What the heck is going on with the global economy?
If you’ve been following news about things other than Ebola, you’ve likely picked up on the following:
–New worries about the rate of global growth have led to all sorts of market volatility.
–Declining rates of interest and inflation both here and in Europe reflect clear signs of weakness and, in the case of the declining yield in US Treasuries, both flight to safety and lower expected growth.
–Inflation in the Euro area just clocked in at 0.3%; unemployment there is 11.5%.
–Stagnant US wages are a likely factor in yesterday’s disappointing new on retail sales.
–The rising dollar will make it tougher to reduce the growth-restraining US trade deficit.
The title of the latest IMF World Outlook is instructive, and even a little poetic, in this regard: Legacies, Clouds, Uncertainties. Their infographic describes the problems as stemming from financial sector excesses, geopolitical tensions, slowing emerging markets, and monetary surprises. Though inadequate fiscal support—the premature pivot to fiscal austerity—is clearly one of the most important aspects of the diagnosis, the IMF tends to pull their punch on that point, as this is unfortunately, if not unbelievably, still a hotly debated topic among key members.
Wolfgang Schaeuble, Germany’s finance minister and Mr. Austerity himself, said just the other day that “writing checks” wouldn’t help “…the euro zone to boost growth, and he urged France and Italy to do more in the way of economic reforms.”
Still, at least the Fund led with infrastructure investment and “jobs-friendly” fiscal policy on their “what-to-do” list. Such investments were also the consensus of a panel on the topic in which I participated the other day.
You can go deep in the weeds in this if you like, but the fact is that nothing fundamental has changed in recent weeks or months or quarters. (The one exception is the decline in oil prices, which is largely a supply-side factor, and while it will put some downward pressure on prices (less so on core prices), it is more important as a boost to growth and real incomes.)
The IMF’s 0.4% markdown of their growth forecast is not some new phenomenon. Our own Fed and CBO have done the same thing many, many times. When Larry Summers speaks of secular stagnation, he looks very much to be speaking of something real: economies stuck in weak-demand doldrums, where potential investment dollars abound on the sidelines but are not put to use even at persistently negative real interest rates. Where inequality diverts earnings from the broad middle-class, dampening spending and increasing economic anxiety. Where long-term unemployment and weak-demand-driven labor force exiters contribute to reductions in both the active labor force and the potential rate of growth.
So, is all of this just a depressing new normal? Only if we accept it as such.
As David Wessel correctly puts it “lousy economic growth is a choice.” The problem is political, not economic. This is a well-articulated policy agenda that would go a long way toward generating more of the demand that’s lacking; constructing and developing that agenda is the point of CBPPs full employment project, and this first tranche of papers is, if I may be allowed to say so, a strong start.
That assertion re politics begs a million questions and complaints, I know. On the panel to which I linked above, when someone suggested a political solution, someone else would say, “Gridlock!!” That’s fair, though there are some sub-state developments that deserve more attention.
But my point here is that we should be very careful not to separate the global economic problems from the political dysfunction problems, whether the latter is European ministers who resist evidence regarding austerity or the US Congress that resists an obvious opportunity to invest in public goods.
It is not at all correct to throw up your hands and say “everything’s broken—government doesn’t work and economies won’t recover. This new normal sucks!” No. Economies won’t recover because government doesn’t work.
The new normal is only here to stay if we continue to make it so comfortable.