Paradigm Premises and Insights into Stagnating Global Economic Growth

SOURCE ITEMS

Why does political instability afflict Europe and the United States? The answer is that just as the great transformation of the world economy between 1850 and 1890 generated political instability, so too does the globalization of the present era. In addition, the second great transformation of the world economy is larger than the first, and thus, not surprisingly, generates greater churn. … Those countries able to keep unemployment and inequality within bounds will be more stable. The greater the levels of inequality and unemployment, the greater the political instability and the smaller the chance of achieving stable economic growth.

David W. Brady, Globalization and Political Instability, The American Interest, March 8 2016. Accessed March 24, 2016.

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Political instability reduces the likelihood of defining and implementing a reasonably comprehensive, coherent, and sustained economic-policy agenda. The resulting persistence of low growth, high unemployment, and rising inequality fuels continued political instability and fragmentation, which further undermines officials’ capacity to implement effective economic policies.

Michael Spence and David Brady, Economics in a Time of Political Instability, Project Syndicate, March 23, 2016. Accessed March 24, 2016.

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We tend to focus on the problem of the moment — the subprime crisis, the euro crisis, the China slowdown, the oil bust. But surely these events are connected. What threads link them? I’ve been collecting possible story lines for a while now. … Put these all together, and what do you get? A Great Muddle, perhaps. Some stories overlap. At least two of them contradict each other. They don’t all add up to any kind of consistent narrative.

Justin Fox, Eight Story Lines Explain the Global Economic Crisis, BloombergView, March 10, 2016, Accessed March 24, 2016.

COMMENTS

Statements about what can be done and should be done in a particular arena of human activity rest on foundation premises about how that part of our world works. These premises establish a paradigm for gathering and interpreting data about the world. They pull certain things into view and push other things out of view.

Professor Brady says we are in an era of transformation in the world economy.   Everyone knows that things are changing rapidly and in big ways and Brady is far from alone in concluding that a transformation is underway. This is an important development because the term transformation connotes change that reaches past surface phenomena, change that runs deep into the machinery of a system.

Such deep-running change often exposes weaknesses in a paradigm that worked well in the past. This is the case for theories of economic growth.

The field of economics is in turmoil because of the unpredicted crisis of 2008 and the persisting economic growth stagnation. In the search for answers, the paradigmatic premise that humans act rationally is now widely questioned. But, other premises should be getting more attention.

One premise worth questioning is that systemic continuity is a given. This premise is embraced across the fields of economics and politics. It is reflected in two assertions that are widely made and widely accepted.

The first is that this time is really not different. Although a few economists have argued that the financial crisis of 2008 is unusual, the dominant view is that it is not fundamentally different from numerous other financial crises in the history of capitalism. Brady affirms this view by comparing the transformation of the world economy in our time to the transformation in the 19th century. He sees it as more destabilizing, but not fundamentally different. After the transformation has played itself out, life can return to what we call normal.

The second assertion is that government policy interventions can restore world economic growth. In the past, economic growth has stagnated and stalled, but in every case it was sooner or later restored. Now is no different. By adopting the appropriate economic policies, governments can restore economic growth to levels that restore full employment and steadily increase human wealth and well-being.

The concepts of transformation and systemic continuity do not sit together well. This is a telling juxtaposition to which economists should be giving more attention. Perhaps as I have been arguing in this blog, it isn’t bad policies that are limiting global economic growth; perhaps it is existential limits to economic growth that make all policy interventions fall short.

Perhaps economists, including Brady himself, should set aside the premise of continuity and explore all the implications of applying the concept of transformation to our current circumstances.

Today’s Strengths are Tomorrow’s Weaknesses; Today’s New Hires are Tomorrow’s New Unemployed

In an a single world economy with decentralized policy making, stability for a nation’s economy is not achievable.

SOURCE ITEMS

Cutbacks in demand from overseas customers and domestic energy producers led to the weakest growth in new orders since May 2013, prompting U.S. factories to slow the rate of hiring. At the same time, manufacturing is being underpinned by sustained spending from American consumers who are enjoying low prices at the gas pump.

Bloomberg News, Manufacturing in U.S. Expands at Slowest Pace in a Year, Bloomberg, March 2, 2015.

COMMENTS

Back in the Fall of 2014, economists hailed the strong dollar as evidence of a strong U.S. economy and only whispered warnings about the potential for lost foreign demand for U.S. goods. Similarly, they have hailed the shift in consumer spending that low oil prices allow, but only whisper warnings about the resulting job losses in the energy related industries.

Economists completely ignore the fact that a very large proportion of consumer goods that we American’s buy are produced abroad.  This matters because whatever job growth we get from the shifts from buying gasoline and heating oil to buying furniture, electronic goods, and trinkets will mostly be in lower-wage retail, not in higher-wage production. Moreover, when fuel prices begin to rise again, as they will, consumer spending will shift back into heating oil and gasoline, destroying the retail jobs that were so recently created and restoring jobs in energy industries.

Economists tell us that we have entered a period of positive economic trends; they have been doing this almost every year since the financial crisis of 2008. It’s wishful analysis because economic instability and volatility are build into the institutional structure of world economy.  So, if you just got a new job, don’t count on it lasting.

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.

A Gathering Consensus About the Limits to National Economic Policy?

SOURCE ITEMS

Despite the subsequent decision of the Group of 20 in 2009 on the need for rules to supervise what is now a globally integrated financial system, world leaders have spent the last five years in retreat, resorting to unilateral actions that have made a mockery of global coordination. Already, we have forgotten the basic lesson of the crash: Global problems need global solutions. And because we failed to learn from the last crisis, the world’s bankers are carrying us toward the next one.

Gordon Brown, Stumbling Toward the Next Crash, New York Times, Published: December 18, 2013.  (Gordon Brown, a Labour member of the British Parliament, is a former chancellor of the Exchequer and prime minister.)

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Nothing endangers globalization more than the yawning governance gap – the dangerous disparity between the national scope of political accountability and the global nature of markets for goods, capital, and many services – that has opened up in recent decades. When markets transcend national regulation, as with today’s globalization of finance, market failure, instability, and crisis is the result.

Dani Rodrik, National Governments, Global Citizens, Project Syndicate, March 12, 2013.  (Dani Rodrik is Professor of Social Science at the Institute for Advanced Study, Princeton, New Jersey.)

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Around the world, policies, technologies, and extended learning processes have combined to erode barriers to economic interaction among countries. Pick any indicator: trade relative to global GDP, capital flows relative to the global capital stock, and so forth – all are rising.

But economic policies are set at the national level, and, with a few notable exceptions like trade negotiations and the tracking of terrorist funding and money laundering, policymakers set goals with a view to benefiting the domestic economy. And these policies (or policy shifts) are increasingly affecting other economies and the global system, giving rise to what might be called “policy externalities” – that is, consequences that extend outside policymakers’ target environment.

Michael Spence, The Blurry Frontiers of Economic Policy, Project Syndicate, September 19, 2013.  (Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, and Academic Board Chairman of the Fung Global Institute in Hong Kong.)

COMMENTS

In certain quarters of American society, one can find rejoicing over the condition of the U.S. economy.  Just today, the Federal Reserve began its long anticipated tapering of its bond buying program for stimulating the U.S. economy, citing enough economic progress to do so.

Given the quotes above, one has to wonder, however, whether a small change in Fed policy in the U.S. will have much effect one way or the other.   The bond buying program is only one in a global sea of public policy mechanisms that affect the U.S. economy.  And some of those other policy mechanisms are being manipulated by actors in the world economy that are quite powerful – the EU, China, the BRICS nations.

It must also be pointed out that the effects of the Fed’s decisions are not contained by U.S. political borders.  Those consequences are spread across the world economy through the global financial system, and some or many nations will be harmed by those effects.  Actions bring reactions and we do not know whether those reactions will conspire with Fed policy to improve employment and incomes in the U.S. or conspire against Fed policy to further damage employment and income growth in the U.S.

See my Blog Posts under Global Economic Governance for more sources and comments.

Job and Earnings Churning Is Not Job and Earnings Growth

Paul robs Peter, then Peter robs Paul.  Round and round and round.  And we all fall down.

SOURCE ITEMS

At the price of a doubling in unemployment and near-10 percent plunge in labor costs, the so-called peripheral euro nations are reviving manufacturing and trade. In Spain, exports reached a record 222.6 billion euros ($287 billion) in 2012.

Joblessness already tops 25 percent in both Spain and Greece…

Ford Motor Co. (F) (F) said at the end of last year it will increase capacity near Valencia as it shuts plants in the U.K. and Belgium. Peugeot (UG), which is cutting workers in its home market of France, is also lifting output in Spain and Portugal.

Simon Kennedy, Even Greece Exports Rise in Europe’s 11% Jobless Recovery, Bloomberg, March 21, 2013.

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Barely two years ago, Brazil’s rapid economic growth and expanding middle class made it the darling of financial markets …. With slow growth and stalled economic reforms, financial markets were about to write off Mexico as a lost cause.

So Brazil has become the star that disappoints, while Mexico is the underperformer that suddenly shines.

Andres Velasco, A Tale of Two Countries, Project Syndicate, March 14, 2013.

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Mexico’s minimum wage commission set the increase for 2012 at 4.2% for all three of the country’s geographic zones…

The increase brings the minimum wage in Mexico to 62.33 pesos ($4.60) a day for zone A, which includes Mexico City. The minimum wage is slightly lower in other geographic zones.

What is the minimum wage in Mexico?,Maquila Reference website.

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Perry sent letters to 26 gun and ammunition manufacturers earlier this month inviting them to consider a move to Texas if the states they currently operate in impose “restrictive laws” on their industry, according to a copy of the letter and list of the manufacturers provided to ABC News by the governor’s office.

“As you consider your options … you may choose to consider relocating your manufacturing operations to a state that is more business-friendly.  There is no other state that fits the definition of business-friendly like Texas,” Perry wrote, pointing out financial incentives the state offers companies.

Arlette Saenz, Rick Perry Invites Gun Manufacturers to Set Up Shop in Texas, ABC News, February 22, 2013.

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We find that products systematically tend to co-appear, and that product appearances lead to massive disappearance events of existing products in the following years…. This is an empirical validation of the dominance of cascading competitive replacement events on the scale of national economies, i.e. creative destruction.

Peter Klimek, Ricardo Hausmann, and Stefan Thurner, Empirical confirmation of creative destruction from world trade data, arxiv, December 13, 2011.

COMMENTS

A few years back, business was booming in Ireland and experts were hailing it as the land of smart policy.  Then things went south.  Overnight, the land of smart policy became the land of dumb policy.

The problem for the world’s nations isn’t whether a nation adopts smart policy or dumb policy. The problem is that the world economy is a system of trade and competition in which nations, provinces, states, and local governments design and implement policies to steal jobs and earnings from other nations, provinces, states, and local governments.  As a result, there is much less actual job and earnings growth in the world economy and much more inter-territorial migration of jobs and earnings (churning) than is typically claimed by the champions of global capitalism.

This has always been the case, but decades ago this reality was much less visible to Americans and Western Europeans because the churning took place at a much slower pace and the winners and losers were not so intimately connected to each other through global systems of communication and transportation.  Moreover, we were usually winners in the global job churning system, so we had little incentive see the churning.

In the interceding decades, the rate of inter-territorial movement of jobs and earnings has been accelerating.  Global communications and transportation systems have expanded and improved markedly, facilitating ever rising numbers of inter-territorial financial transactions and deal closings. In turn, job and earnings churning has and continues to accelerate.

As the churning accelerates, it is becoming more visible to Americans and Europeans.  One reason is that the same communications and transportation systems that are accelerating churning are also connecting the peoples affected by the churning more closely together.  More importantly, though, Americans and Europeans are now more often finding themselves on the losing side of the churning.  Seeing the churning has become more likely because not seeing the churning only leads to policies that work only over a short period of time that is growing increasingly shorter.

The best policy move for everyone is for the world’s leaders to put an end to global job and earnings churning.  In the U.S. we certainly must put an end to interstate job and earnings churning, or our political gridlock and policy floundering will likely pull us deeper into an accelerating spiral of economic and political disasters. 

Things Come Undone: One Reason Global Economic Troubles Are Becoming Chronic

ITEMS FOR YOUR CONSIDERATION

We humans devise all sorts of methods for obstructing or “damming” the second law [of thermodynamics] for considerable periods of time. A mundane example: We paint iron to prevent it from rusting.

Frank L. Lambert (Professor Emeritus, Chemistry), Entropy Is Simple — If We Avoid The Briar Patches!, Occidental College website, February 2008.

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Our scenario shows that over the coming twenty years the world evolves from being mostly poor to mostly middle class. 2022 marks the first year more people in the world are middle class than poor. By 2030, 5 billion people – nearly two thirds of global population – could be middle class.

Homi Kharas and Geoffrey Gertz, The New Global Middle Class: A Cross-Over from West to East, Wolfensohn Center for Development, Brookings Institution, 2010.

COMMENTS

When we add a new person to the world we create a need to increase the amounts of energy and materials devoted to the production of food, clothing, shelter and other necessities that keep people alive.  We know this almost intuitively.

We are less aware of the fact that every time we add a new item of wealth (social or material) to the world we also create a need to increase the amounts of energy and materials devoted to maintaining our stock of wealth and to replacing items of wealth when they wear out or break.  We know that our cars malfunction and wear out, weeds grow in our gardens, our toys break, and alienated youth vandalize our buildings, but we tend to see these processes and events as personal or local losses, not as losses to our global stock of wealth.

Essentially, the world’s stock of wealth is an enormous and ongoing confrontation with natural forces that work to undo the things that we have done.  The more wealth the world’s people create, the larger and more costly that confrontation becomes.

This means that growing the world’s middle class (a class associated with enormous amounts of personal and social wealth) comes at the cost of devoting more and more of the world’s available energy and resources to repairing and replacing existing items of wealth.  The rates at which energy and materials are produced must continuously increase in order to produce enough to both maintain the existing level of wealth and add new wealth.

The world is finite.  At some point the rates at which energy and materials must be extracted from natural systems just to repair and replace existing items of wealth bump up against the natural and institutional limits to those rates of extraction.  Economic growth (net increases in global wealth) slows and then stops.

The global economic troubles that began with the 2008 financial crisis seem to have become chronic.  Most economists argue that the world economy continues to be troubled because the world’s governments are not pursuing the correct policies.  A few, though, admit to being perplexed by the persistence of the world’s economic troubles.

Perhaps the heart of the problem is that the world is already bumping up against limits.  Perhaps economic policies no longer work as well as they once did because the policy goal (economic growth) is becoming less and less attainable.

And if economic growth is becoming less attainable, so too is the job growth associated with economic growth.

U.S. Job Growth is Becoming Increasingly Vulnerable to Economic Troubles That Develop Almost Anywhere in the World Economy

ITEMS FOR YOUR CONSIDERATION

“’There is a separation between the United States economy and stock prices,’ said Russell Price, a senior economist with Ameriprise Financial. He said in 2008, a lot of the market momentum came from sales growth overseas in emerging markets, and a weaker dollar that helped profits.”

Christine Hauser, S.&P. 500 at Highest Close Since ’08, New York Times, February 24, 2012.

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“Globalization is one factor driving up profit for companies in the United States. According to a March 2011 paper by the Bureau of Economic Analysis, foreign earnings represented 40 percent to 45 percent of total profit between 2008 and 2009, against around 20 percent in the 1980s.”

Martin Hutchinson, U.S. stock bubble is in profit, not value metrics, Reuters Breakingviews, March 5, 2012.

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A recent Standard & Poor’s study found that 50 percent of sales by companies in the S.&P. 500-stock index are outside the United States. Interestingly, the report also found that these companies paid more in foreign taxes than to the United States government. ”

Steven M. Davidoff, Tax Policy Change Would Bring Cash Piles Abroad Back Home, New York Times, August 16, 2011.

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“China’s economic growth may further slow in the first quarter to 8.5 percent, from 8.9 percent in the fourth quarter of 2011, with the potential risks of a sharper global deterioration and a sudden domestic property downturn raising the government’s concerns about policy changes, a senior economist from the State Council’s think tank said on Thursday.”

Chen Jia, Economic growth could slow further, China Daily, March 23, 2012.

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“After a decade in which GDP rose by at least 9% a year, it slipped back to ‘only’ a bit above 8% by the end of last year, according to the OECD. For the next decade, the OECD forecasts annual growth will hover at around 7%.”

Brian Keeley, How Slow Will China Go?,OECD Insights, March 21, 2012.

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The difficulties in the euro area have affected the U.S. economy. … In addition, weaker demand from Europe has slowed growth in other economies, which has also lowered foreign demand for our products.

Ben S. Bernanke, The European Economic and Financial Situation, Testimony Before the Committee on Government Oversight and Reform, U.S. House of Representatives, Washington, D.C., March 21, 2012.

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A main indicator of business sentiment in Europe unexpectedly fell deeper toward recession territory Thursday, compounding concerns about the global recovery after signs of slowing manufacturing in China.

The survey of purchasing managers in the Chinese factory sector, released by HSBC, showed that activity declined in March for the fifth consecutive month, as the Chinese economy felt the pain of feeble global economic activity.

China has become a major market for European products as varied as heavy machinery and luxury goods, so a slowdown there worsens problems in Europe.

Jack Ewing and Bettina Wasserner: Indicators Fall in China and Europe, New York Times, March 22, 2012.

COMMENTS

U.S. job growth is becoming more vulnerable to economic troubles that develop beyond the borders of the U.S. because U.S. corporations increasingly earn their profits in multiple regions of the world economy, perhaps not even primarily in the U.S.  This trend can be expected to continue as high end manufacturing, investments in science and technology, and populations of affluent consumers continue to grow in Brazil, Russia, India, China, South Africa (referred to as BRICS) and spread to more countries.

The global distribution of U.S. corporate profit centers links economic troubles elsewhere in the world economy to U.S. job growth in two ways: through the impact of those troubles on the investment decisions of U.S. corporations and through their impact on incomes of older Americans.

Adverse Impact on Corporate Investments in the U.S.

With their economic interests spread across the world economy, economic troubles outside as well as inside the U.S. reduce the funds U.S. corporations have to invest anywhere.  Wherever economic troubles arise, U.S. corporations are largely free to distribute losses across multiple parts of their worldwide operations in whatever combinations they deem most profitable.

The U.S. is very likely to get a share of investment losses, even those losses that originate outside the U.S.  This is likely for at least two reasons:

  • In recent years rates of return on investments have generally been higher in some of the emerging economies than in the U.S., so U.S. corporations are unlikely to favor the U.S. over all other countries in which they have operations.
  • With an eye to future possibilities, U.S. corporations may even respond to shrinking profits outside the U.S. by shifting funds from the U.S. to economically troubled regions to maintain political favor, increase the productivity of operations in those regions, and/or finance takeovers of weaker competitors.

A reduction in the flow of investments in the U.S. almost necessarily slows job growth.

Adverse Impact on Spending by Older Americans

Economic troubles outside the U.S. can have an adverse impact on spending by all Americans, but the adverse impact on spending by older workers and retirees is particularly direct.  Moreover, the size of the impact is growing as large numbers of baby boomers transition out of the labor force.  (The Pew Research Center estimates that about 10,000 people now turn 65 every day. )

Older Workers.  Older workers see retirement coming, so they are likely to increase investments for retirement.  Those with families are also likely to try to build investments to leave their children.

Increases in investment activities link the spending behavior of older workers directly to economic troubles outside the U.S. because decisions about how much income to invest are influenced by stock market trends.  And those trends are tied to profits earned by U.S. corporations outside the U.S. as well as those earned in the U.S.

To reach a given financial position, higher stock market returns translate into being able to keep more income for spending.  Lower returns translate into having to reduce spending and invest more income.  (In this regard, it is important to note that the majority of older workers are at the highest income plateau they will reach in their working lives, so investment increases must be offset by spending reductions.)

By lowering the rate at which stock values increase, troubles outside the U.S. reduce spending in the U.S. Less spending translates into slower job growth.

Retirees.  The link between economic troubles outside the U.S. and the spending behavior of retirees is even stronger.

Retirement brings a partial or complete shift to sources of income that are quite dependent on trends in corporate profits and stock values – social security, pensions, and government programs that supplement incomes (e.g., Medicare, Medicaid, assistance with food, transportation, and housing costs).  Pensions are directly funded by corporate profits and stock values.  Social Security and other government programs are funded by revenues partly derived from taxes corporate profits and taxes on individual earnings on stock portfolios.

Thus, through their adverse impact on corporate profits and stock values, economic troubles outside the U.S. reduce spending by U.S. retirees and government spending on behalf of retirees.   Slower job growth necessarily follows.

The Longer View

Most economists keep looking for a much needed shift to a sustained high rate of job growth in the U.S.  It probably will not come.

As things now stand, the world economy is chronically unsteady, plagued by sporadic outcroppings of economic troubles (that are mistakenly defined in terms of national boundaries rather than in terms of the world economy).  U.S. job growth is dampened by this global and revolving economic troubles account and will be dampened further as U.S. corporations spread their operations to even more regions of the world economy.

This state of things is more likely than not to continue indefinitely, unless the world’s nations do a much better job of managing the world economy as a whole and the U.S. government does a better job of managing investments in the U.S.