Diverging Nations, U.S. Employment Prospects: A Matter of Interpretation

SOURCE ITEMS

The economy grew at a sizzling 5% annual pace in the third quarter of last year. And more than 1.5 million jobs were created from June to November, the best six-month stretch since 1999-2000.

With that momentum, combined with falling gasoline prices, 2015 is likely to be a good year, notwithstanding Monday’s stock market sell-off.

The Editorial Board, More jobs is not enough: Our view, USA Today, January 5, 2015.

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In the coming year, “divergence” will be a major global economic theme, applying to economic trends, policies, and performance. As the year progresses, these divergences will become increasingly difficult to reconcile, leaving policymakers with a choice: overcome the obstacles that have so far impeded effective action, or risk allowing their economies to be destabilized.

Fortunately, there are ways to ensure that 2015’s divergences do not lead to economic and financial disruptions. Indeed, most governments – particularly in Europe, Japan, and the US – have the tools they need to defuse the rising tensions and, in the process, unleash their economies’ productive potential.

Mohamed A. El-Erian, A Year of Divergence, Project Syndicate, December 8, 2014.

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Taken together, the average 10-year bond yield of the U.S., Japan and Germany has dropped below 1 percent for the first time ever, according to Steven Englander, global head of G-10 foreign-exchange strategy at Citigroup Inc.

That’s not good news. The rock-bottom rates, which fall below zero when inflation is taken into account, show “that investors think we are going nowhere for a long time,” Englander wrote in a report yesterday.

Simon Kennedy, Free Money in Bond Markets Shows Global Economy Still Struggling, Bloomberg, January 6, 2015.

COMMENTS

One can explain the divergence among nations in terms of autonomous national economies in which global economic growth is nothing more than the sum of the growth of national economies. The economic growth divergence among nations is a function of differing national policy approaches, some correct, most incorrect (since most economies are either stagnating or growing well below rates economists deem achievable). If only all nations of the world adopted correct policies, all would be growing in harmony and at a rapid clip.

The alternative is to see what is called the U.S. economy as only a component of the world economy as a whole. The world economy is the only actual economic system and there is only one economic growth rate – the growth rate of the world economy as a whole. National policies have some effect on the global rate of economic growth, but much less effect than is commonly thought. Global parameters (such as resource and ecological limits, transportation bottlenecks, commodity price volatility, climate volatility, and institutional limits to global demand growth) have much more impact.

The economic growth divergence among nations is much less a matter of good and bad national policies than a matter of the impact of the interactions among various and changing national policies on the distribution of global economic growth among the world’s geopolitical population groups.

The interpretative difference is enormously important. The first interpretation suggests that the U.S. rate of growth did not increase in 2014 at the expense of economic growth in Europe, China, Brazil and other nations. It further suggests that the higher U.S. rate of economic growth is sustainable almost regardless of the courses of action taken by other nations (just as long as the U.S correctly modifies its policies in response to those other national courses of action).

The second suggests that a convergence can only take place through an alignment of national policies that produces a different distributional outcome for growth in the world economy. In such a scenario, the growth rates of the U.S. (and China) would have to fall so that the growth rates of the stagnating nations could rise. Given the lack of powerful global political institutions and the very low level of geopolitical cooperation (compared to the high level of economic integration in the world economy), a struggle among nations that is heated and dangerous is the likely scenario for a long time to come.

The implications for U.S. employment are obvious. Job growth in recent months should be seen as precarious. Our policy commitments to market freedom and investor dominance in economic matters puts job creation at the mercy of global economic growth volatility and divergence. At the moment U.S. workers are somewhat on the beneficial side of volatility and divergence. That will almost surely change.