets, education, healthcare — for all that frees people to create things to invest in, whether those things are new technologies, products, services, artworks, or towns and cities.

Now let us connect the dots. If the job of leaders is investing in people when societies are in decline because interest rates are negative, then the problem is that demagogues do precisely the opposite. They disinvest in people, and turn down the good bargain markets offer. It is as if when offered free money, that people desperately need, demagogues turn it down, and put the people to work building walls instead — and thus stagnation is turned into depression.

Demagogues build walls, made of brick and stone, or rules and regulations. But building walls is not investing in human potential. Every dollar, pound, or euro invested in a wall is one that is not invested in people. It does not enable them to study, learn, create, build, imagine, grow. Perhaps, at most, it employs a few thousand people in its construction, whether they are builders, lawyers, or agents. But that is the most good it will ever do. By keeping talent and ideas out, walls starve stagnating economies of investment opportunities, depressing them.

So here is the rule that I wish you to remember.

Leaders invest in human potential. Demagogues ruin human potential. By investing in human potential, whether through the means of direct injections, indirect subsidies, or public goods, leaders make greater prosperity possible for all. But by starving economies of investment in human potential, the demagogues diminishes the prosperity all are capable of.

Let me try and distill the above. The leader invests in the human potential of the people suffering the most from decline. The demagogue does the opposite: he starves the human potential of those at the lowest ranks of a society, its outcasts and untouchables, its illegal immigrants and unwanted refugees from investment. But these are not the same thing. Spending money to create a class of outcasts is not investing in society’s losers. One is a substitute for the other: you cannot do both at the same time. And so societies must choose: leadership, or demagoguery?

When societies choose to spend money on creating a class of outcasts, by building walls, they have chosen poorly. Money that should be spent on the imploded middle, and the forgotten poor — on turning those desperate mediocre lives into lives resonant with possibility — is spent instead on casting people out. Casting people out may by psychically satisfying, and emotionally cathartic. But it is merely spending money in precisely the wrong way, at exactly the wrong time. Every dollar spent on casting out a refugee, alien, immigrant, is one that is not spent on educating, training, supporting, nurturing, healing a life spiralling downwards from middle class prosperity into new poverty.

What is the net result?

The demagogue turns stagnation into depression. The walls that he hopes to build, whether brick and stone or rule and procedure, are malinvestments. They do not just slow the economy by raising prices and costs. They themselves are a cost without a benefit, what economists call a “deadweight loss” — a futile endeavor, which is undertaken not out of our better instincts, but out of spite, anger, and rage. Because the walls are a deadweight loss, the more of them that a society builds — not just physical, but legal, social, institutional, cultural — the faster and fiercer stagnation turns into depression. It is as if society’s most valuable resources — it’s talent, imagination, creativity, effort, time, labor, love — are being thrown away, flung into the sea, incinerated — for the economic effect is precisely the same.

Ages of rage are characterized by walls. I have taken you through many interwoven and complex ideas here. As a leader, you must remember this much. Walls do not keep prosperity in. They ever keep possibility out.

Umair 
London
March 2016