Wednesday, November 26, 2014

Advanced Malaise

NEW YORK – Economics is often called the dismal science, and for the last half-decade it has come by its reputation honestly in the advanced economies. Unfortunately, the year ahead will bring little relief.

Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United Kingdom, and the United States is lower today than before the Great Recession hit. Indeed, Greece’s per capita GDP has shrunk nearly 25% since 2008.

There are a few exceptions: After more than two decades, Japan’s economy appears to be turning a corner under Prime Minister Shinzo Abe’s government; but, with a legacy of deflation stretching back to the 1990’s, it will be a long road back. And Germany’s real per capita GDP was higher in 2012 than it was in 2007 – though an increase of 3.9% in five years is not much to boast about.

Elsewhere, though, things really are dismal: unemployment in the eurozone remains stubbornly high and the long-term unemployment rate in the US still far exceeds its pre-recession levels.

In Europe, growth appears set to return this year, though at a truly anemic rate, with the International Monetary Fund projecting a 1% annual increase in output. In fact, the IMF’s forecasts have repeatedly proved overly optimistic: the Fund predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a 0.4% contraction; and it predicted US growth to reach 2.1%, whereas it now appears to have been closer to 1.6%.

With European leaders wedded to austerity and moving at a glacial pace to address the structural problems stemming from the eurozone’s flawed institutional design, it is no wonder that the continent’s prospects appear so bleak.

But, on the other side of the Atlantic, there is cause for muted optimism. Revised data for the US indicate that real GDP grew at an annual pace of 4.1% in the third quarter of 2013, while the unemployment rate finally reached 7% in November – the lowest level in five years. A half-decade of low construction has largely worked off the excess building that occurred during the housing bubble. The development of vast reserves of shale energy has moved America toward its long-sought goal of energy independence and reduced gas prices to record lows, contributing to the first glimmer of a manufacturing revival. And a booming high-tech sector has become the envy of the rest of the world.

Most important, a modicum of sanity has been restored to the US political process. Automatic budget cuts – which reduced 2013 growth by as much as 1.75 percentage points from what it otherwise would have been – continue, but in a much milder form. Moreover, the cost curve for health care – a main driver of long-term fiscal deficits – has bent down. Already, the Congressional Budget Office projects that spending in 2020 for Medicare and Medicaid (the government health-care programs for the elderly and the poor, respectively) will be roughly 15% below the level projected in 2010.

It is possible, even likely, that US growth in 2014 will be rapid enough to create more jobs than required for new entrants into the labor force. At the very least, the huge number (roughly 22 million) of those who want a full-time job and have been unable to find one should fall.

But we should curb our euphoria. A disproportionate share of the jobs now being created are low-paying – so much so that median incomes (those in the middle) continue to decline. For most Americans, there is no recovery, with 95% of the gains going to the top 1%.

Even before the recession, American-style capitalism was not working for a large share of the population. The recession only made its rough edges more apparent. Median income (adjusted for inflation) is still lower than it was in 1989, almost a quarter-century ago; and median income for males is lower than it was four decades ago.

America’s new problem is long-term unemployment, which affects nearly 40% of those without jobs, compounded by one of the poorest unemployment-insurance systems among advanced countries, with benefits normally expiring after 26 weeks. During downturns, the US Congress extends these benefits, recognizing that individuals are unemployed not because they are not looking for work, but because there are no jobs. But now congressional Republicans are refusing to adapt the unemployment system to this reality; as Congress went into recess for the holidays, it gave the long-term unemployed the equivalent of a pink slip: as 2014 begins, the roughly 1.3 million Americans who lost their unemployment benefits at the end of December have been left to their own devices. Happy New Year.

Meanwhile, a major reason that the US unemployment rate is currently as low as it is, is that so many people have dropped out of the labor force. Labor-force participation is at levels not seen in more than three decades. Some say that this largely reflects demographics: an increasing share of the working-age population is over 50, and labor-force participation has always been lower among this group than among younger cohorts.

But this simply recasts the problem: the US economy has never been good at retraining workers. American workers are treated like disposable commodities, tossed aside if and when they cannot keep up with changes in technology and the marketplace. The difference now is that these workers are no longer a small fraction of the population.

None of this is inevitable. It is the result of bad economic policy and even worse social policy, which waste the country’s most valuable resource – its human talent – and cause immense suffering for affected individuals and their families. They want to work, but the US economic system is failing them.

So, with Europe’s Great Malaise continuing in 2014 and the US recovery excluding all but those at the top, count me dismal. On both sides of the Atlantic, market economies are failing to deliver for most citizens. How long can this continue?

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    1. CommentedLuke Ho-Hyung Lee

      I believe the real cause of the current global economic malaise is the lack of appropriate infrastructure in the modern supply chain process (or e-commerce). It is just as if there are no public bridges in the real world.

    2. CommentedPeter Gosnell

      It astonishes me that anyone can be so simplistic as to think the GFC was the product of untrammeled capitalism or free markets gone wild. There would never have been an explosion in the malicious derivatives at the heart of the credit crunch if the political elite - particularly Clinton - hadn't been so to desperate to ensure every non-white American owned their own home. Governments stripped the system of its restraints and seemingly assumed every loan applicant was creditworthy and every mortgage broker honest. Such a degree of irresponsible optimism might be classified as intellectually defective.

    3. CommentedTom Kash

      When more than 90% of financial and economic recovery goes to the top 1%, velocityof money decreases overall. 1% can only spend so much per year, and only selectively and of localized nature. When disposable income does not increase or even decrease for the rest of 99%, US economy which is driven by domestic consumer consumption (approx 70%) will naturally suffer.
      The government need to reinforce the education system from elementary school and up, to university level to ensure that future generations are well educated and can be the engines of future industries.
      Unfortunately, most fundamental unit, the family unit, is unraveling as time progresses. All the government support and help can only do so much, when child's development are so influenced by family core values.
      Will improving economy for everyone at all financial situation improve the social fiber of the nation?

    4. CommentedHerbert Walter

      So what's your solution, professor? More government debt, right? You have the additional problem (that unlike most of your Neo-Keynesian colleagues including L. Summers) you also advocated much higher government spending in the late 1990s when the US economy was overheating. Boost government in the good times and the bad times. I wonder what JM Kyenes would have made of this.

      The reality is that the oil price at the current level is depressing US ANNUAL GDP growth by 1.5% compared to where it was at the level of the oil price in the last recovery 2001-2006. This is a colossal and ongoing supply-side shock that Neo-Keynesians don't like to talk about. This same factor is even more detrimental to the eurozone because it has virtually no domestic oil supply.

      Under these circumstances, artificially boosting aggregate demand is exactly the wrong thing to do. Only structural improvements in the economy have the potential to solve this problem.

    5. CommentedEugene Devany

      "median income for males is lower than it was four decades ago" Women have regained all the jobs they lost during the recession while men have regained just 75 percent.
      Is this reverse discrimination?

    6. CommentedProcyon Mukherjee

      "Advanced malaise", which could also be coined as the "recovery of the top", is the saga of exclusion, which dominates the progressive agenda is a faded reminder of the limits of what a public policy entrenched in narrow private gains could be muddled publicly; the public on the contrary are privately uninitiated in the areas of discourse where the benefits of finance leaves the majority impoverished, while the rhetoric of ambition and hope for individuals to circumvent all odds to become rich becomes a tom-tom.

    7. CommentedArthur Namu

      Matthew 26 :11 'the poor will always be with you..' Cannot be taken literally. The current development and political model that has failed must be addressed by people like you and also, lesser mortals, like me.

    8. CommentedArthur Namu

      On Prof. Stieglitz "advanced Malaise.
      It saddens me that distinguished economists like Stieglitz are reduced to writing dirges on the state of the world economy instead of offering solutions. There is no doubt the present, built on a faulty past, is not delivering for the poor. It cannot be that the poor will always be with us.

    9. CommentedMichael Cohen

      It appears the oligarchs that run the economy and have at least achieved a veto power over government action through their control of the Republican Party are not willing to allow workers to share in the productivity of the economy. This leaves too many of us out of work or flipping burgers for minimum wage.

      Perhaps it is time to do what the British did in their age of empire; Soak up the extra labor by creating a class of servants. This way, the excess workers among the lower 90 percent could get out of the gutters and into respectable homes with a modicum of self respect and three squares a day.

    10. CommentedPer Kurowski

      Get it Stiglitz, As long as by force of regulations banks are made to favor “the safe”, and discriminate against “the risky”, they will fail to deliver to all citizens.

    11. CommentedLennart fredrikson

      I pick up last sentence in article"How long can this continue?"Mean recovery for the REAL Economy not just inflating BANKS balance sheets. Focus on Eurozone forst: Impact coming events: 1. Karlsruhe verdict in February on ECB OMT program. 2. Outcome coming EU parlament elections in May with posible Sharp increaqse Anti-EU parties representation will threaten attempt for deeper integration on Political agenda.
      3. Greece discussion on needed further Haircuts that Creditors want to delay until 2015.
      US Recovery:
      Underway but present threats due to extreme high DEBT burden and FED future monetary policy. Two DOOM and GLOOM predictions presented by James Rickards arguing for a revised Monetary system as urgent. Harry Dent arguing for triggering of Economic Gravity forcé that will Boost USD and Deleverage Private DEBT. FED QE is just intent to prevent the Tilting of Economy with DOW plummit to 6000 and OIL 10Usd/barrel. Sounds like SCIENCE FICTION but Mr DENT have an impressive record of predicting Financial CRISIS last two decades. Probably nothing of both Scenarios will happen short term just BUSINESS as USUAL until CURTAIN FALLS with lost CONFIDENCE in FIAT MONEY and follow a BIG GLOBAL BUST!
      Quoting Mr DENT: HISTORY shows that all high DEBT lead to DEFLATION not INFLATION the current fear!

    12. Commentedsanjeev verma

      This write-up by a frontrunner thinker and economist is a strong indicator of the fact- a greater acceptability is descending , that State has a central role and calibrated intervention is imperative;it is welcome departure from the arch-type capitalist model ,thought to be infallible , sanctimonious - had been left everything to the vicissitudes of market forces-leaving the weak,dis empowered ,marginalized to fend for themselves.However, a prolonged financial crisis, exposed a vast multitude of population to unemployment,indigence: a food for thought about the relevance and over reliance on this model .I hope the leading economists,in the U.S, would be revisiting ,the efficacy ,potency and utility of the extant economic approach .

    13. CommentedMarc Sargen

      I think the view is truly damaging is the view of investing in Hunan capital. Governments have NEVER invested in human capital. People used to do it for themselves. The simple fact is that few people are really the same tough choices that their parent, grandparents, & great grandparent did to get ahead.
      In the end, I would much rather help a hard working Indian, Romanian, or Nigerian get ahead then worry about an American who doesn't.

        CommentedTom Wood

        You should read about Thomas Jefferson. He created the 1st Public University (Virginia) and public schooling for all. I would think this was a pretty masive investment.

        CommentedJohn Harris

        The proposition by Sargen is ridiculous. What caused the US to leap ahead in the proportion of the population in pursuing higher education? The answer is very simple -- the GI Bill the the 40s and 50s was massive productive investment in human capital. It was an investment that paid off enormously, increased productivity, and decreased inequality.

        CommentedROBERT BAESEMANN

        I think the public universities and junior colleges of the US constitute a massive investment in human capital. Here in California we have the University of California System which is the envy of the world. Governments do invest in human capital.

    14. CommentedTomas Kurian

      And a lot could be improved if only people in power understood some basic macroeconomics, like for example that salaries need supplements in order to gain adequate buying power.
      17.1. Primary & subvenced productivity