The Danger in Today’s Good Economic News

Jan 11, 2018 Kemal Derviş , Zia Qureshi

Failure to stem the rise of inequality will fuel social tensions and already-resurgent nationalism, producing disruptions that will ultimately lead to losses for everyone. That is why today’s good growth news may not be as promising as many believe.

WASHINGTON, DC – As 2018 begins, things are looking up for the global economy. Over the last six months, growth projections by official institutions like the International Monetary Fund, matched or even exceeded by private forecasts, have been adjusted upward. But not all of the news is good.

To be sure, there are plenty of positive indicators to inspire optimism. The eurozone Purchasing Managers’ Index for manufacturing hit an all-time high last month, and even Greece’s economy is finally growing. In the United States, growth now appears likely to exceed the IMF’s October prediction of 2.3% for 2018.

In the emerging world, China seems to have staved off the risk of a sharp slowdown: while its economy is no longer achieving double-digit growth, its increased size implies that, in absolute terms, today’s 7% annual rate exceeds the 10% rates of the past. Turkey, for its part, posted 11% growth in the third quarter of 2017. Even Brazil, which experienced negative growth in 2016, is likely to exceed the IMF’s forecast of 1.5% growth in 2018.

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Kemal Derviş

Writing for PS since 2003
109 Commentaries

Kemal Derviş, a former minister of economic affairs of Turkey and administrator for the United Nations Development Programme, is a senior fellow at the Brookings Institution.

Zia Qureshi

Writing for PS since 2015
6 Commentaries

Zia Qureshi, a former director of development economics at the World Bank, is a non-resident senior fellow at the Brookings Institution.

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0 Comments on this paragraph, 14 in all 14 Comments on this article

Robert Goldschmidt Mar 27, 2018

The "good news" depends on the statistic you hang your hat on. Personally, I believe that the Dow Jones and Unemployment Rate are poor indicators of the economic stress on working (or would be working) families. I much prefer the labor participation rate of 25-54 yr old males which has fallen from 85% in 1948 to 70% today. Most people are shocked to learn that despite the low headline unemployment rate, twice the percentage of working age males, 30% vs 15%, are not working.

Even more important is the measure of the ability of the working class to purchase the fruits of their labor. This is measured by the ratio of total wages to GDP and has fallen from 50% to 43% since 1972. Seven percent may not seem like a significant drop until you realize that it is well in excess of $1 trillion/yr and corresponds to a shortfall of over $1,000/month for every full time employee. Most of that shortfall shows up as increased corporate earnings as a percentage of sales which is artificially and unsustainably driving up the price of stocks.

The latest tax cut created a shortfall of $1.5 trillion which will ultimately be paid for by working families. A trillion dollars of this is spread out over 10 years as increased earnings after taxes for corporations which has pumped their stock value to even higher and more unsustainable levels. This while they capitulate on growth and buy back their stock to prop up its value with their abnormally high earnings.
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Marla Bryant Jan 18, 2018

This is a good article. The bottom line is that you only have democracy where there is relative equality between citizens. All the international trade in the world won't give you a democratic state if most of the wealth goes to government officials or their wealthy benefactors. Citizens will rise up and to keep the peace governments must stifle press freedom and use their own propaganda to blame foreign forces or minorities. The governments encourage nationalism and then equate their government policies with supporting that nationalism.
We see this occurring now in Turkey, Hungary, Poland and the United States of America. We only have to look at Nazi Germany to see where this can lead.

Democratic governments know this and enact policies to strengthen equality with their borders.
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Scott Paterson Jan 15, 2018

What a quaint little article about the obvious. GDP analysis is something that the paid press does to justify their butt truffle proximation to power. Can we please move beyond this?

By way of which I mean can we not rely on the modern tools that Thomas Pikkety and others give us? Can't we just begin with the concept of class struggle as the basis of the new economy instead of leaving the concept unprotected like an open wound only to be infected with racism, nationalism and similar putrefaction. Division is the way of Capitalism as a justification for giving all to few.

Before I begin to glaze your eyes with Pikkety let me assure you that I am pro -capitalism to a point, let's say the first million dollars that a family earns or let's say for the sake of argument the first half-million in a savings account in a world where where the concept of individual saving accounts is promoted through legislation. It could happen! So some little mouse with his trump filter turned up to maximum setting is not going to scare you away from the meme of social democracy by calling me a name or bring up images of Stalin and Gulags to poo - poo the new solutions that are offered to solve the glaring shortcomings of Capitalism in the twenty-first century.

Whew, now the fun part: Let's talk about Capital in the Twenty-first Century by Thomas Pikkety. In the tome the French economist puts forth some immutable laws of capital, among other things. These become more meaningful tools than GDP forecasting or stock market analysis relied on by Dervis and Qureshi. I liked the article but I wonder what the authors are really offering us as far as new thinking. Pikkety offers the concept of national income as an alternative to GDP: think of the measurement of gross national product; it doesn't account for wages paid, distributions to stockholders, costs of borrowing money, or the expense of replacing the mechanisms of production. GDP is analogous to what our American President says he's worth.

National income subtracts the costs of capitalization from the GDP figures in exactly the same way capitalists have been doing on their taxes forever. This is cool because now we can use tax records to do a realistic assessment of capital flow as opposed to some voodoo alternative Marxian analysis or Balzac's theory that lack specific parameter. Economists! Always wanting to talk about their Balzac's.

Pikkety provides a plethora of charts and analyses that indicate the disparity of income - the danger in good economic news - between the haves and have nots has been this bad before: just before WW I, WW II and the Belle Epoch (Americans, think of Napoleon). Ooh! capitalism culls through war. How convenient!

Think of national income as the income that is reported by the President on his IRS forms only more accessible - come on, someone somewhere knows what it is. Pikkety calls this alpha and tells us it equals r times beta, where r is the rate of return on capital investment and beta is capital divided by the income ratio or in other words the measure of capital assets divided by national income.

So the First Fundamental Law of Capital is a = r x b. If I knew how to bring up Greek letters in webpages. It's utility and relevance is that when the rate of return on capital investment is greater than the growth of the economy ( r > g ) thats when disparity in income increases.

Almost done, glazed ones.

Pikketey's Second Fundamental Law, beta equals sigma divided by g ( b = s/g ) ( sort of ) tells us that the capital / income ratio beta equals the savings rate sigma divided by the growth of the economy. It makes more sense if you do the math and state that the growth of the national economy equals the savings rate divided by the capital / income ratio. ( g= s / b ).

Here are your non voodoo tools to improve the economy of your country, Nigel, not a call for nationalism and the fascist baggage associated with it. Promote individual savings accounts, sovereign wealth funds like Norway uses. If capital has concentrated into the hands of a few, tax and redistribute the riches into savings accounts of the poor. Render unto Caesar etc. Last I looked our currency does not bear the likeness of a Rupert or Sumner though I do confess your queen is looking more like George Washington every year.
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nigel southway Jan 15, 2018

It’s clear that the global thinkers still don't get it.... the problem is not threats to globalism, but its globalism itself that is the problem…. It’s a failed model.

Global Trade has increased by 8 times since 1980 but GDP in most cases has flatlined in real terms… A very ineffective prosperity model and a very unsustainable trading solution in terms of wealth transfer and pollution in all forms.

A return to more nationalistic trade blocs with balanced trade including the strict control of capital flow is what is needed.

Stop this hand waving about improving global level controls with international organizations…. Enough of that as it does not work…. the working model of control is a nation with strong borders in all forms.....

got to get the wheels back on that national economic model... stop treating populism and nationalism as the threat…… It’s the only hope.
- Scott Paterson Jan 15, 2018
  
  Nationalism, that old dinosaur, sounds like something Nigel Farage would say.
  - nigel southway Jan 15, 2018
    
    well.... something more toward the Bretton woods formula... anythings better than what we now have.
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- Steve Hurst Jan 15, 2018
  
  Nigel. The intrinsic problem with globalisation is activity and profits are global but liabilities are national. There is no mechanism that can provide 100% global regulation so the problem is perpetual
  - Scott Paterson Jan 15, 2018
    
    Are you saying Capitalism is more powerful than nations? Do you believe in magic, too? We simply use those supercomputers that record our every conversation and keystroke at the NSA to do the same with all tangible and non-tangible transactions and we levy a tax. You're not a citizen? If you do business in the country you pay taxes like a citizen. Let's not be martyrs by throwing up our hands and saying nothing worked in the past therefore nothing will work in the future, Steve. This is a wonderful time to be alive at the logical limits to capitalism because we get to usher in a lasting and equitable system to replace it.
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  - nigel southway Jan 15, 2018
    
    I 100% agree... That's why it does not work as I have said.... The national governments need to take the lead rather than let things just happen..
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j. von Hettlingen Jan 15, 2018

Kemal Derviş and Zia Qureshi say corporate and political leaders should not be carried away by the current good economic tidings - stock markets have been hitting record levels - and kick the can down the road on making changes that are needed to "create truly inclusive economies."
For the first time since the 2008 financial crisis growth is operating at its full potential - according to the World Bank. The authors say, "as the growth pessimism of recent years fades, some of the warnings that have been made in recent years seem to have become outdated." Indeed, there is fear that the upswing may be short term, while gains in improving living standards and reducing poverty levels may not sustain.
Observers argued that the US economy was "bound to slow down, because today’s technological innovations would not boost growth to the extent they had in the past." Former treasury secretary Larry Summers warned against "sliding toward 'secular stagnation', because the interest rate needed to bring desired investment in line with desired savings was below zero." The phrase “secular stagnation” was coined in 1938 by the economist, Alvin Hansen. Despite a recovery from the great depression in the early 1930s, there was a relapse in 1937. Pessimism about the future was as widespread then as it is now.
The authors say debt levels are "potential causes for concern." As interest rates around the world stay near zero, it has encouraged households, businesses and governments to borrow. Global debt levels in relation to GDP have gone up, raising financial stability risks. So "nominal interest rates are set to climb from their current historic lows." This will hit the developing countries hardest, as they struggle with the double whammy of lower commodity prices and higher costs for repaying the debts, due to a stronger dollar. But, "given low inflation, there is little reason to expect interest rates to rise sharply, and gradual monetary-policy normalization would not necessarily have negative effects on growth or inflation."
The question is whether the world economy will have the capacity to sustain decent growth beyond the current recovery. Experts say it does not have potential to grow as it used to, due to years of lacklustre improvements in productivity, weak investment and an ageing workforce. In fact the "current boom seems to be demand-led, with private consumption being the biggest driver, though private investment, too, is finally starting to rise." In the long run growth slowdown is expected to persist, affecting countries that together account for two thirds of global economy.
The authors point out that inequality within countries rather than between countries is on the rise. Each individual country shows "different levels of inequality......with income and wealth increasingly concentrated at the very top." Despite rapid growth a country's "political and social woes, including the rise of populism and nationalism" will not go away, if only the elites emerge as winners, leaving the rest of the population worse off.
In order to reduce inequality and eliminate poverty through an inclusive economy, there must be "broad-based access to affordable and quality education, including skills upgrading and retraining." The author explains the impact of taxation on inequality: "ensuring that pre-tax incomes rise in a more inclusive fashion and strengthening the equalizing role of taxes and transfers." A fair society can be reality if "tax-base erosion" could be limited by means of "regulatory frameworks".
As our world has become interconnected, "global approaches" are required to address the issues that concern "international trade, investment, competition, and intellectual property rights." A rules-based system will guarantee "greater inclusiveness." Failure to deliver "would stoke social tensions and fuel already-resurgent nationalism, producing disruptions that would ultimately lead to losses for everyone." Hence it is imperative that leaders do not let the good economic performance to "weaken" their will to promote inclusive growth that benefits everybody.
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Elizabeth Pula Jan 13, 2018

Check the real agency and departmental money flow in US operations. The attached link not only addresses media differentials of higher and lower orders, but also some interesting details on budgets and expenses that actually affect the US economy, whether any of US want to acknowledge the reality of anything. There has been no effective real policy and budget constraints that mean anything for over 40 years.
The operational budgets, especially, in the US, if not worldwide, have no real bottomline, public access information available to the public. There is NO EXCUSE for the situation. The nation, and in fact all nations, have had access to principles and software applications to guarantee efficient and accountable operations for over 40 years. Project2 in the 80's, Oracle, SAP, and many others. Absolutely no excuse.
Just a minimal sample, that does not reveal any of the whole picture as to WHY there may be societal disruptions.
https://www.strategic-culture.org/news/2018/01/12/real-news-we-ignore-our-peril.html
- Steve Hurst Jan 15, 2018
  
  Elizabeth, Re your link - The 50% overhead in this sort of project implementation is not that unusual nor particularly inefficient per se
  - Elizabeth Pula Jan 15, 2018
    
    That may be past not unusual "best practices". BUT, how many companies would survive with that kind of overhead etc..? AND, there is no easy access of bottom- line department costs for even state legislators to review, let alone the general public. Have you been following any of the DOD info., especially how many "lost" helicopters? Even if, the loss is only bad cross indexing of data, in any kind of true emergency (uh like Hawaii's fiasco) just what would happen to reveal any level of real on-the-ground preparedness options? Like what FEMA planning is really possible? That's even before the evaluation of budgets short or long term by any upper administrative staffing- Hey, if everyone has already been killed, I guess no one has to be concerned Right? A real plan! No policy is the real policy, which is effectively what exists in real terms, fake news or no fake news. DOD hasn't had an effective audit in how many years? Who's gaming who, and where?
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Paul Friesen Jan 12, 2018

Creating an inclusive economy would not be hard, given political will. As economic output is more and more the product of technology - of the knowledge that the human race has built up over the millenia, and less and less the product of labour, we need a different method to distribute its benefits.
A basic income, paid for by a sales tax, would do that. Nobody who produces anything today is really doing it from scratch. They are taking all that knowledge and re-arranging it and perhaps adding just a little bit of new knowledge. It is fair that they get paid for what they contribute, but not for the entire value of what they produce. All that knowledge should belong to everybody, and everybody should get paid for it. Recognizing this would allow us to create a really inclusive economy that can survive into the future, even as artificial intelligence becomes a reality and the need for human labour vanishes completely.
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