Hamish McRae: For economies in the so-called advanced world the challenge is to adapt and thrive

Plus: Congress must cook up a deal to delay fiscal crunch

What if there is no growth? There are two debates that have become conflated. One is the disappointingly slow recovery from the last recession, not just in the UK but throughout the developed world. The other is whether the great machine, which has been humming ever since the industrial revolution and has propelled the present developed world towards an ever-higher standard of living, is somehow slowing down.

There has been a deal of anguish about the first issue, especially here in Britain, and that will continue. But the other debate seems to me infinitely more interesting and important. After all, if growth recovers across the developed world, unless a country does something seriously stupid, it will be pulled along. The UK might have slightly slower growth than the rest of the pack, as we did in the 1960s and 1970s; or we may have slightly faster, as we did in the 1980s and 1990s – indeed through to 2007. But the differences will be marginal and eventually growth will recover.

If, on the other hand, there were to be a general and persistent slowdown across the developed world then one core assumption – that we will generate greater wealth and use that to improve the human condition – will come into question.

It is a complicated debate so let's try to sort out the different strands. For a start, there is a confusion between GDP and GDP per head. Obviously countries' economies can grow yet living standards remain stagnant if the GDP per head does not rise. So whenever you hear of a country's economy growing you have to factor in population growth. This cuts both ways. A country with a rapidly growing population needs to grow faster just to stay in the same place. A country with a stable population – Japan at the moment – does not have the same imperative, though it has other pressures, such as looking after its elderly population and servicing its national debt.

This leads into one of the two biggest issues affecting long-term growth: age structure and productivity growth. A word about each.

A population's changing age structure has a deep influence on growth performance, with a key factor being the size of the working population relative to the total. Other things being equal, a country with a rising working population relative to the number of young and old people will tend to grow faster than one with a declining working population. You can see some projections for the main developed countries' total working populations in the main graph. One obvious conclusion is that the US will have a better chance of retaining its growth model over the next half century than Italy or Japan. It will also be easier for the US to pay off its debts.

Countries can, to some extent, cope with ageing populations by keeping more people working longer. That is one of the most interesting phenomena of the UK's slow recovery, for more than half of the rise in employment since the recession has been of people over the age of 65. You can see that in the right-hand graph, with particular growth among the elderly being in self-employment and part-time working.

So countries can, to a degree, counter potentially adverse demographic trends by adapting to them. But I don't think we can get away from the fact that, for the past couple of hundred years, virtually all developed nations have had rising populations and that this has been associated not only with growth in GDP (of course) but also with growth in GDP per head. Now many developed countries –though not the UK – face the prospect of declining populations. That does mean that it will be impossible to increase living standards; just that it will be harder to do so.

The extent to which it will be harder will depend on the ability of societies to keep increasing productivity, output per person. It has proved relatively easy to increase productivity in manufacturing but much harder to do so in service industries. As a rule of thumb, you get an increase of about 3 per cent a year in productivity in manufacturing, as companies find ways of doing more with fewer people. In the Sixties, British Motor Corporation employed more than 20,000 people in Cowley. Now the BMW-owned Mini plant produces more cars with fewer than 5,000.

Productivity is increasing in service industries, but they are harder to automate. A consultation with a doctor, a university tutorial, a restaurant meal – all require human interaction. We are learning how to produce acceptable quality with fewer resources and in some industries that has led to big increases in productivity. Airlines manage their capacity much more efficiently now than they did 20 years ago, thanks to online booking and other innovations. The shift of retailing to online is, I suppose, the most recent example of this.

Can we go on doing it? It is easy to see the world as a whole increasing productivity by less-developed countries adopting technology invented in more advanced ones. But that does not help increase living standards in the present developed world – quite aside from other massively important issues such as the environmental consequences of China and India seeking to achieve the living standards of the West. That is a whole extra subject.

For us – those of us in the so-called advanced world – there are, I think, three challenges. One is to use the new technologies to improve productivity in service industries, including especially the public sector.

A second will be to rethink how we make not just service industries, but our societies more efficient. For example, less crime would release resources not just from the police and courts but from insurance companies and all the other services needed to cope with the effects of crime – quite aside from the social and human benefits.

And third, a more efficient society requires different skills and behaviour if it is not to include greater inequality. We have a world of declining inequality between countries but increasing inequality within them. A lot to be done.

Congress must cook up a deal to delay fiscal crunch

The boom in US share prices and the steady growth in employment have continued, notwithstanding that negative number for final-quarter growth.

There were big upward revisions for job growth in both November and December and employment rose through January, too. Over the three months to the end of last month, 600,000 jobs were created. That cannot be a shrinking economy.

But the US faces a huge problem, as the focus shifts back to the stalled budget plans. The Centre for Economic and Business Research put it starkly: "Towards the end of this month Congress will have to complete another round of negotiations surrounding spending cuts, tax rises and the US debt ceiling. If a deal is not struck, the resultant tax rises and spending cuts have the potential to push the US deep into recession and cause large rises in unemployment."

So are employers and traders betting on a positive outcome for these talks? And if so, will Congress deliver?

My own reading is that the real crunch in fiscal policy is some way off. All Congress has to do is cook up some deal that is deemed good enough, as, paradoxically, it cannot fix the deficit in this set of talks.

What is needed is an overhaul of the whole tax structure, reducing nominal rates and closing loopholes – a two-term, if not a two-decade job. All the President can hope to do is to nudge the public towards requiring legislators to be realistic about closing the deficit, notwithstanding the present ability to finance it. Got to be done; can't be done quickly.

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
News
Elton John and David Furnish will marry on 21 December 2014
people
News
people
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
PROMOTED VIDEO
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
Voices
Joseph Kynaston Reeves arguing with Russell Brand outside the RBS’s London offices on Friday
voicesDJ Taylor: The great tradition of St Paul and Zola reached its nadir with a worker's rant to Russell Brand
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
News
i100
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick