Charles Goodhart and Manoj Pradhan
Palgrave Macmillan, London, UK, 2020, 280 pp., $24.40
The eminent Swedish economist Knut Wicksell (1851–1926) once argued that textbooks on economics
should start with a chapter on population. A new book by Charles Goodhart
and Manoj Pradhan echoes this approach, placing demographics and the
influence of slow-moving and persistent trends on macroeconomic
developments front and center in economic discussions.
The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival
focuses on demographics and the participation of China in the global
economy. It argues that the confluence of these two dynamic forces led—over
the past three decades or so—to deflationary forces that explain falling
inflation and nominal interest rates. These two phenomena also contributed
to weak nominal wages, increased inequality in many countries, and social
and political upheaval. Going forward, both forces will operate in reverse,
leading to looming inflation pressure. The logic of the argument, in the
body of the book, points to this plot playing out in the next three decades
or so.
The authors acknowledge that, as of the beginning of 2020, they did not
have a tight view of the timing of the coming inflection point. But
COVID-19 changed everything, and they advance a very precise prediction:
“…what will happen as the lockdown gets lifted and recovery ensues,
following a period of massive fiscal and monetary expansion? The answer, as
in the aftermaths of many wars, will be a surge in inflation, quite likely
more than 5% or even in the order of 10% in 2021.”
Goodhart and Pradhan argue that the demographic reversal and the very
expansionary monetary and fiscal policies put in place to combat COVID-19
will lead—sooner rather than later—to less saving and more investment. That
will push the natural rate up. Financial markets and policymakers are
unprepared for such developments. Accumulated leverage leads to financial
fragility and discourages central banks from tightening, so inflation is
bound to increase.
One year after COVID-19 was declared a pandemic, uncertainty remains
elevated. Savings are high, and investment is weak. Workers are
understandably concerned about their jobs and job prospects. Inflation has
been low for years, and monetary policy has been under the shadow of the
effective lower bound.
