“We meet today during a period of fundamental change in our economy. Our population is growing older. The skills needed in today’s workforce are shifting. Global competition for business and investment is becoming more intense. And technological innovation is happening at a rapid speed. Our core responsibility is to make sure our economy is as vibrant and robust for our children and grandchildren as it was for previous generations.” ~ Jack Lew, June 2014
~ “The euro zone’s deficit reduction, through austerity budgeting, came at an enormous cost in lost economic growth. Having been in a long slump, Europe is now experiencing a pickup. The outlook remains poor, however. The recovery we’re seeing is weak and patchy, especially considering the past major losses of output. With inflation exceptionally low – less than 1 per cent – the only way to be optimistic would be to see strong growth and a pickup in inflation. There is no prospect of that at the moment.” ~ Simon Tilford, April, 2014
~ “Corporations are flush with cash coming off a huge profit cycle. Despite this abundance of cheap money, we’re in the midst of one of the weakest investment cycles ever. Averaged over the past two years, U.S. non-defense capital goods orders have increased by less than half the rate of business investment between 1993 to 1998.” ~ Daniel Rosenberg, October 2013
~ “Some time ago, I and others invoked the idea of secular stagnation, raised the possibility the American and global economies could not rely on normal market mechanisms to assure full employment and strong growth without sustained unconventional policy support.” ~ Larry Summers, Dec. 2013
I just returned last week from Europe, where many folks are openly expressing deep concerns about their economic future. Here in America, similar voices are sounding about our economy and future prosperity. To be sure, we seem to have turned the corner and got through the aftermath of the 2008-09 Great Crash. But for many of us, there remains an uneasy feeling we are not returning to the late 1990s normal of fast growth recovery.
In face of slow, lackluster recovery since 2009, fraught with political turmoil and setbacks, renewed concerns are being raised by top policy-makers about how the American economy and other high-income regions – Europe, Japan – are faring and what this portends for our future prosperity and security. Not without a sigh of relief, policy-makers and economists finally see the US and the world economy picking up in 2014 and growing somewhat faster in 2015-16. But ominously, we have been here, and they thought this, before – in 2012 and 2013. Now, renewed alarm bells have rung out in the past two weeks on both sides of the Atlantic and in Japan:
~ In Europe, Mario Draghi – President of Europe’s Central Bank – last week took quite extraordinary action, for the first time lowering Euro Zone interest rates to negative levels in an effort to stave off deflation. The major concern (echoed in Simon Tilford’s comment above) is that this will be insufficient and Europe will slide into a downward spiral of declining output, employment and investment – posing a major setback to its recovery and to the world economy.
~ In the U.S.A., Treasury Secretary Jack Lew this week gave a widely talked about speech (see above quote) in which he stressed the need for major reform actions to restore the long-term dynamism of the US economy, after years of crisis followed by weak recovery.
~ In Japan, Prime Minister Shinzo Abe’s ‘three arrow’ program to revive the economy appears to be losing momentum. Monetary stimulus alone is proving insufficient. Meanwhile, fiscal cuts combined with a sales tax hike to reduce the country’s huge government debt will slow growth – as politically difficult reforms are once again rejected.
~ The world’s two mega-emerging markets – China and India – are suffering from weaker growth than in past years, and facing structural reform challenges to restore faster growth.
So, at best, we can expect to do slightly better than before and with major challenges ahead. Clearly, significant changes have taken place in the past decade. And they are now catching up with us. How well we tackle them will determine whether we face a more prosperous, vibrant and fulfilled future, or one of greater want and declining affluence.
Key Questions : How did we get to the point we are at today? What were the main drivers of weaker recovery in the near term? What are the deeper seated structural problems our economy – and the world economy – now face ? What needs to be done to head off long-term future stagnation and ensure a brighter, more prosperous future for our children?
Where We Are Now and How We Got There : Broadly speaking, the massive dislocations of the 2008-9 global financial crash and Great Recession have been overcome across advanced economies. All are growing again now, but only slowly – less than three per cent in 2014 in the USA – compared with over five per cent in the late 1990s. Europe and Japan are growing even more slowly – below one and two per cent each in 2014. Highly imbalanced policy approaches have led to weak and faltering recovery. Even in America, to date after five years, employment has only just recovered to its pre-recession level. We have not added any new jobs yet! Weak demand has translated into lower business investment – as Wall Street analyst Daniel Rosenberg points out (see above quote). At least in the USA, by contrast with Europe and Japan, our economy’s output has surpassed pre-Crash level, even though it has remained stubbornly lower than its potential.
Key Drivers of the Weak Recovery : ~ Excessive reliance on loose monetary policy and low interest rates have been insufficient to stimulate greater demand, while government spending has been low or even contracted. In both America and Europe, in face of weak growth and high unemployment, fiscal deficits have been reduced to below normal levels – less than 3 per cent of GDP. In effect, there has been no counter-cyclical fiscal policy to spark public sector-led demand, and public sector employment has contracted. ~ This has led to weak – or declining – investments in public goods – infrastructure, education, skills development, basic research – needed to stimulate long-term productivity. ~ Distorted tax and regulatory policies have favored large corporations over more dynamic, job-creating small businesses. ~ Corporatism has expanded in key economic sectors for growth – notably telecoms in USA – raising business and consumption costs and dampening innovation.
A sad irony is that, through the Great Recession, a massive financial/fiscal transfer occurred : private balance sheets (especially of banks) were restored – ‘bailed out’ – at the cost of massively increased public debt and taxpayer funded bail-outs. Since then, slow growth has added to government debt – to meet social safety net and welfare payments. ~ Declining public investments in education and training have coincided with a major shift in the global economy – where out-sourcing of lower skilled, lower paid jobs to emerging markets actually required a major expansion in these areas.
This has added to rising poverty and inequality in advanced economies – most notably in the USA. Almost 20 % of American adults, and still more children, live in poverty today – a sharp rise since 2008. ~ Already, as Jack Lew noted (see above quote), America – and even more so other advanced nations (Germany, Japan, Italy) face major emerging demographic shifts as their populations are aging. But high unemployment, stagnant wages and increasing poverty are arousing strong political resistance to increased immigration – even while it is vitally needed to maintain growth and government spending on safety nets and public goods.
New Housing Bubbles ? : Against this backdrop, this week the International Monetary Fund (IMF) has warned of growing risks in many advanced economies of new housing bubbles that might spark a repeat of the 2008-09 global financial crash. Excessively loose monetary policy and low interest rates are sparking this situation. In the UK alone, London area housing prices are by now 25 per cent higher than pre-Great Crash peaks! Despite a range of actions taken in America and Europe to tighten financial sector regulation, as the Dallas Fed pointed out in 2011, “too big to fail” is still a significant potential threat to US banking, housing market and economic stability. Meanwhile, Europe’s fledgling Eurozone banking regulation reforms are yet to take effect.
Where Do We Go From Here? : As former U.S. Treasury Secretary Larry Summers has noted (see above quote), echoed by Jack Lew this week, there are mounting concerns that mere continuation of the economic policies pursued to get through the aftermath of the Great Recession is a recipe for prolonged economic (‘secular’) stagnation and declining prosperity in advanced nations.
In face of fundamental and emerging shifts in the world economy and in high-income societies over the past two decades, new policies and approaches are urgently needed : ~ Expanded public spending is needed now focused upon key public goods – education, skills training, infrastructure, basic research – to improve our economy’s long-term productivity and to reduce poverty by creating many more high-skill, high-wage jobs. ~ Contrary to ‘austerity’ policy thinking of recent years aimed at cutting public debt for its own sake, such fiscal stimulus would also help spur stronger sustained economic growth in the next few years. Since interest rates are low, it would come at reduced cost to taxpayers. ~ Rising inequality and poverty in advanced societies – particularly in America – urgently need addressing through proactive programs aimed at lifting a whole generation of poor folks out of poverty. This could include greater support for early childhood education, and for health and nutrition programs needed to make this successful. ~ Tax reform needs to focus upon encouraging employment and innovation through small business start-ups. Lowering the corporate income tax to a uniform low rate – say 12-15% – and replacing the payroll tax with a carbon tax could help jump-start job creation, address climate change and keep more corporate capital from staying off-shore. ~ Far more robust prudential regulation of financial institutions and the housing market is needed to head off imminent future bubbles. Rebalancing of fiscal and monetary policy – giving greater emphasis on the former to stimulate revival of economic growth would help this substantially. ~ A stronger constituency needs to emerge – across all advanced societies – to welcome expanded immigration – needed to ensure a stable and expanding workforce long-term. ~ In some major countries (Europe, India, Japan), labor market reforms – opening up for creation of more high-skilled jobs and to enhance youth employment will be key. ~ Finally, the world needs strong leadership to promote a renewed round of multi-lateral global trade liberalization – to take the place of the proliferation of bilateral deals in recent years that merely divert trade without creating new output and jobs.
Conclusion : Keen observers of the world economy and advanced societies – such as Summers, Lew, Draghi, Tilford, and Rosenberg – all recognize that ‘business as usual’ approaches will not lift us to renewed, more broad-based and share prosperity. However, many are pessimistic about our societies’ political will to change. I, for one, consider it is worth the fight for us all to clamor for such changes now! Let’s not wait any longer, our and our children’s future prosperity are at stake!