THE

 GREAT  DEGENERATION  

 Sector  Asset  Management,  Oslo,  June  17,  2015  

Some  people  worry  about  “secular  stagna>on”  
 I  don’t  
Contribu)ons+to+percentage+change+in+real+GDP,+quarterly+
6$

4$
Government$consump9on$
2$ expenditures$and$gross$
investment$
0$ Net$exports$of$goods$and$
2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ 2014$ 2015$ services$

!2$
Gross$private$domes9c$
investment$
!4$
Personal$consump9on$
!6$ expenditures$

!8$

!10$
Source:  BEA  
 And  some  people  worry  about  rising  inequality  
The$top$1%$income$share$in$the$United$States$since$1913$
25"

20"

15"

10"

5"

0"
1913" 1923" 1933" 1943" 1953" 1963" 1973" 1983" 1993" 2003"
Source:  Saez  (2008)  
 I  don’t  
Number'of'Forbes'400'individuals'with'inherited'wealth'
180"

160"

140"

120"

100"

80"

60"

40"

20"

0"
1982" 1987" 1992" 1997" 2002" 2007"
Source:    Forbes  
I  really  don’t  

Source:    Hellebrandt  and  Mauro  (2015)  

 But  this  is  what  I  worry  about  
Shares'of'world'GDP,'198052020'
25"

20"
Brazil"
China"
15" Germany"
India"
Japan"
10"
Russia"
United"Kingdom"
5" United"States"

0"
1980" 1985" 1990" 1995" 2000" 2005" 2010" 2015"
Source:  IMF  
 BRICs  …  and  JUUGs  
BRICs&and&JUUGs:&shares&of&global&GDP,&1980=2020&
45"

40"

35"

30"

25"
BRICs"
20" JUUGs"

15"

10"

5"

0"
1980" 1985" 1990" 1995" 2000" 2005" 2010" 2015" 2020"
Source:  IMF  
The  Great  Re-­‐convergence  is  the  big  story  of  our  >me  
The$Great$Divergence:$Ra1os$of$per$capita$GDP,$1600;2010$
22"
20"
18"
16" Italy/Japan"
14" Netherlands/Indonesia"
12" England/India"

10" Portugal/Brazil"
Spain/Mexico"
8"
USA/China"
6"
Russia/Turkey"
4"
2"
0"
1600" 1819" 1844" 1869" 1894" 1919" 1944" 1969" 1994"
Source:  Maddison  
 And  the  gap  is  expected  to  keep  narrowing    
US/China)per)capita)GDP)ra2o,)201282060)
6"

5"

4"

3"

2"

1"

0"
2012" 2022" 2032" 2042" 2052"
Source:  OECD  
Western  decline  has  a  demographic  dimension,  too  
Hun$ngton's*West*as*%*of*world*popula$on,*1950:2050*
22%$

20%$

18%$

16%$

14%$

12%$

10%$
1950$ 1960$ 1970$ 1980$ 1990$ 2000$ 2010$ 2020$ 2030$ 2040$ 2050$
Source:  UN  
 But  what  are  the  real  drivers  of  this  shi\?  

1. Development  economists  tend  to  be  focused  on  how  poor  

countries  with  bad  ins>tu>ons  can  get  be_er  ones  

2. But  it  may  be  just  as  important  to  understand  how  rich  
countries  with  good  ins>tu>ons  can  end  up  with  worse  ones  
The  Rest  are  downloading  the  West’s  “killer  apps”  

1.  Compe>>on  
2.  The  Scien>fic  Revolu>on  
3.  Property  rights  
4.  Modern  medicine  
5.  The  consumer  society  
6.  The  work  ethic  
But  the  West  is  suffering  from  ins>tu>onal  degenera>on  
 
1. Breakdown  of  the  contract  
between  the  genera>ons    

2. Excessive  complexity  of  

regula>on  

3. The  rule  of  lawyers  rather  

than  the  rule  of  law  

4. Decline  in  civil  society  

 1.  Genera>onal  imbalances  …  
Ways%to%achieve%genera0onal%balance,%2013%and%2023%(%)%
Immediate#&#permanent#increase#in#all#federal#taxes##
Immediate#&#permanent#cut#in#all#government#outlays##

64#
2013#
35#

70#
2023#
38#

Source:  Kotlikoff  (2013)  

…  are  the  key  to  the  U.S.  fiscal  problem  

Source:  Urban  Ins>tute;  Next  Genera>on  

 2.  Excessive  regula>on  …  
Number'of'pages'in'Federal'Register,'c/w'real'GDP'
(1936=100)'
3,500"
Ronald  Reagan  cuts  red  
tape  by  31%,  increases  
3,000" GDP  by  30%  

2,500"

2,000"
Adjusted"total"pages"
1,500" Real"GDP"

1,000"

500"

0"
1936" 1946" 1956" 1966" 1976" 1986" 1996" 2006"
Source:  Crews  (2013)  
…  is  the  disease  of  which  it  purports  to  be  the  cure  
Deteriora(on*in*ease*of*doing*business,*2006–2013*
(percentage*increase*in*number*of*days*to*complete*seven*procedures)*

Finland"
Zimbabwe"
Latvia"
Ireland"
Seychelles"
United"States"
Burundi"
Lithuania"
Yemen,"Rep."
Canada"

0" 5" 10" 15" 20" 25" 30" 35" 40"

Source:  IFC  
3.  The  rule  of  law(s)  …  

Source:  CCH;  Freedom  Works  

…  has  become  the  rule  of  lawyers.  For  example:  

Source:  h_ps://www.southwestvoucherse_lement.com//  
Cui  bono?  

Source:  h_ps://www.southwestvoucherse_lement.com//  
4.  The  decline  of  American  ins>tu>ons  …  

Source:  WEF  
…  is  not  confined  to  Congress  and  TV  news  

Source:  Gallup  
This  is  just  one  symptom  of  the  problem  

Source:  OECD  /  PISA  

 You  might  even  say  the  U.S.  is  turning  “La>n”  
Es0mates'for'governance'quality,'U.S.,'1996-2011'
2.20$

2.00$
Maximum'2.5,'minimum'-2.5'

1.80$
Voice$and$accountability$
Government$effec?veness$
1.60$
Regulatory$quality$
Rule$of$law$
1.40$
Control$of$corrup?on$

1.20$

1.00$
1996$ 2000$ 2003$ 2005$ 2007$ 2009$ 2011$
Source:  WGI  
 (Except  that  La>n  America  has  been  improving)  
Es0mates'for'governance'quality,'Chile,'1996-2012'
1.80#

1.60#
Maximum'2.5,'minimum'-2.5'

1.40#

1.20#
Voice#and#accountability#
1.00# Government#effec?veness#

0.80# Regulatory#quality#
Rule#of#law#
0.60#
Control#of#corrup?on#
0.40#

0.20#

0.00#
1996# 2000# 2003# 2005# 2007# 2009# 2011#
Source:  WGI  
But  it’s  not  a  Chinese  century  yet  
Meet  China’s  6  killer  “viruses”  
 1.  Demographic  “greying”  
Share&of&the&popula-on&aged&65+,&201082100&
40"

35"

30"

25" China"
Germany"
20"
India"
15" Japan"
USA"
10"

5"

0"
2010" 2020" 2030" 2040" 2050" 2060" 2070" 2080" 2090" 2100"
Source:  UN  
 2.  Excessive  leverage  
Trends'in'pre*stress'credit/GDP'
250"

200"

t,6"
150"
t,5"
t,4"
100" t,3"
t,2"

50" t,1"

0"
Japan" Korea" Britain" United"States" China"
1985,1990" 1994,1998" 2002,2007" 2002,2007" 2008,2013"
Source:    PBOC,  Fitch,  China  Trustee  Associa>on  
 3.  Financial  instability  

People  gather  in  front  of  a  branch  of  Jiangsu  Sheyang  Rural  Commercial  
Bank,  in  Yancheng,  Jiangsu  province,  March  25,  2014  (Reuters)  
 4.  Lack  of  rule  of  law  
World&Jus*ce&Project&Scores,&2012513&(min&0&max&1)&
0.0# 0.1# 0.2# 0.3# 0.4# 0.5# 0.6# 0.7# 0.8# 0.9# 1.0#

1:#Limited#Government#Powers#

2:#Absence#of#CorrupCon#

3:#Order#and#Security#

4:#Fundamental#Rights#

5:#Open#Government##

6:#Regulatory#Enforcement#

7:#Civil#JusCce#

8:#Criminal#JusCce#

Source:  WJP  
5.  Air  pollu>on  

Source:  WHO  
 6.  Energy  dependence  
Energy)deficit/surplus)as)%)of)consump'on,)1990=2035)
10%%

5%%
Produc'on)deficit/surplus)as)%)consump'on)

0%%
1990% 1995% 2000% 2005% 2010% 2012% 2015% 2020% 2025% 2030% 2035%
!5%%

!10%%
China%
United%States%
!15%%

!20%%

!25%%

!30%%

!35%%
Source:  BP  
So  there  is  some  real  light  in  the  Western  gloom  

Goldman  Sachs  keeps  the  lights  on  during  Hurricane  Sandy  

But  what  does  all  this  mean  for  a  country  like  Norway?  
 Norway  is  more  of  a  petro-­‐state  than  ever  

Petroleum  
and  products:  
62%  c/w  47%  
in  1995  

Source:  Observatory  of  Economic  Complexity  

 So  it  has  no  public  debt  problem  
General'government'net'debt'(%'GDP)'
0%
1980% 1985% 1990% 1995% 2000% 2005% 2010% 2015% 2020%

!50%

!100%

!150%

!200%

!250%
Source:  IMF  
 But  the  commodity  super-­‐cycle  is  over    
Crude&oil&(Brent),&US$&per&barrel&
120"

100"

80"

60"

40"

20"

0"
1980" 1985" 1990" 1995" 2000" 2005" 2010" 2015" 2020"
Source:  IMF  
 And  the  economy  has  markedly  slowed  
Norway:(Gross(domes.c(product,(constant(prices((%(change)(
6#

5#

4# 10!year#moving#average#

3#

2#

1#

0#
1980# 1985# 1990# 1995# 2000# 2005# 2010# 2015# 2020#
!1#

!2#
Source:  IMF  
 Norway  is  ageing  like  all  of  Europe  
Norway's)ageing)popula1on:)Senior)shares)of)total,)1950<2100)
35"

30"

25"

20"
65+"(%)"
15" 80+"(%)"

10"

5"

0"
1950" 1970" 1990" 2010" 2030" 2050" 2070" 2090"
Source:  UN  
 And  it  is  failing  (badly)  to  integrate  immigrants  
Foreign-­‐born  unemployment  rate  rela>ve  to  na>ve-­‐born  unemployment  rate    
(ra>o,  2011  or  latest  available  year)  

Source:  OECD  
 Not  only  populists  should  be  worried  by  this  
Projected)compound)annual)growth)rate)of)Muslim)
popula7on)2010;2030)(%):)Fastest)growing,)plus)France)
0.0# 1.0# 2.0# 3.0# 4.0# 5.0# 6.0#

Ireland#
Finland#
Norway#
United#States#
Sweden#
Italy#
Andorra#
United#Kingdom#
Spain#
Belgium#
France#

Source:  Pew  
A  right  that  not  only  Americans  enjoy  

“In  America  you  have  a  right  to  be  

stupid  –  if  you  want  to  be.”  
Secretary  of  State  John  Kerry,  February  26,  2013      
©  Niall  Ferguson  2015