The Global Economy’s Groundhog Day

Yves here. I’m quite taken with the use of the Groundhog Day metaphor to characterize economic forecasting in the wake of the global financial crisis. Every year, liftoff is just around the corner, and then it never seems to happen.

The simple explanation is that, as Richard Koo was early to explain, in balance sheet recessions, individuals and companies prioritize getting their balance sheets in order, as in reducing debt levels rather than spending or investing in growth. In the US, we’ve had a bit of a mixed bag, as the very richest have seen good income growth and have therefore been willing to borrow and speculate as well as spend. But income growth among the rest of the population has been flattish, more and more new jobs are part time, and employment tenures are short, all negatives to sustained consumer spending. And that looks positively rosy compared to flagging conditions in most of Europe.

Ashoka Mody argues that the severity of the crisis hangover is masking an underlying secular change: that lower growth rates, both in advanced and emerging economies, are here to stay.

By Ashoka Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University. Originally published at Project Syndicate; cross posted from Bruegel

In the movie “Groundhog Day,” a television weatherman, played by Bill Murray, awakes every morning at 6:00 to relive the same day. A similar sense of déjà vu has pervaded economic forecasting since the global economic crisis began a half-decade ago. Yet policymakers remain convinced that the economic-growth model that prevailed during the pre-crisis years is still their best guide, at least in the near future.

Consider the mid-year update of the International Monetary Fund’s World Economic Outlook, which has told the same story every year since 2011: “Oops! The world economy did not perform as well as we expected.” The reports go on to blame unanticipated factors – such as the Tōhoku earthquake and tsunami in Japan, uncertainty about America’s exit from expansionary monetary policy, a “one-time” re-pricing of risk, and severe weather in the United States – for the inaccuracies.

Emphasizing the temporary nature of these factors, the reports insist that, though world GDP growth amounted to roughly 3% during the first half of the year, it will pick up in the second half. Driven by this new momentum, growth will finally reach the long-elusive 4% rate next year. When it does not, the IMF publishes another rendition of the same claims.

This serial misjudgment highlights the need to think differently. Perhaps the focus on the disruptions caused by the global financial crisis is obscuring a natural shift in developed economies to a lower gear following years of pumped-up growth. Moreover, though emerging economies are also experiencing acute growth slowdowns, their share of the global economic pie will continue to grow. In short, tougher economic competition, slower growth, and low inflation may be here to stay.

In the United States, conditions for an economic takeoff ostensibly have been present for the last year. Household debt and unemployment have fallen; corporate profits and cash reserves are large; the stock market is valuing the future generously; banks are ready to lend; and fiscal consolidation is no longer hampering demand.

Yet, contrary to expectations, growth in household consumption has remained lackluster, and businesses have not ramped up investment. In the first two quarters of this year, America’s GDP barely exceeded the level it attained at the end of last year, and much of the increase was driven by goods that have been produced but not yet sold. The prevailing explanation – a brutally cold winter – is wearing so thin that everyone should be able to see through it.

American consumers remain scarred by the crisis. But there is another problem: in their homes and workplaces, the sense of excitement about the future is missing, despite all the gee-whiz gadgetry that now surrounds them. And while the US Federal Reserve’s policy of quantitative easing has propped up businesses, it is no substitute for the enthusiasm and anticipation needed to propel investment.

Even the reduced global forecast of 3.4% GDP growth for this year is likely to prove excessively optimistic. Before the crisis, world trade grew at 6-8% annually – well faster than GDP. But, so far this year, trade growth remains stuck at about 3%.

Failure to recognize the fundamental slowdown that is occurring is reinforcing the expectation that old models can revive growth – an approach that will only create new fragilities. Atif Mian and Amir Sufi warn that US consumers’ purchases of cars and other durables have been bolstered by the same unsustainable “subprime” lending practices that were used to finance home purchases before the crisis.

Similarly, Mark Carney, Governor of the Bank of England, envisages a Britain with a Cyprus-sized financial sector amounting to 900% of GDP. And economist Michael Pettis cautions that China’s reliance on policy stimulus to kick-start the economy whenever it stalls will merely cause macroeconomic vulnerabilities to accumulate.

The two tectonic shifts in the global economy – slower GDP growth and increased emerging-market competition – have created a fault line that runs through Europe. The technical lead held by Europe’s traditional trading economies is being eroded, while wage competition is encouraging fears of deflation. And, with the eurozone’s most debt-burdened economies bearing the brunt of these shifts, Italy is sitting directly atop the fault.

The European Central Bank, however, is unable to revive eurozone growth on its own. Given the resulting drag on the global economy – and especially on world trade – it is in the world’s interest to engineer a coordinated depreciation of the euro. At the same time, a globally coordinated investment stimulus is needed to create new opportunities for growth.

Just as Bill Murray’s character could not escape Groundhog Day without radically changing his life, we cannot expect different economic outcomes without fundamentally different growth models.

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30 comments

  1. Ysaac

    Neoliberalism combined with excessive private debt. Unless these are carefully studied and implemented against, we’ll be stuck like in Dante’s purgatory. The latter has already been looked at by Steve Keen and other heteredox economist. Their ideas need more propagation, not this speculative ‘maybe this is where we will stay forever’ nonsense.

    1. Ysaac

      Would have appreciated if the author had actually looked into alternatives growth models rather than simply ending it on a low note. Basically another “all is going to hell eventually” article.

      1. Jim Haygood

        … along with the technocratic fillip that ‘all we need to do is just twist a forex dial to fix this’:

        ‘It is in the world’s interest to engineer a coordinated depreciation of the euro.’

        Why of course. And if we would all just drain 5% of the mercury out of our thermometers, global warming would be fixed too.

        Simple solutions for simple folks!

  2. John

    The bigger problem we have is economic growth economists regularly prescribe is not compatible with climate change. Too many economists are oblivious to the consequences of growth at any cost to the environment. What we need to be hearing from economists is how to grow the economy while at the same time significantly reducing green house gas emissions. Globalization has caused irreparable harm to the environment and continues unabated.

    1. Ben Johannson

      I imagine we require a society in which we consume fewer things and more services, like education. We would likely also work less, producing fewer GHG emissions and giving us time to enjoy those services, while allowing people to take that vacation every year on slower, less energy intensive forms of transportation. But things like air travel will have to go, at least on a regular basis. Growth could only occur if a way is found to produce a good or service without an increase in emissions, unless some way is found to offset by removing carbon somewhere else.

    2. MyLessThanPrimeBeef

      Thank you, John, Eleanor and Carla.

      I am reminded of yesterday’s (or Saturday’s) link about ‘faith in science.’

  3. Ignacio

    “it is in the world’s interest to engineer a coordinated depreciation of the euro”

    I am not sure that this is the solution. The problem of inadequate demand in the EU is caused by internal imbalances within the EU that wouldn’t be mended with a depreciated euro. As Michael Pettis uses to write what is needed is increase of demand in Germany relative to peryphery nations.

  4. paulmeli

    Growth can’t progress sustainably beyond growth in spending (it never has) , and growth in spending depends substantially on expanding the money supply.

    Credit (consumer credit) has not expanded the money supply appreciably since 2008, and public investment growth (govt spending) declined to very near zero between 2012 and 2013, something we haven’t seen since before WWII and maybe since the 1800’s.

    Thus any GDP growth would have to depend on increased leverage, i.e. ratcheting up of real asset values relative to spending or a draw-down of savings by consumers.

    Neither of these things are sustainable.

    I see a bubble bursting before long, within the next year or two unless some sustainable growth in the money supply occurs.

    1. Linus Huber

      “Growth can’t progress sustainably beyond growth in spending (it never has) , and growth in spending depends substantially on expanding the money supply.”

      You are talking simply about quantitative growth which is measured by governments. An economy may show negative gdp-growth while the population enjoys an improved standard of living, a possibility that escapes the imagination of most economists who are seldom more than econometricians trained to work with quantities without the interdisciplinary requirements to recognize quality.

      1. human

        An astute observation re growth!

        It has been observed that those with additional academic backgrounds (take Krugman…please) become so narrowly focused that they are blinded of reality. Main Street does not need growth to survive. They would do very well, explicitly, without any interventions as Main Streets have done since the beginning of time. Besides which, Main Street has very different definitions of growth that have everything to do with intangibles which are not financial in nature.

      2. cnchal

        a possibility that escapes the imagination of most economists

        It goes further. Economists do not allow themselves to imagine.

        Has an economist ever imagined, that in the future, people might be paid to abstain from consuming energy?

      3. MyLessThanPrimeBeef

        Thank you, Linus Huber, cnchal, human, fresnodan for sharing that.

        As Yves has said before, GDP growth (cause) leads to Money Growth (effect).

        And as I have said before, it’s possible

        1. We have more money in the system, even if we tax the rich more
        2. Even with less money, we can more growth (fresnodan linked it before from an IMF paper)
        3. And even with less growth, we can be happier (less wealth inequality or better quality GDP)

    2. MyLessThanPrimeBeef

      They brainwash us with the word ‘growth’ the same way they use those attack alert levels throughout the 2000’s.

      ‘Growth threatened’ – that’s a Main Stream Media trigger for people to go out and buy more junk, or to scream for money printing in order to send the Down higher.

  5. Tyler

    Since income growth among the 99% has been flattish, maybe the federal government should…walk with me here…triple the minimum wage.

    1. Linus Huber

      Well Tyler,

      Why not simply hire Ben’s helicopter and let money rain on all of us. Never mind that the $ lost over 95% of its purchasing power over the past 100 years but at least we all have some bills to throw around.

        1. MyLessThanPrimeBeef

          Tyler, the other day, Lambert requested abynormal not to paste the whole article without adding some comments of her own that would highlight what is relavent/interesting/important.

          Linking the whole website is going the other direction, I believe. It’s good that all of us, including yours truly, remind ourselves of that, from time to time, as none of us is immune to that little tendency.

    2. human

      That’s, actually, about right. If the minimum wage reflects that which a person of “modest means” needs annually, determined as the personal tax exemption of $1,500.00 in 1913, then the minimum and untaxed first $40 -50K of income is where it should be now.

  6. Jim Shannon

    Groundhog Day has been replaying worldwide for centuries! Governments replay the same script, written for the benefit of the few, at the expense of the consumer!
    The consumer is NOT STUPID, corruption of and by Governments is nothing new, but the end result continues to magnify as power/money continues to abuse the source of ALL wealth!

  7. susan the other

    We should mobilize to capture the methane from the arctic. That would stimulate the world’s economy. We’ll need new equipment and a gazillion boats, jobs for all those ex-fishermen in Japan. And Alaska, and Washington, Oregon, California and Mexico. If we are successful we will reap enormous quantities of methane which instead of going into the atmosphere unburned and polluting it 10 times more than burned fossil fuels, can be turned back into hydrates maybe and kept safely to be used at a sustainable pace. You would think that the only thing that matters is the sale of cars. I was thinking last nite that the support of the automobile industry – a spinoff of military industry – is a lot like supporting the nuclear industry. It wouldn’t hurt to consider this military-economic mindset to be a dangerous crisis of denial in and of itself and to take drastic measures to curtail war and war-related industries.

  8. impermanence

    When was the last time somebody from a Ivy League institution had any interest but the furthering of support for/exploitation of the status quo?

    1. John Zelnicker

      About the late 1960’s to early 1970’s, when I was a student at the Univ. of Pennsylvania.

  9. jgordon

    I’m disconcerted by people who still try to attribute our industrial economic stagnation to balance sheets and currencies and what not. Our current economic conditions and political malaise are the direct result of dwindling available resources, ecosystem destruction, and no realistic strategy for coping with dwindling available resources and ecosystem destruction. I think you all may benefit from abandoning this notion of seeing the world in terms of fanciful social theories and instead switch to seeing it in terms of resources, ecology, and political/military power. The money and economic systems exists or do not exist, in whatever form they do exist in, at the capricious whim of these other systems. Studying money and economics, and thinking you can derive general principles and theories from it, is like studying the tail and then imagining that you know the dog.

  10. Calgacus

    I’m disconcerted by people who still try to attribute our industrial economic stagnation to balance sheets and currencies and what not.

    Our industrial economic stagnation has one cause which works through balance sheets and currencies and what not. Human decisions to have stagnation, that prefer stagnation and poverty amidst plenty to the alternative of broad-based prosperity and satisfaction of human needs. The people who disconcert you are ones who are thinking carefully.

    Our current economic conditions and political malaise are the direct result of dwindling available resources, ecosystem destruction, and no realistic strategy for coping with dwindling available resources and ecosystem destruction.
    Nope, they have next to nothing to do with these things, for better or worse.

    The money and economic systems exists or do not exist, in whatever form they do exist in, at the capricious whim of these other systems.
    These other systems don’t have whims or caprices. Human beings do. One of them is to set up economic systems that ask other people to perform impossible deeds, that sets up a game of musical chairs and turn the “winners” into morons surprised that one person can’t find a seat every time a seat is removed, and who blame the “loser” or invisible agencies for the decrease in seatedness.

    Studying money and economics, and thinking you can derive general principles and theories from it, is like studying the tail and then imagining that you know the dog.
    No, it is like studying the dog’s head and mind and imagining you can know something about how the dog will behave.

  11. JMarco

    Right. The Fed is ready to call victory in its efforts to solve US unemployment when unemployment hits 6%. The magical unemployment bottom use to be considered 4% in Pres. Clinton’s time. Supposely, if we go under 6% inflation will rear its ugly head.

    My big fear is enough Americans will vote to give Republicans control of Senate and Congress in 2014. Repulicans will then cut the safety nets and offset that spending with increased defense expeditures. US economy will probably still have a paltry 1-1.5% GDP growth with average worker still struggling to get by.

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