Saturday, November 29, 2014

Hard Truths About Global Growth

NEW YORK – The world’s high-income countries are in economic trouble, mostly related to growth and employment, and now their distress is spilling over to developing economies. What factors underlie today’s problems, and how appropriate are the likely policy responses?

The first key factor is deleveraging and the resulting shortfall in aggregate demand. Since the financial crisis began in 2008, several developed countries, having sustained demand with excessive leverage and consumption, have had to repair both private and public balance sheets, which takes time – and has left them impaired in terms of growth and employment.

The non-tradable side of any advanced economy is large (roughly two-thirds of total activity). For this large sector, there is no substitute for domestic demand. The tradable side could make up some of the deficit, but it is not large enough to compensate fully. In principle, governments could bridge the gap, but high (and rising) debt constrains their capacity to do so (though how constrained is a matter of heated debate).

The bottom line is that deleveraging will ensure that growth will be modest at best in the short and medium term. If Europe deteriorates, or there is gridlock in dealing with America’s “fiscal cliff” at the beginning of 2013 (when tax cuts expire and automatic spending cuts kick in), a major downturn will become far more likely.

The second factor underlying today’s problems relates to investment. Longer-term growth requires investment by individuals (in education and skills), governments, and the private sector. Shortfalls in investment eventually diminish growth and employment opportunities. The hard truth is that the flip side of the consumption-led growth model that prevailed prior to the crisis has been deficient investment, particularly on the public-sector side.

If fiscal rebalancing is accomplished in part by cutting investment, medium- and longer-term growth will suffer, resulting in fewer employment opportunities for younger labor-market entrants. Sustaining investment, on the other hand, has an immediate cost: it means deferring consumption.

But whose consumption? If almost everyone agrees that more investment is needed to elevate and sustain growth, but most believe that someone else should pay for it, investment will fall victim to a burden-sharing impasse – reflected in the political process, electoral choices, and the formulation of fiscal-stabilization measures.

The core issue is taxes. If public-sector investment were to be increased with no rise in taxation, the budget cuts required elsewhere to avoid unsustainable debt growth would bein implausibly large.

The most difficult challenge concerns inclusiveness – how the benefits of growth are to be distributed. This is a longstanding challenge that, particularly in the United States, goes back at least two decades before the crisis; left unaddressed, it now threatens social cohesion.

Income growth for the middle class in most advanced countries has been stagnant, and employment opportunities have been declining, especially in the tradable part of the economy. The share of income going to capital has been rising, at the expense of labor. Particularly in the US, employment generation has been disproportionately in the non-tradable sector.

These trends reflect a combination of technological and global market forces that have been operating over the last two decades. On the technology side, labor-saving innovations in network-based information processing and transactions automation have helped to drive a wedge between growth and employment generation in both the tradable and non-tradable sectors.

In the tradable part of advanced economies, manufacturing automation – including expanding robotic capabilities and, prospectively, 3D printing – has combined with the integration of millions of new entrants into rapidly evolving global supply chains to limit employment growth. Multinational companies’ growing ability to decompose these global supply chains by function and geography, and then to reintegrate them at ever lower transaction costs, removes the labor-market protection that used to come from local competition for workers.

This challenge is particularly difficult, because economic policy has not focused primarily on the adverse distributional trends arising from shifting global market outcomes. And yet the income distributions across advanced economies, presumably subject to similar technological and global market forces, are, in fact, startlingly different, suggesting that a combination of social policies and differing social norms does have a distributional impact. Although the theory of optimal income taxation directly addresses the tradeoffs between efficiency incentives and distributional consequences, the appropriate equilibrium remains a long way off.

A healthy state balance sheet could help, because part of the income flowing to capital would go to the state. But, with the exception of China, fiscal positions around the world are currently weak.

As a result, deleveraging remains a clear priority in a range of countries, reducing growth, with fiscal countermeasures limited by high or rising government debt and deficits. Thus far, there is little evidence of willingness on the part of politicians, policymakers, and perhaps the public to reduce current consumption further via taxation in order to create room for expanded growth-oriented investment.

In fact, under fiscal pressure, the opposite is more likely. In the US, few practical measures that address the distributional challenge appear to be part of either major party’s electoral agenda, notwithstanding rhetoric to the contrary.

To the extent that this is true of other advanced economies, the global economy faces an extended multi-year period of low growth, with residual downside risk coming from policy gridlock and mistakes in Europe, the US, and elsewhere. That scenario implies slower growth – possibly 1-1.5 percentage points slower – in developing countries, including China, again with a preponderance of downside risk.

Read more from our "Zombie Growth" Focal Point.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (25)

    Please login or register to post a comment

    1. CommentedMATTHEW M

      Agree with Tom Hagan Robots do not spend. Globalization is a fraud: was develop with inherent inequities built into it. At some point the music stops. If I am the best poker player and have the best poker face and never throw a hand, well it becomes an early night.

      There are billions in search of work. There is plenty of excess capacity and evermore so created by advanced robotics. The US military is currently being robot-cised - drones, SWORDS/Talons.

      In India and China, the majority still live in abject poverty. The Foxxconn worker making $5-6K/year does not and can not adequately fill the consumer demand vacuum created by the advanced economies erosion of middle class.

      In a world of ever scarcer resources and the giant sloshing sound of central bank excess liquidity cost push inflation is upon us. Given the excess labor and automation ever decreasing downward wage pressure means no demand pull. Presto stagflation.

      Money needs to be eliminated from politics all over the world. Otherwise, we will continue to witness, whole countries being raped and pillaged to make banks whole. And much human suffering.

      The circuitous central banks to global bank liquidity when there is solvency problems solves nothing. And all the credit remaining captive only enriches the few and the expense of the many and produces systematically economic death to the holistic.

      Perhaps if we embraced global warming in the profound way it should be embraced whole "new systems" (political, economic cultural) would usher in a new dawn.

    2. CommentedNathan Coppedge

      I echo something I found interesting if true: "No 3-year spending cut has occurred since 1949, and since then, GDP growth has slowed."

      This seems to add to the claim that what the lower class wants is virtual economics, whereas what the major capitalists want is a capitalist economy. Psychologically, however, there may be an existential claim that neither case---perhaps from the very nature of money---reflects real reality---both are syntheses.

      But the point made above seems worth re-iterating. The poor don't necessarily feel the economy in the same way the rich do. Big numbers might mean nothing, if there remain special benefits. Everything is QOL.

    3. CommentedNathan Coppedge

      The theory can be abbreviated as A. Capital, B. Computing, C. Virtual, D. Creativity, which can be used in whole or partial sentence form.

    4. CommentedNathan Coppedge

      Creative conservatism was an economic idea. There should be ways to use conceptual tools under the principle of "benefiting money" as a first policy for economics.

      The obvious answer is to create some kind of perpetual motion machine. As long as economics is a largely invented concept (like money) this seems entirely possible.

      For example, opposite concepts can be used, such as free computing resources versus necessary industrial resources. The creation of computers is then a form of profit, when free computing resources are capable of developing an economy. Some might say this is impossible, but this suggests that we're not being conceptual enough.

      So, following the logic:
      1. We're not being conceptual, or
      2. Industry is the only economy, or
      3. Industry-products generate money, or
      4. Economics is virtualism

      Accepting any one of these points should generate interest in a specific policy approach.

    5. CommentedSamir Patel

      Genius professional economists REFUSE to admit that the New Communism called Globalization is a MASSIVE failure. 15 years of "cost cutting" and shipping high-wage jobs to low-wage countries the THE PRIME cause of the "economic crisis" - a "crisis" that could have been avoided if we had just left the 90s boom alone.

      Henry Ford said "I have to pay my people enough to enable them to buy my product". If no one has jobs or decent pay, no one's going to be buying anything.

      Get Mr. Spence? Or do I have to come down to your offices and draw you a diagram on the whiteboard before you people get it?

        CommentedMichael Zanette

        "New Communism," really? Globalization, as we know it now, is mainly consistent with rapid trade liberalization, technological gains in financial and capital markets, and all the other factors most commentors on here understand well enough.

        Offshoring jobs is consistent with free capital flows, capital flight, foreign direct investment, and freer international markets. It's the exact opposite of what you describe in your first sentence.

    6. CommentedMark Pitts

      Virtually every article these days on the developed countries advocates additional public and private spending on education. But does that make sense?

      In the last 30 years or so, the real (inflation-adjusted) spending per student on K-12 education in the US has doubled. Yet, test scores are down over the same period.

      Have students’ IQs decreased in the last 30 years, or does most of our public money go primarily to benefit teachers and administrators instead of students?

      Similarly, college students have taken out huge student loans to obtain degrees in areas where there is little demand.

      Education may be key. But in the US we are clearly forging the wrong keys.

    7. CommentedMarc Freed

      Our current problem with employment resembles that created by the mechanization of agriculture a century ago. The migration of agricultural workers to towns and cities with industrial jobs cured that, but the solution took a generation or more. Most of the rural poor simply became urban poor. Only their children, in most cases, experienced a meaningful improvement in living standards.

      Today the mechanization of industrial jobs requires us to once again find meaningful work for people trained to work in that environment. A vast increase in the breadth and quality of service sector jobs accompanied by commensurate changes in compensation for such work may solve this problem; but as in the previous transition, it may not occur at a rate that permits workers in transition to maintain the living standards they desire or expect.

      Managing that transtion is the job of policy makers. For that to occur, we need to find some who understand that first.

    8. CommentedJephtah Lorch

      Post 2nd WW, US deficit was similar to todays deficit. At that time US was a major development and manufacturing power house. Most US manufacturing has been 'sold cheap' to south east Asia, exporting jobs to enjoy low cost (not to say cheap) products. We are now paying the bill.

    9. Commentedjoe verkuyl

      Results from The annual Economic Freedom of the World report and the U.S. down to 18th:

    10. CommentedPaul Kerouac

      I'm sure the majority of people will dismiss this as naive but why has the world become obsessed with constant economic growth? Doesn't anyone ever just stop and ask.. actually, I've bought enough 'things'. Instead of toiling away most of our lives if we just decided we had enough 'stuff' and kept at a baseline level of comfortable lifestyle perhaps there'd be more time for things like... reading a book? Visiting an art gallery? Enjoying life perhaps? Radical, no?

        CommentedMichael Zanette

        Paul Kerouac

        I am inclined to agree with you.

        My personal opinions probably run along with your statements here.

        I too often find myself recoiling from the consumerism of Western states (and now a lot of non-Western states who have felt the heavy influence of Western economic "standards" and paradigms).

        More so, in many developing countries--especially middle income countries--obesity rates are rising at exponential rates. This is happening in states that have profound limits on their capacity to deal with such health concerns. And in-keeping with you argument, this seems to be the trend amongst most states with high growth rates.

        No doubt our economies are not oriented as perfect systems. Certainly it would be a naive outlook to think things could be so otherwise. But I share a conviction with many others who believe that we have moral obligations to others within a global (not international) community. Cosmopolitanism I guess.

        I think Thomas Pogge offers a good argument for increased global governance, vertical and horizontal dispersion of sovereignty, and more just processes--both politically and economically. As your example illustrates, poor people in other countries have little say over what economic structures affect them in their own states, let alone with in the global economic system. We need a more dialogical and democratic system to govern the global commons. Clearly this is platitudinous of me to say given that the complications of implementing a more just system are vast and almost beyond comprehension (maybe they are?). However, this should not stop us from talking.

        Anyway, I digress. I just wanted to say that I enjoyed what you had to say and hope you offer more opinions on more articles.


        CommentedPaul Kerouac

        Michael Zanette - actually, yes, I do agree with you. 'Economic Growth' as it's so loosely called is a catch all term that needs defining when debating such things. When you say Economic Growth, I believe you mean, in a more general academic sense of what it was intended to mean. I.e that broadly speaking, economic growth, if applied on a global scale SHOULD lift people out of poverty whilst benefiting those who helped create that growth. A sort of extending the ladder at the top, whilst shortening at the bottom (with no-one falling off).

        However, what has actually occurred as a result of inequities having been built in to systems of economic growth that have been used over the last 50/60 years, is the complete opposite. The Financial Sector (yes, I know, everyone likes to bash the Financial Sector) has not, in any way shape or form, to my non-economic specific field of expertise/perspective helped anyone. Even the few 'at the top' are starting to feel the heat. So whilst in principle, I agree that economic growth when gone about properly, is a good thing and doesn't always equate to just buying more 'stuff', in truth, the reality of the situation is that for most people in first world countries, this is exactly what it equates to. And the third world countries? Oh a few wars, a couple of famines... nothing for the first world to worry about eh? No, this isn't aimed at you personally.

        Endless consumerism is an effort that would be far better spent on technological advancement that benefits man-kind (desalination + vertical farming, space programmes etc etc.) rather than the next pointless tablet that was no 'better' technologically than the other 50 versions on the market. This isn't to say that those things aren't happening, they are, but they most certainly aren't the focus either economically or culturally for those countries responsible for global economic growth.

        CommentedMichael Zanette

        Economic growth does not necessarily equate to individuals acquiring more stuff. At least not to certain point.

        The importance of economic growth (in conjunction with good governance, the rule of law, public and private institutions, and so forth) in most of the global south can literally mean lifting millions of people out of extreme poverty. Economic recession or depression are ultimately devastating events in people's lives as I am sure you're well aware.

        So "growth" as it is loosely defined is mostly a good thing. How an economy grows, how it orients its production, and how people choose to spend their added financial wealth are all things left up a mix of political, social, cultural, and arbitrary factors.

        Most would agree, including yourself, that people equate a rise in wealth with a rise in consumption of nonessential goods and services. This is social and cultural, but it could also be argued that it is partly a pathology of modern hypercapitalism (which would be a very interesting marxian thought). In truth, we all ought to be saving a lot more than we spend, as many of our grandparents did.

        Commentedtom thomson

        Radical, no? No. Back when I was a kid ( Early 1960's) there was a bumper sticker: "Whoever dies with the most STUFF wins." (It was intended to be sarcastic.)

    11. CommentedLuke Ho-Hyung Lee

      Things are becoming bigger and more complex… Isn’t there any way to make things smaller and simpler?

      Without being aware of it, we have made a serious mistake in developing numerous real (or physical) transaction systems through the use of information technology and developed too many job-killing machines (mostly by big companies) in real markets over the last 30 years of the Modern Information Age. If we do not replace the existing job-killing machines with a new job-creating machine that could be developed by fixing that mistake, structurally, it will be almost impossible to make things smaller and simpler and to avoid the upcoming economic catastrophe, no matter what we do. I believe this is the root cause of the current economic crisis, more specifically, the current job crisis.

      Strangely, it seems nobody has recognized this yet, and no expert has considered this at all in his or her public ruminations about the economy.

      I would strongly suggest you see this article: “Job-Killing Machines in the Modern Information Age...”

        CommentedRuss Wilcox

        Our family was driving through Vietnam last year. We saw many hundreds of people in the fields, hunched under a bright sun, as they pulled at rice seedlings. "What misery - surely that could be automated!" I said to our guide. "Oh yes," he said, "We bought many such machines in the 1970s. But then all the peasants had no work. They drank and made problems. Now we have no tractors. And everyone is happy." And not to pick on Vietnam - I bet the ancient Egyptians had a similar logic when they embarked on their nation-wide shovel-ready jobs program and of course the Luddites would have endorsed it as well. But this sentiment can never be the right answer for the progress of mankind. Our problem is how to allocate liberty created by technology, not how to outlaw technology at cost of liberty.

    12. CommentedZsolt Hermann

      The article contains indeed the hard truth, the whole list of symptoms.
      If we add one more component which is the global, interdependent network we all exist in the end result is a vicious cycle.
      The problems outlined are not national problems, but they reach from one end of the network to the other.
      If we want to increase export to balance non-trade-able deficit that requires someone else to consume what I want to sell, but they do not have the means to consume, or if they do so they get into deeper trouble, which in one way or the other will rebound to the whole network and reach back to me as well.
      The whole global economy is in a state of mountain climbers tied together stuck on a slippery ice-wall, and any time any of them moves, the whole company slides further towards the cliff's edge.
      There is simply no solution with the present system, in such a global, integral and closed system constant quantitative growth is simply not possible.
      Humanity has to realize what this global, interdependent and closed and finite state means and we have to rearrange our whole system in a way that is suits the conditions.
      The conditions are not going to change, we have to give up this constant growth dream and start a more qualitative development.

    13. CommentedPaul A. Myers

      Changing the composition of federal spending might improve the situation if more spending could go to public investment in infrastructure and other program that improve long-term private sector productivity.

      In the US, the federal government is running a deficit to finance basically consumption in the nontradeable goods sectors (health care and transfer payments) and defense spending, which has low domestic multiplier effects on current income and little future "investment return." State and local governments are cutting back ("deleveraging") significantly which diminishes any federal stimulus effect.

      Real median wages in the US have been declining for at least a dozen years. More federal spending in the community colleges might improve the skills of the median worker. Spending more to send marginal students to four-year college programs to acquire non-skills-based education seems inappropriate when two-year-college-based skills acquisition programs might be better (politicians like the California legislature and most of the California education establishment utterly fail to grasp this point).

      President Obama's job bill is stalled behind a wall of Republican obstructionism in the Congress. It would be a good first step towards turning some of these trends towards a positive direction.

      The NYT had a recent article on the middle income trap many advanced countries find themselves in. A large middle of their workforces have had good incomes in the past but are short of skills to remain competitive and attract new jobs because of a wage-skills imbalance. Too many of these individuals are voting "resentment" politics this year, which mostly empowers the wealthy to increase the inequality of income and wealth.

        CommentedTom Hagan

        Yes, lack of education and retraining for the jobs that exist is to blame. Just as 100 years ago when horses were displaced by the internal combustion engine, we could have avoided sending them all off to glue factories by retraining them instead.

        Just think, with proper retraining, all those horses could have become bus drivers.

    14. CommentedTom Hagan

      Yet another analysis that omits the fundamental issue: the present system is inherently unstable. It is unsustainable, doomed to collapse. Once inequality of wealth gets great enough, the system comes crashing down due to lack of demand. Robots don't buy cars. Nor do the workers they have displaced.

      No "jump start" will fix the economy. How can the banks start lending again when private debt in the US is at $100,000 per capita? Why don't the "Nobel Laureates" in economics (there are in fact none) ever ask this question? Why is public debt "bad", private debt "good"? How much crop can a sharecropper share?

    15. CommentedMichael Heng

      The problems associated with the current great recession are political in nature. Just consider the scenario resulting from the following actions: slash defence expenditure, increase progressive taxation, invest in infrastructure, invest in environment, invest R &D in green technology, invest in primary and high school eduction. Defence expenditure beyond a certain point is wasteful investment, while investment in infrastructure, education, environment and green technology research is productive.
      Why cannot Western democracies engage themselves in a meaningful debate on these issues? It is a puzzle to supporters of democracy in the developing countries. At the same time, it is a challenge for the rich countries to take this as a crisis of democracy.

    16. CommentedProcyon Mukherjee

      A very stimulating article, which talks of the impacts of deleveraging and moves to a number of areas starting from debt accumulation, lack of investment and distortion in allocation leading to an unbalanced growth that is far from being inclusive.

      One other aspect and this is also associated with risk is the amount of balance sheet expansion that has taken place in the central bank balance sheets around the world, which now stands at $18 Trillion. To create a global growth of less than 3%, the balance sheet size is really too much. Prudential management would suggest that such a bloated balance sheet should be avoided in a market which is far from being unstable. Also in the event that interest rates harden the rewinding and contraction would mean an equivalent amount of contraction in the GDP of the world for every delta unwinding. This is another element of risk that we go through.

      Procyon Mukherjee

    17. CommentedJohn A Werneken

      The gist seems to be that as long as folks prioritize fairness and personal impact, no solution is possible. As I have long believed, lol.