Saturday, November 22, 2014

National Drift or Global Mastery

LONDON – As world business leaders gather in Davos, a long-overdue paradigm shift in monetary policy – subordinating the targeting of inflation to the targeting of growth – is slowly taking shape.

In what some call a “reverse Volcker moment,” US Federal Reserve Chairman Ben Bernanke has specified a target of 6.5% unemployment alongside his inflation target; Japan’s new government has proposed a minimum inflation target; and Mark Carney, the next governor of the Bank of England, has argued that “there could not be a more favorable case for nominal GDP targeting.” Meanwhile, China has pledged to double average domestic per capita income by 2020.

Sadly, it has taken four years of gross underestimation of the impact of fiscal austerity and a chronic shortage of demand (with the economy’s supply potential beginning to decline accordingly) for us to agree to target growth – which the G-20 called for in 2009.

So why, with change materializing, is there so little optimism about growth as we enter 2013, and why is there so much talk of a “lost decade”? The answer is that the problem of low growth requires more than a shift in national monetary policies: it also requires an agreement to coordinate global growth – a solution that has not been forthcoming.

Of course, some of the pessimism arises from the weakness of Europe, which has agreed only that the European Central Bank be lender of last resort; and some stems from recognition of the limits of quantitative easing. In part, we are victims of a self-fulfilling pessimism – the view that a debt overhang dooms us to unemployment and stagnation, with nothing to be gained by attempting to use fiscal expansion or monetary innovation to counter it.

But I believe that we have failed to grow faster for a more fundamental reason. Put simply, ten years ago, America could deliver a global recovery. Perhaps ten years from now, Asian consumer spending will fill this void. But today, for the first time in decades, no single economy can drive the global economy forward.

For 150 years, until 2010, the West (America and Europe) was responsible for the majority of global output, manufacturing, trade, investment, and consumption. Now we are in a transitional era, with the rest of the world out-producing, out-manufacturing, out-trading, and out-investing Europe and America – but not yet out-consuming them.

This imbalance means that producers of most goods and services are outside the West, but rely on Western consumers to absorb their output. Until the transition is complete, we depend on each other: no one can succeed alone. But, in the absence of global coordination, the world is stuck in a rut, acting out its own global version of the “prisoner’s dilemma” – a universe in which no major economy can succeed on its own, yet none trusts any other enough to attempt cooperation and coordination.

Nominal-GDP targets may be a necessary way forward, but they are not a sufficient response to slow global growth. Even the boldest of national initiatives may fail – not because targeting economic growth is the wrong approach, but because there is no way to sustain the higher levels of growth that we need without better global coordination. In the absence of a favorable global context, any change in economic policy that is purely national, like employment targeting, will have limited benefits (and may discredit the pursuit of a national employment goal).

So today’s fundamental policy void – yet to be addressed – lies in national governments’ unwillingness to contemplate global leadership. Cynics might argue that this is dysfunctional national decision-making replicated at a global level. But there is a more compelling explanation: nobody will confront pervasive protectionism.

Of course, economic nationalism is obvious in America, with its nervousness about China and hostility to global agreements; but Europe, too, is now witnessing both a wave of anti-immigrant sentiment and rising resistance to helping poorer countries.

Indeed, it is safer for politicians to offer the opposite of a global vision: to renationalize every economic problem and attribute all of them to the mistakes of domestic opponents. So, for four years, budget deficits – which do, of course, have to be addressed by long-term debt-reduction plans – have virtually monopolized economic-policy debate in Europe and America, at the expense of sensible discussions about growth, employment, and trade.

Put crudely, it is more beneficial politically for an opposition politician to claim that his country’s problems are self-induced, caused by domestic profligacy, and have little to do with global financial failures. Citizens would be excused for concluding that the 2008 global financial crisis had nothing to do with a global banking collapse and was entirely caused by a few spendthrift national governments racking up deficits.

As a result, millions of people are unemployed unnecessarily, and millions more face reductions in their living standards. Economics is now global, but politics remains local. Global challenges grow, while the agendas of international summits contract, reinforcing the myth that they are mere talking shops.

But, even as protectionist sentiment frustrates cooperation, there is a global growth deal waiting to be done. It starts from the recognition that large surplus savings and much unused capacity are waiting to be mobilized, and that expanding consumer demand among Asia’s rising middle class holds the key to expansion. Yet China, whose consumers are perfectly able to absorb imports from the West, will remain wary of boosting middle-class demand while it is in fear of losing some of its Western export markets. India’s government wants to open up its economy to Western imports, but the rest of the world is not addressing its fears of over-exposure to global volatility.

Only a coordinated policy response covering all of the G-20 economies can break this vicious cycle of low confidence and slow trade growth. If China could be confident that its export markets will not falter, it could expand domestic consumer demand and take in Western goods. Likewise, if America were confident that it could sell in Asia, Western consumer confidence would rise.

Three years ago, the International Monetary Fund showed that by coordinating the expansion of Asian demand and investment in Western infrastructure, we could mobilize private funds for big private-public partnership projects. Global output would rise 3%, employment would grow by 25-30 million, and 100 million people would escape poverty.

Global economic coordination is no longer a luxury. Winston Churchill’s gibe about the policies of the 1930’s haunts us as well. Governments, Churchill said then, were “resolved to be irresolute, adamant for drift, solid for fluidity, and all-powerful for impotence.” In 2013, it is irresolution, drift, and the resulting impotence that we, too, must address.

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    1. CommentedKathy Holland

      Actually, Gordon, I see the debt overhang as one of the areas of growth potential. If done properly we can bring unemployment under control and experience financial discoveries in the process. Is there any other way to do this without fiscal expansion? I mean really how does one drive a vehicle with a V12 engine but only 6 are working?

      Targeting and coordinating growth cooperatively are promising steps towards our global vision.

      Excellent article.

    2. CommentedJohn Nugée

      With the rise of the emerging market economies, the world is a less homogenous place than it was, with no one dominant ideology (China’s version of capitalism – run by the state for the state – is materially different and leads to a significantly different policy mix), and a less ordered and consensual place, because more countries have the economic might to expect that their concerns over how the global economy is run will be given due consideration. This leads to more variety in policy responses, and less uniformity and adherence to a standard orthodoxy, and results in the more complex world financial system we now have.

      One consequence of Asia’s emergence is the large increase in reserves as a percentage of world GDP and world trade. Both of these numbers tell the same story, which is of a world that now operates with more cash per unit of activity. In economic terms, that signifies a reduction in financial efficiency – if money is the fuel that drives economic activity, then the world economy now requires more fuel per unit of output.

      This should not be a great surprise, because over the last 20 years the world has moved from a position where global economic activity was dominated by developed (and so presumed efficient) economies, to one where more than 50% of world GDP is now generated by developing (and so presumed less efficient) ones. We know that the Chinese economy is energy-inefficient (literally: it uses much more oil or oil-equivalent to generate a dollar of GDP than the US does), and it is not a great surprise that it is also finance-inefficient.

      Given that we don’t expect any of these trends to change – China is not about to become a smaller part of world GDP and it is not going to become a much more efficient economy overnight – the bigger question is what this means for the global economy going forward. I would suggest there are two main consequences: a global financial system with excess liquidity washing around it will be more difficult to control, and a global economy in which increasingly large parts of it are not subject to the automatic stabilisers of market economics (ie, the Chinese authorities can set their face for longer against market-driven corrections of imbalances) will be subject to larger excesses and sharper reversals. Not a very encouraging outlook.

    3. CommentedRobert Pringle

      As the comments show, Gordon, your article has struck a chord with many observers. But there is a big lacuna in your argument.

      What is missing is something to convince governments, the business community and electorates that the results of a big global stimulus will actually be beneficial, in terms of sustainable growth and employment. Won’t they also splutter out, leaving heightened concern about inflation and even more debt and little real growth?

      Without complementary action, such a Keynesian package could also trigger heightened exchange rate conflicts, as new monetary surges destabilise emerging markets in the search for yield and spark new cross-border currency and asset bubbles.

      The remedy is to strengthen the international monetary system so that it can contain the forces that such a boost would unleash, as explained in

    4. CommentedCarol Maczinsky

      So let's get back to proper regulation and economical governance and sent canon boats to offshore islands and other parasites of the international order.

    5. CommentedTimothy Williamson

      Here's the problem, we're too focussed on minutia. To move forward, to lift up all our peoples, in a hyper-connected world where our interactions with others are accelerating across and beyond traditional borders, then a big vision is needed. See my presentation called, Human complexity-Creating sustainable local growth at

    6. Commentedjracforr jracforr

      Free unrestricted trade which allow nations to create vast trade imbalance is a thing of the past. This is not economic nationalism it is called common sense.Just as we set loss limits in trading on the stock market,so should they be applied to international trade. The US is bankrupt by free trade and China will not expand consumption unless it is guaranteed unlimited access to the US already bankrupt economy !!?? really. Is it any wonder India is skeptical of the present economic system.

    7. CommentedRobert Wolff

      Gordon only missed one point - that for inert money to invest itself in growth requires the prospect of profit with reasonable risk - and the only place that exists is Asia.

      How will the West encourage trillions of dollars on the sidelines to invest in Western growth? Western governments can no longer afford to subsidize profits in the West. The US experienced 2% growth in 2012 with a profit rate of 12% - which means that 10% of corporate profit was subsidized by US Government and US consumer debt. The accumulated debt prohibits further government subsidization of profits.

      Is Prime Minister Gordon suggesting something other than capitalist profit maximization as the cure for world financial ills?

    8. Portrait of Pingfan Hong

      CommentedPingfan Hong

      You can target growth, but what is more importantly is whether you can attain the target through the policy instruments at your disposal.

    9. CommentedAnthony Botsman

      No to any form of global coordination , a contradiction in terms and part of a typical wish list from governments ignoring the need for competitiveness.

      When we see accountability and transparency within the last/only unmeasured 'sector' , ie Government, then and only then will we see a return to healthy, equitable growth.

      Capital and talent will flow to progressively managed economies such as Latvia who 'bit the bullet' and reduced their public servants (but not service) by 30%; others must follow and governments in general accept the need for a 'source and application' transparency as part of their accounting and accountability.
      Tony Botsman

        CommentedTimothy Williamson

        Anthony, there is a way. Actually, it's absolutely imperative that we utilize the connections growing globally regardless of state. Those days are over. Here's the problem, we're too focussed on minutia. To move forward, to lift up all our peoples, in a hyper-connected world where our interactions with others are accelerating across and beyond traditional borders, then a big vision is needed. See my presentation called, Human complexity-Creating sustainable local growth at

    10. CommentedFrank O'Callaghan

      The great change wrought in parallel with globalization was greater inequality. This must be reversed. The poor have paid for the crisis.

    11. CommentedJ St. Clair

      "Asian demand and investment in Western infrastructure"....for income?....."Global output would rise 3%, employment would grow by 25-30 million, and 100 million people would escape poverty"...this is ambiguous...where and which povertied people are we talking about...

    12. CommentedPaul Langford

      Actually if you're a country/company supplying what (say) Chinese and Indian consumers want, growth isn't really an issue (I don't think the board of Volkswagen will be too worried for example).

      The UK of course has long focussed on more established markets. According to an IMF report, income inequality has driven middle/working class indebtedness (and the woeful current account balance). Structural change isn't easy or quick (BoE report), and consumers and government are going to be deleveraging for years (in part because of off balance sheet PFI commitments, though that of course isn't the whole story).

      In short, this article seems more like an appeal for others to grow enough so we can grab onto their coat tails. In the meantime we need to make sensible adjustments (not the short sharp burst of "austerity" kind, though debt will have to decrease) but I suspect also the outlook doesn't look pretty in the UK for quite some time. (That's not to contradict Timothy's message for which perhaps "decarbonisation" in some form could be a grand project - but don't look to the current UK govt to put up any money!)

    13. CommentedTimothy Williamson

      As interactivity and interconnecting grow and accelerate, the need also increase for a long range plan and vision.

    14. CommentedTimothy Williamson

      I've been saying this for some time: our focus has been in the wrong direction - it needs to be forward looking, big, awe-inspiring. see my presentation at.... Here's my newest presentation called "Human Complexity - Creating Sustainable Local Growth" at

    15. Commenteddonna jorgo

      FIRST . i HAVE TO SAY MY RESPECT safe UK (sterlin)from desaster ..
      iam agree in total accapt the last economy will go in luxery ..
      because if we have to remande the global popularity will grow very soon 9b
      and THE IDEOLOGY KENYSE starte to trasist the economy in NOT policy monetary but spend for take back
      Europe is not the only continent have emigrant problem (so this is not exuse)
      'antanagonismo' was and will continue to be strong (because all wanted to survive)
      THANK YOU (sorry for not perfect eng)