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.

—————

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.

—————

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 19^th 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.

1st Quarter 2014 Economic Decline: Not Unique and Not Due to Idiosyncratic Factors

SOURCE ITEMS

Gross domestic product fell at a 2.9 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976.

Jeanna Smialek, U.S. Economy Shrank in First Quarter by Most in Five Years, Bloombert.com, June 25, 2014.

—————

A combination of shrinking business inventories, terrible winter weather and a surprise contraction in health care spending drove the first-quarter decline, which is the worst since the first quarter of 2009, when the economy shrank at a 5.4 percent rate.

…

But the economy was hit by an unlikely combination of negative forces that conspired to turn what seemed set to be another quarter of so-so growth into a considerably more gloomy experience.

Neil Irwin, Economy in First Quarter Was Worse Than Everybody Thought, New York Times, June 25, 2014.

—————

That’s one of the findings in a report published today called “Risky Business,” commissioned by some of America’s top business leaders to put price tags on climate threats. For example, by the end of the century, between $238 billion and $507 billion of existing coastal property in the U.S. will likely be subsumed by rising seas, and crop yields in some breadbasket states may decline as much 70 percent.

Tom Randall, Climate Forecast: A Heat More Deadly Than the U.S. Has Ever Seen, Bloomberg.com, June 24, 2014.

COMMENTS

Economists and other experts continue to describe economic bad news as temporary and to predict a return to “normal”. This is wishful thinking. The world we once knew is now on its head: frequent encounters with combinations of economic growth stopping events is the new normal.

Extreme weather is not temporary: we are well into a new weather world that is changing everything about what can be expected for growth in the world economy.
Reduced health care spending is not a surprise: any way you cut it, in the U.S. a huge part of health spending is funded by the federal government; cut federal spending and you cut health care spending.
Declining consumer spending is not temporary: consumer incomes have been stagnant or falling for decades, the labor force participation rate has been falling for decades, and neither trends in union membership nor trends in government wage protection and employment policies suggest that wages will rise and labor force participation will rise.
Geopolitical upheavals like the current insurgency in Iraq are here to stay: rising income and wealth inequalities have produced a world filled with hundreds of millions of people who are big losers; they are all looking for ways to reverse their fortunes.

Why are Americans Stumped about the Economy? Nonsense for Analysis

SOURCE ITEMS

Some Federal Reserve policy makers are citing the lowest inflation rate in at least five decades as an alarm bell for the economy. Economists at UBS Securities LLC say the figure isn’t as troubling as it appears. … Among the reasons for slowing inflation are improved efficiency and a stronger dollar, which puts downward pressure on prices of imported goods such as cars and clothing.

“If anything, the price softening is helping to support demand,” and the dollar is set to rise further, said Coffin [an economist at UBS Securities]. … “Households are getting a little bit more purchasing power out of their income growth.”

Michelle Jamrisko, Inflation at 53-Year Low Belies U.S. Demand Vigor: Economy, Bloomberg, June 12, 2013.

COMMENTS

If a stronger dollar means you can buy more T-shirts from Bangladesh, then the manufacturing job growth will be there not here. Just as importantly, who says you are going to buy another T-shirt or a new Toyota with money saved because a stronger dollar creates lower real prices. Maybe you just might bank the extra money or buy a couple more GM stocks. What happens to demand growth in that case?

Then, there is the other side of the stronger dollar. While American consumers can buy more T-shirts from Bangladesh with the same wages, the factory owners in Bangladesh have to pay higher real prices for the American parts to keep their sewing machines running. Maybe they turn to China or Brazil for those parts. Quite logically, any demand growth at home can easily be offset by losses in demand from abroad.

(Of course, most economists either work for global corporations and investors or support their agendas. Global corporations and investors don’t care where the demand is rising and where it is falling or where jobs are being created or being destroyed. Unlike you and me, they are not tied to a particular nation or a particular city or a particular family, so their fortunes do not rise and fall in connection with a particular place or a particular group of people.)

The key point is that supply and demand functions are global. To write about supply and demand in nation terms is misguided and misguides readers. The U.S. has to export goods and services to pay for the things we import — although we are now wedded to a way of life in which we buy goods and services made in other countries on credit and then pay our debts by selling ownership of our tangible wealth to global investors in those other countries.

Debt supported buying has obscured the loss of wealth in the U.S. But, only in the short term can debt do this. Sooner or later a transfer of real wealth has to take place to clear the debt — then the loss that occurred a decade ago is finally seen for what it is. (It may well be that one part of the value of the foreclosed home down the street from you now belongs to an Asian investor and the other part belongs to a Swiss investor.)

In a world economy, what matters for the working people in the U.S. and for working people everywhere else in the world is the structure of global investment decisions that give life to the relationship between global supply and global demand. Globally, there are now too many businesses and not enough buyers, and tracking the ebbs and flows of demand within the U.S. obscures the far greater power of this global reality over our working lives.

The Annual Season of Spending Is Routinely Misinterpreted by Economists and Financial Experts, Creating Cycles of Hope and Disappointment

SOURCE ITEMS

The Employment Situation for January 2013 News Release (PDF Version), Bureau of Labor Statistics, February 1, 2013.

—————

U.S. Bureau of Economic Analysis, January 20, 2013.

—————

Despite a moderate pick-up in output growth expected for 2013–14, the unemployment rate is set to increase again and the number of unemployed worldwide is projected to rise by 5.1 million in 2013, to more than 202 million in 2013 and by another 3 million in 2014.

Executive Summary, Global Employment Trends 2013, International Labour Organization, January 2013.

—————

As the global economy has gone from crisis to crisis in recent years, the cure has become part of the disease. In an era of zero interest rates and quantitative easing, macroeconomic policy has become unhinged from a tough post-crisis reality. Untested medicine is being used to treat the wrong ailment – and the chronically ill patient continues to be neglected.

Stephen S. Roach, Macro Malpractice, Project Syndicate, Sep. 30, 2012.

—————

The euro-area recession deepened more than economists forecast with the worst performance in almost four years as the region’s three biggest economies suffered slumping output.

…

The European data chimed with statistics in Japan, where the economy unexpectedly shrank last quarter as falling exports and a business investment slump outweighed improved consumption. GDP fell an annualized 0.4 percent, following a 3.8 percent fall in the previous quarter.

Marcus Bensasson, Euro-Area Economy Shrinks Most Since Depths of Recession, Bloomberg, February 14, 2013.

COMMENTS

Every year a spate of optimistic stories about the recovery from The Great Recession pour into American homes, offices and automobiles, as businesses and consumers rev up for the annual Season of Spending (and Hopeful Signs). This season begins with the returns to school in August and September and ends with the post-holiday sales in early January.

Soon after the Season of Spending ends, the optimistic stories begin to disappear as the economists and financial experts to whom writers and commentators in the media turn for information begin to grudgingly acknowledge that all is not well, after all, in the land of beautiful spending. The Season of Spending fades into memory and the artificially pumped up optimism of American business owners and consumers gives way to disappointment.

The annual cycle of positive and negative economic news is real, as the charts of over-the-month employment changes and quarter-to-quarter real growth in GDP illustrate[1]. But, the annual cycle of hope and disappointment is manufactured by influential economists and financial experts who either willfully ignore the flat trend line that cuts through the multi-year cyclical pattern, or worse, aren’t even aware of it. Ignore the underlying trend line and every fall time spending spree becomes a new “morning in America.”

Instead of pumping up optimism each fall on the basis of positive economic signals that are demonstrably temporary, economists and financial experts should be pointing out that job growth is not accelerating and explaining why the level of job creation remains well below the level needed to restore full employment and grow incomes. The trouble is, they can’t explain the trend line because it doesn’t make sense in traditional nation-centric models of employment growth.

The cyclical pattern of employment change in the U.S. is influenced by domestic spending, but the trend line around which U.S. employment change fluctuates is greatly influenced by world economic factors. U.S. employment trends are a subset of global employment trends, which are embedded in global economic processes, investment trends, and spending trends.

The world economy is limping along and recent reports strongly indicate that little improvement will take place over the next couple of years. GDP growth will be too slow to generate adequate employment growth, so unemployment and underemployment will rise. In this context it is wishful thinking to suppose that this spring will not bring another round of disappointment about job and income growth in the U.S.

[1] This pattern makes sense given the seasonal pattern of spending by Americans. The most difficult to resist pressures to spend are concentrated in the last five months of the year, the Season of Spending. Parents have to pay school fees and buy backpacks, computers, new clothes, and even cars for their children. During the holiday season, which follows close on the back to school season, spending increases because we all face powerful pressures from family and friends and advertisers, and because many of us have postponed optional spending until the holidays give us dispensation to empty out savings accounts and haul out the credit cards.

More Evidence That Global Policy Making is the Only Path to Job and Income Growth

SOURCE ITEMS FOR YOUR CONSIDERATION

The size and composition of spillovers across countries is one of the many issues that have resurfaced in the wake of the Great Recession. It is now apparent that events in some countries can have profound spillovers elsewhere which are not limited to their immediate neighbors but can ricochet around the globe.

…

Although progress is being made, the financial sectors in large macroeconomic models are poorly developed and, at an even more basic level, there are no strong theories as to why financial markets are as closely linked as they appear to be in the data.

…

The structure of a typical large macroeconomic model generates low correlations of output, bond yields, and (where modeled) equity prices across countries. This does not correspond to the high correlations actually seen in the data. Imposing these financial market correlations produces estimated output spillovers that are much closer to those seen in the data, but we lack a comprehensive model explaining why these international asset price correlations are so high.

Bayoumi, Tamim ; Vitek, Francis, Macroeconomic Model Spillovers and Their Discontents, Working Paper, International Monetary Fund, January 2013.

COMMENTS

In other words, most economists are holding us back, not leading us forward.

Nations are more economically interconnected that most economists admit. Really, we live in one world economy, not a world of national economies, and the scope of policy making must match the scope of the economy. Otherwise, we will keep getting the terrible job and income growth consequences and the associated domestic and geopolitical turmoil we have been getting.

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.

__________

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.

The Transition To A Clean And Sustainable World Economy Will Change Job Descriptions, But It Will Not Increase Global Job And Income Growth

CONSIDER THE FOLLOWING ITEMS

“While there are conflicting views about whether any changes in total employment would be positive or negative, there are likely to be quite significant impacts in terms of shifting employment patterns between sectors as economic development shifts from “brown” to “green” economic sectors.”

Green Growth Studies: Energy, Preliminary Version, Organization for Economic Cooperation and Development (OECD), 2011.

—————

“Across the range of issues to be addressed, policy initiatives should be designed in terms of: cost-effectiveness, adoption and compliance incentives, and ability to cope with uncertainty and provide a clear and credible signal to investors.”

Towards Green Growth, Organization for Economic Cooperation and Development (OECD), 2011.

—————

“Many countries are using a menu of policy incentives instead of a single policy approach. Policy makers realize that these incentives need to be coherent, stable and designed for the long-term to be able to attract the necessary funds for robust deployment and strong markets that ultimately will reduce the cost of renewable energy.”

Report of the Secretary-General – Promotion of new and renewable sources of energy (Advance unedited copy), UN Department of Economic and Social Affairs, Division for Sustainable Development, August 15, 2011.

COMMENTS

Global job and income growth are in trouble whether the world makes the transition to a cleaner and more sustainable economy slowly or quickly. If the transition is done slowly the world will suffer large job and income losses due to the negative impact of environmental pressures on economic growth. Losses will also occur because of a poorly designed “green” investment strategy.

If the transition is done quickly, job and income losses due to environmental pressures will be reduced, but more losses will be caused by the “green” investment strategy itself.

The current strategy for transitioning to a clean and sustainable global economy relies heavily on market competition and traditional governmental policy tools to put downward pressures on the costs of producing cleaner energy and to motivate business enterprises to create alternatives to resources that are being depleted. Thus, the current strategy leaves the institutional forces that are slowly eroding global employment and income levels in tact.

At the core of those institutional forces are the scope and intensity of competition among business enterprises and governments. Global scale communications, trade agreements, investment flows, and commodity flows now bring many more investors and business enterprises virtually face to face in the same markets.

Faced with many more competitors, business enterprises invest heavily in finding ways to reduce labor costs. Moreover, governments abet these efforts by helping their domestic business enterprises with policy structures and financial subsidies that encourage investments in machines rather than workers. In this economic environment, job destruction and wage reductions in some sectors and regions of the world economy generally outpace job creation and wage growth in other sectors and regions of the world economy.

An accelerated “green” transition will exacerbate the gaps between job creation and job destruction, wage growth and wage decline. It will shift more investment funds to the energy sector, which is very machine and technology intensive. More investment funds will also go to enterprises engaged in the development and production of resource alternatives, enterprises that tend to be more highly automated and employ fewer workers that the enterprises they replace. The net result will be a further decline in global demand for workers and lower wages.

The transition to a clean and sustainable world economy can be done without harm to employment and income growth, but only by simultaneously reducing system wide downward pressures on job and income growth. This can be done by making increased governmental management of global market forces and the increased use of governmental employment and income programs (to supplement private sector employment and compensation levels) components of the “green” transition strategy.

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: