Yves here. The regular sightings of the confidence fairy in November and December have been followed by a spell of unusual sobriety, at least among economists.
By Ashoka Mody, Professor of Economics at Princeton. Originally published at Project Syndicate
Last April, the International Monetary Fund projected that the world economy would grow by 3.5% in 2015. In the ensuing months, that forecast was steadily whittled down, reaching 3.1% in October. But the IMF continues to insist – as it has, with almost banal predictability, for the last seven years – that next year will be better. But it is almost certainly wrong yet again.
For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003 to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%.
The question is why. According to Christina and David Romer of the University of California, Berkeley, the aftershocks of modern financial crises – that is, since World War II – fade after 2-3 years. The Harvard economists Carmen Reinhart and Kenneth Rogoff say that it takes five years for a country to dig itself out of a financial crisis. And, indeed, the financial dislocations of 2007-2008 have largely receded. So what accounts for the sluggish economic recovery?
One popular explanation lies in the fuzzy notion of “secular stagnation”: long-term depressed demand for goods and services is undermining incentives to invest and hire. But demand would remain weak only if people lacked confidence in the future. The only logical explanation for this enduring lack of confidence, as Northwestern University’s Robert Gordon has painstakingly documented and argued, is slow productivity growth.
Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured by an illusory sense of prosperity in much of the world. In some countries – notably, the United States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking were mutually reinforcing. At the same time, countries were amplifying one another’s growth through trade.
Central to the global boom was China, the rising giant that flooded the world with cheap exports, putting a lid on global inflation. Equally important, China imported a huge volume of commodities, thereby bolstering many African and Latin American economies, and purchased German cars and machines, enabling Europe’s largest economy to keep its regional supply chains humming.
This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank, Bear Sterns, from collapse. With the eurozone banks also deeply implicated in the subprime mortgage mess and desperately short of US dollars, America and much of Europe began a remorseless slide into recession. Whereas in the boom years, world trade had spread the bounty, it was now spreading the malaise. As each country’s GDP growth slowed, so did its imports, causing its trading partners’ growth to slow as well.
The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system. Eurozone policymakers, by contrast, rejected monetary stimulus and implemented fiscal austerity measures, while ignoring the deepening distress of their banks. The eurozone thus pushed the world into a second global recession.
Just when that recession seemed to have run its course, emerging economies began to unravel. For years, observers had been touting the governance and growth-enhancing reforms that these countries’ leaders had supposedly introduced. In October 2012, the IMF celebrated emerging economies’ “resilience.” As if on cue, that facade began to crumble, revealing an inconvenient truth: factors like high commodity prices and massive capital inflows had been concealing serious economic weaknesses, while legitimizing a culture of garish inequality and rampant corruption.
These problems are now being compounded by the growth slowdown in China, the fulcrum of global trade. And the worst is yet to come. China’s huge industrial overcapacity and property glut needs to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption networks have to be dismantled.
In short, the factors that dragged down the global economy in 2015 will persist – and in some cases even intensify – in the new year. Emerging economies will remain weak. The eurozone, having enjoyed a temporary reprieve from austerity, will be constrained by listless global trade. Rising interest rates on corporate bonds portend slower growth in the US. China’s collapsing asset values could trigger financial turbulence. And policymakers are adrift, with little political leverage to stem these trends.
The IMF should stop forecasting renewed growth and issue a warning that the global economy will remain weak and vulnerable unless world leaders act energetically to spur innovation and growth. Such an effort is long overdue.
“But demand would remain weak only if people lacked confidence in the future”
Sometimes … demand is restricted by the fact that nobody has any money in their pocket.
***demand is restricted by the fact that nobody has any money in their pocket.***
If only you wore a black turtleneck and hands-free mic while giving a lecture with 30 read-along powerpoint slides. Then maybe the intelligensia would believe you.
Is he kidding:
The only logical explanation for this enduring lack of confidence, as Northwestern University’s Robert Gordon has painstakingly documented and argued, is slow productivity growth.
Real wages for a hefty percentage of the population haven’t risen since 1971. Most people are treading water or losing ground. Over 90% of the modest gains since the 2008 crash have gone to 1% or less of the population. But the problem is productivity! And this guy has a tenured job at Princeton. Standards for employment there must include smug self-assurance, ideological blinders, and the inability to assimilate any facts not cogent to people richer than you are.
Well said, JL!
If Princeton’s most illustrious alumnus can finally make some serious loot in the private sector, soon the author will be toiling at the Bernanke School of Economics.
Leveraging beta is very profitable when you have a PhD. You can even be a Master Beta in the private sector.
It’s even better to be the boss – Head Master Beta. Then you can slap some productivity outta your staff! Beats working. hahahahaha.
I’ll try the veal!
Productivity is the cocaine of the labour pool, like the old cocaine ad of the 80s in Calif [during the epidemic].
White square room about 6M X 6M, top shelf sale executive sort doing laps like a con and the verse goes like…. I do cocaine because I’m more productive… so I make more money… so I can do more cocaine… over and over and with each litany increases his speed until a blur….
Skippy…. the end is a wrung out wretch sitting on the step of some low socioeconomic apt talking about losing, wife, kids, job, everything…. w burnt out dopamine receptors as a lullaby till morte’
+ 1001 squillion!
Yeah, it seems that he tries to get motor of the low productivity growth argument going, but then drops it and starts talking about other factors that have more to do with demand/supply conundrums. An elite economist in transition, struggling to reorient?
Or paying lip service to his lords and masters.
Excellent comment as usual, James Levy. “Productivity vs Wages graph” search in Google Images shows productivity has risen well over 200 percent since 1971 while real wages have been kept flat according to compilation of data from the BLS, BEA and Census.
Golly, wonder who has pocketed the difference?… as you point out.
I think Mody is correct here but just comes at it from a different angle than the excellent article today by Ann Pettifor.
Pettifor very nicely lays out the current problem of debt deflation and how it is being fueled by austerity policies, unemployment and low wages ultimately leading to poor demand.
“the global economy will remain weak and vulnerable unless world leaders act energetically to spur innovation and growth. Such an effort is long overdue.”
This is where Mazzucato’s The Entrepreneurial State can play a role. Governments can take the lead here and encourage sustainable programs based on system reproduction such as better social services, alternate energy sources, better public transportation etc.
Here in the US:it’s not like there’s a shortage of work to be done to fix the massively inappropriate national infrastructure – to make it human sustainable – I mean for the ‘little people’. There is of course the perennial lack of congressional vision and long term planning. There lies a huge root of the problem.
Is this meant as a good cop/bad cop contrast piece with the Ann Pettifor post?
Here, I gave up any hope of Mody being at all earnest when he cited Rogoff and Reinhart (!!!). Then the rest of the article completely self-destructs: weak productivity and insufficient innovation are the issue?
When combined with yesterday’s NYT article on inequality, the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.
Modern neoliberal economics is just an ideology not a science. It exists to justify the current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling class.
These days the Lysenkos are starting to gain traction even in the hard sciences.
Cf. ENCODE, which has managed to effectively banish an established scientific fact (junk DNA.) While they’ve backpedalled very slightly, no-one of any standing is willing to challenge them after seeing the ostracism Graur et al. got for pointing out the emperor had no clothes. Even Larry Moran, who was banging the drum the loudest against them, is going to omit junk DNA from his textbook for fear of “alienating readers”.
. . . the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.
They are the useless eaters. Clueless about the real world because their fat paycheck magically appears in their bank account, while producing nothing.
Here is Mody
The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system.
did he have to say “almost banal” predictability? Ouch. How about almost “implacable” predictability or “assiduous” predictability or even “undaunted” predictability. Some economist over at the IMF is probably steaming right about now.
At first I thought this was a Wolf Richter article but the headline was too calm.
This could be the year the global economy booms. I can almost see it, like a reverse asteroid. Like a rough and cratered moon shooting out of the earth and getting smaller and smaller in the sky. You just say “Wow.”
As long as the stock market goes up, who cares about the economy? Reverse asteroid, mushroom cloud – shouldn’t matter. It’s all good when the market is going up!
even if the market is just one person! as long as it’s “the market” it’s OK
Former FOMC member Richard Fisher’s Fed mea culpa this morning regarding the stock market ramp since March 2009 suggests a “period of digestion” could lie directly ahead absent renewed central bank-primary dealer market support. Among many other things, the QE-ZIRP policy since autumn 2008 provides abundant cause for broad repudiation of the “free markets”-based neoliberal agenda.
That’s a great image for it. There is a theory the Moon is the left-over debris from an early Earth impact – that would’ve been pre-history, maybe even pre-money.
James Levy points out one of the article’s most egregious howlers above, but I was already snorting into my coffee at “the financial dislocations of 2007-2008 have largely receded.” Sure, okay, things have stabilized just fine for the tiny percentage of the population that Mody thinks is worth noticing. If only the stagnant and staggering remainder would stop holding them back!!!!
I’ve thought for a long time – since the Global Economic Meltdown – that “world leaders” haven’t the faintest clue how to “spur innovation”. Past meltdowns have been mitigated by various and sundry technology “booms”, but since everything tech has pretty much been created (Phones, watches, internet TV, etc., etc.,) and Silicon Valley appears to be spending all their time developing useless games and apps designed to crush labor, what is next for “innovation”? The People Who Rule Us don’t have any idea.
Of course, there are investments in boring old infrastructure that could be made, we certainly could spend more money taking care of our elderly and young, plus addressing global warming, but as has been painfully shown, these ideas are met with brick walls of intransigence, at least in the US. The only ideas that ever seem to get any traction involve weapons and the War Machine.
“Lack of confidence” – let me count the ways. This is a phrase to match every vacuous denial of human economic chaos ever pontificated. Yuck.
This so misrepresents the upside out of 2008, and the current ‘health’ of the US economy, and so understates the potential for serious dislocations, as opposed to mushing through, it reveals just how completely the take-away from 2008 has been turned on its head – instead of a lesson never to be forgotten, i.e., that the Fed is not only fallible, but criminally so with respect to the Financial Crisis proper (whether by negligence or design) the same mad fools (crazy like fox?) created the globe’s greatest ever mess – the only thing to be determined is whether it lands on Obama or his immediate successor.
The world community cannot withstand another full round of QE and NIRP is no solution. We need a fundamental re-think, as in, instead of the fixation on a macro throttle for ‘growth’ when the economy threatens to contract (or its reverse) we steer the f-ing car around the potholes with plenty of room to keep everyone out of the ditch? For the US polity to have left the Fed to ‘fix’ what it and Wall Street so completely broke was an open invitation for a one-way trip to the Twilight Zone.
The ‘wealth effect’ as the central goal of policy has to be considered one of the greatest propaganda victories of all time – trillions to the top tiers (as well as intensification of concentration of ownership) while the OK middle, if asked, has deep misgivings about the future, and it just gets worse from there for those further and further removed, towards the Lower Bound.
I’d also venture that the shameless, relentless exploitation of both old and new divisions within the US by powerful interests have made good governance by either Party virtually impossible, and this degree of gridlock is taking on more and more of the quality of the ground prior to a quake, the energy locked in the rock under huge stresses released suddenly and sharply – I think the US is heading into a crisis of legitimacy, of fundamental expectations, the very identity of particular Americans wherever they are and how they relate with the world. I’ve paid no little attention, and it to my mind is not impossible at some point that only the military will be able to maintain control and keep things going – and they could be right at that point.
Hay Fiver good to see in the traps again…
I agree to a degree with you, tho, generalizations like the Fed QE and NIRP are the antithesis of ev’bal is poorly fleshed out [as our hottnest likes to say – the devil is in the details] e.g. the fed is not responsible for distribution vectors and never was, that is congresses job. Ideological capture can be sticky… eh… especially when self interest has been the motto for so long, like Chinese drip torture over a long and protracted period. Institutional memory go’s right out the window and replaced by all of Dante’s lament.
Albeit a lot of dramas are purely the results of manipulating FER for political or more aptly put ideological reasons i.e. are supposed to pop little bubbles, tho some screw with it and allow HUGE bubbles which then require all kinds of excessive capital and social destruction – distortions. Not to mention some people can make huge fortunes in the run up and in the collapses.
Which can also be traced back to stuff like Stones (SAM), which is formed w/ computable “equilibrium model” e.g. TOT.
If I might I would like to use a mates comment on another platform to highlight this perspective…
“a rules based pegged system sounds very much like the PoBc model to me. The problem is that Governments intervene when the politics are pressing and not when the economics are in need of adjustment. and screw up the stabilizers of floating exchange rates. China is finding out very quickly that a pegged exchange rate costs somewhere, sometime and it’s a struggle to find that equilibrium – like chasing a greased pig around the oval – lot’s of noise and effort and no result t the end of it, unless someone puts a bullet in the pig.
Nah, the global floating exchange/fiat currency monetary system has been bastardized by political interference via central banks. China will find that they will have to let the elite financial parasites take a bath – we haven’t seen anything yet. The next Fed rise will deliver them a big one up the poo shooter again because they are pegged to the USD. Compare that with the battler and you can see that intervention is not required – it will float to it’s own level based on the real economy. Sure, the currency speculators will give it a nudge around the park, but if left alone it will eventually find it’s value. What Governments fail to understand is that they need to let the financial economy adjust – China are finding that out now and are forcing the issue. The Fed has finally woken up to the Chinese game. We should follow the same lead.
Fixing exchange values is a slippery slope to economic oblivion. Global fiat currencies rely on a float. China has been an anomaly – but you can see the impacts of oversupply and central control taking effect now and they can’t control world currencies – China GDP of 6%? Forget it, they will be under 5% before too long as their financial reserves disappear down the gurgler.” – H/T Malcolm
Skippy…. I would only add that I disagree with the term “equilibrium” – where ever its evoked – is erroneous, I prefer the term stored potential adverse.
Thanks for the welcome, Skippy! Hope you’ve been well!
I note today Mr. Soros says we’re in a crisis – whether that reflects he has his own fingers caught in the wringer or not, it just adds more pressure on the Fed to ‘do something’. Good f-ing grief.