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.

Economists at a Crossroads: The Ideology of National Policy Making Sovereignty vs. the Reality of a Global Economy

 SOURCE ITEMS

When Sweden’s Riksbank was founded in 1668, followed by the Bank of England in 1694, the motivation was that a single economy should have a single central bank. Over the next three centuries, as the benefits of instituting a monopoly over money creation became more widely recognized, a slew of central banks were established, one for each politically bounded economy.

What was not anticipated was that globalization would erode these boundaries. As a result, we have returned to a past from which we tried to escape – a single economy, in this case the world, with multiple money-creating authorities.

This is clearly maladaptive, and it explains why the massive injections of liquidity by advanced-country central banks are failing to jump-start economies and create more jobs.

Kaushik Basu (Senior Vice President and Chief Economist of the World Bank and Professor of Economics at Cornell University), Two Policy Prescriptions for the Global Crisis, Project Syndicate, April 23, 2013.

COMMENTS

Since the economic crisis of 2008, most economists have been telling political leaders and their constituents what they want to hear – that national policy making sovereignty is still viable.  (Implement the right policies and your nation will do well no matter what is happening in the rest of the world.)

The time is up for this kind of political expediency.  With more than four years of policy failure now weighing on the world’s political leaders and no promising economic corners in sight, economists can only lose the last of their credibility by continuing to tell policy makers that they are the sole masters of the destinies of their peoples.

The choice for the field of economics is clear: take a chance that some political leaders and some constituencies are ready to acknowledge that national policy making sovereignty is a thing of the past.  That’s the only approach that will save the field of economics from becoming an object of contempt.

See related source items and comments in earlier blog posts:

Accumulating Evidence Shows That the World’s Nation-Centered Economic Policy Making Paradigm is Obsolete, March 21, 2012.

The World Economy’s Demolition Derby of Competing and Overlapping Economic Policy Making Entities, January 22, 2012.

What Happens In Vegas Doesn’t Stay In Vegas: National Policies Have Global Consequences, November 30, 2011.

Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis, September 9, 2011.

The Global Policy Crisis Keeps Growing Because We’ve Never Seen This Kind of World Economic Crisis

ITEMS FOR YOUR CONSIDERATION

But it is no accident that so many of the world’s economies are sputtering at the same time, or that so many people around the globe are angry. … One reason for the synchronized gloom, of course, is the synchronization of the global economy. … Rather, we are all, both together and apart, trying to figure out three big questions. … The first is how nation-states fit into a globalized world economy.

Chrystia Freeland, The three questions of global importance, Reuters, June 21, 2012.

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In an era of globalization, there are no innocent bystanders. There are certainly no oases of prosperity in the face of yet another major shock in the global economy. America’s growth mirage is an important case in point.

Stephen S. Roach, The Great American Mirage, Project Syndicate,  June 27, 2012.

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The possible conclusions are stark. One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more. The only other explanation is that even now, more than three years after the US financial crisis erupted, financial markets’ ability to price relative risks and returns sensibly has been broken at a deep level, leaving them incapable of doing their job …

J. Bradford DeLong, The Perils of Prophecy, Project Syndicate, June 27, 2012.

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If we are to thrive as a global community of almost 10 billion – the projected population by 2050 – these new models are not optional, they are an absolute necessity.

From the Introduction, Outlook on the Global Agenda 2012, World Economic Forum.

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As a world economic crisis developed in 2008 and lasted longer than most economists predicted, it became increasingly clear that beliefs about macroeconomics and macroeconomic policy needed to be thoroughly examined. … By the end of this fascinating conference, we knew that we had entered a brave new world and that the crisis is generating enough questions to fill our research agendas for years to come.

From the Preface: Olivier J. Blanchard, David Romer, A. Michael Spence and Joseph E. Stiglitz, In the Wake of the Crisis: Leading Economists Reassess Economic Policy, MIT Press, 2012.

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We are living in very unusual times,” said Mohamed A. El-Erian, the chief executive of Pimco, the world’s largest bond manager. “History may not be as reliable a guide as it’s been in the past.”

Jeff Sommer, Flights to Safety Can’t Hide the Dangers, New York Times, May 12, 2012.

COMMENTS

A significant number of economists and policy experts have wondered whether this global economic crisis is different – for two reasons: very few experts saw such a severe crisis coming and, even after absorbing that surprise, very few expected the crisis to be so resistant to policy interventions and to persist for so long.

The crisis is different this time – because it is embedded in a confluence of historical developments that the world has never seen before.  It involves the following developments:

  • Global climate change is damaging agricultural, tourism, fishing, and other weather sensitive industries, forcing producers to invest in very costly efforts to move and/or modify productive activities
  • The scale and scope of global production is running up against absolute resource limits, substantially curtailing practices that once were common and allowed market based productive activities to increase at low cost:
    • discovering easy to extract oil, natural gas, and mineral  deposits
    • opening up frontiers (territories not organized under western models of political authority) to invading waves of farmers, miners, loggers, entrepreneurs, and investors
    • adapting to dwindling fish stocks by fishing farther from shore and deeper
    • finding and harvesting virgin forests
    • abandoning aging and polluted cities, rivers and lakes (increasingly costly to maintain) to build newer cities in regions where rivers and lakes are untarnished
  • The centuries long era of incorporating the world’s territories and peoples into the western system of nation-states and coercing and bribing the world’s peasants, tribal peoples, and unpaid family and community workers into labor and consumer markets has come to an end; this has all but eliminated one of the primary ways in which the growth of demand for goods and services generally kept pace with the growth of productive capacity
  • The global spread of advances in productive technology, which entails the substitution of machine energy for human energy and machine thinking for human thinking, is slowing the growth of demand for goods and services by reducing opportunities to gain income through work.

This confluence emerged in recent decades and has permanently damaged the capacity of the world economy to generate the large pulses of consumer demand that historically called forth the productive investment responses that produced pulses of demand for labor.  The pulses of demand for labor increased wages and moved families from the ranks of the poor into the ranks of the middle class.  Over the longer term, more wealth was also pumped into the hands of the people at the top, preparing those people to respond to the next pulse of consumer demand.

Today, there is no mechanism for generating that heartbeat of economic growth.  The confluence of forces has damaged both phases of the cycle.

On the demand side, the first response to the confluence was a massive increase in global debt levels.  Debt growth sustained the growth of demand.  However, debt growth had to come to an end.

Today, with global debt levels very high and with global corporations wielding enormous political power in the world economy, it is not politically feasible to generate a Keynesian pulse of global consumer demand (either by massively expanding global debt levels or by  redistributing a large amount of wealth from the affluent to the have-nots).  But, even if the world economy’s leaders did find a way to generate a large pulse of consumer demand, it would largely fail to restart world economic growth.

On the supply side, the productive investment responses to a large pulse of consumer demand can no longer produce the employment and income gains that they produced in the past.  The ratio of machine energy to human energy in the world economy is so high now that demand for labor would not increase sufficiently to drive up global wage levels to the degree that was the case in the past.  Moreover, and more importantly for the long run, increasing the production of goods and services in the context of a world of resource limits that are becoming more difficult to overcome will drive up consumer prices. Whatever wage gains are realized will be offset by a higher cost of living..

From time to time in the history of the capitalist world economy, its magic has faltered and then been restored. This time the magic will sporadically flicker on for a while here and there in the world economy, but it will not be restored.  Something else will happen.

Multiple Trends Bring Increased Global Economic Instability

Internally Displaced Persons Trend

Data for chart provided by Internal Displacement Monitoring Center (IDMC). See Internal Displacement: Global Overview of Trends and Developments in 2010, March 2011.

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In the broader sense, the biggest question is whether we will be able to feed the world’s population going forward and how much it is going to cost us. Falling yields over the last few decades are raising concerns that current agricultural techniques are nearing their natural limit for productivity.

Global Economic Outlook Q2 2011: Navigating a world of turmoil, Deloitte Research, 2011.

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Disasters and Catastrophes 1970-2010

Chart source: Natural catastrophes and man made disasters in 2010, Swiss Reinsurance Company Ltd

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“The already stressed resource sector will be further complicated and, in most cases, exacerbated by climate change … Technological advances and policy decisions around the world … are likely to determine whether the globe’s temperature ultimately rises more than 2 degree centigrade—the threshold at which effects are thought to be no longer manageable.

For various reasons the US appears better able than most to absorb those shocks, but US fortunes also ride on the strength and resiliency of the entire international system, which we judge to be more fragile and less prepared for the implications of obvious trends like energy security, climate change, and increased conflict, let alone surprises.”

Global Trends 2025: A Transformed World, National Intelligence Council, PDF version, November 2008

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“Since the publication of the April 2011 Global Financial Stability Report (GFSR), financial risks have risen for three reasons … Third, notwithstanding some recent pullback in risk appetite, the prolonged period of low interest rates may push investors into riskier assets in a “search for yield.” This trend has the potential to build financial imbalances for the future, particularly in some emerging markets.

Global Financial Stability Report Market Update, International Monetary Fund,  Updated: June 20, 2011

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Perhaps it is only a coincidence that the number of man-made disasters peaked just before the U.S. financial system went on life support and its troubles kicked off the Great Recession of 2008-09.  Perhaps it’s not.

In a world in which global markets and global investment flows tie each of us to everyone else, anything that happens is likely to bump into and jar everything else. Disruptive weather events, disruptive economic events, transformative investment shifts, and disruptive political events are not unconnected.

Thomas Friedman tells us the world is hot, flat, and crowded.  It is also becoming increasingly susceptible to spasms of destructive instability as global trends more frequently generate destabilizing conjunctures of economically costly events.

The world does not have adequate systems of governance for managing these destabilizing conjunctures, so as the world gets hotter, flatter, and more crowded, the more devastating these spasms of instability will be.