Heiner Flassbeck and Patrick Kaczmarczyk write that amidst global political and economic fragility, the downturn in the Germany economy adds to the uncertainty in a world that, as Paul Krugman put it, has a “Germany problem”. It not only raises questions and doubts over the future of the largest European economy but, …More …
In the short video below, Richard Koo, originator of the idea of balance sheet recessions, argues that the current global economic stagnation is largely due to private sector firms as a whole in most of world’s largest economies acting as net savers rather than net borrowers and investors, despite very low interest rates. This is weakening aggregate demand and is compounded by the failure of the other sectors in the major economies, namely households and governments, to compensate by borrowing and spending to counter this weakness.
Of course, the US government is running a budget deficit, which has sustained moderate growth there, but for the largest economies taken together, private sector saving is proving to be a drag on continued recovery.
Koo doesn’t go into the reasons for this behaviour, although he has argued elsewhere that the private sector in many countries is attempting to save in order to pay down high levels of debt, producing a balance sheet recession, or stagnation at best. Fiscal policies that boost demand as well as policies that increase private investment opportunities in general would help to counter this.
He also touches on the US-China trade war as adding to global weakness, and notes that it is unlikely to end anytime soon, due to the job losses in the US which decades of current account deficits have reflected. As Koo puts it, free trade has created enough losers economically to make it a political problem in the US, and one that contributed to the election of Trump.
Aside from the trade war, it is quite likely that rising inequality has contributed to global weakness. With much of the income from economic growth accruing to the already wealthy, who save a larger proportion of it than poorer groups, significant increases in consumption in advance of the financial crisis relied on higher household debt since it is less able to be supported by rising wages for the majority.
In economies such as Germany and Japan, the result has been weaker growth, rising public debt in Japan, and a soaring current account surplus in Germany, while in the US and UK the result has been higher household debt and current account deficits. These trends sustained each other for some time, but the resolution of such imbalances may well be the source of much of the current global turmoil which has followed the crisis of more than a decade ago.
This interpretation suggests a need for policies which reduce inequality and increase wages, boosting consumption in a more sustainable fashion, and therefore increasing private investment opportunities. Greater public investment in infrastructure would also help. In a number of countries this has been constrained by policies focusing on austerity and reducing public debt, which have in many ways proved economically and socially damaging.
By Daniel Gay and Kevin Gallagher
Few would deny that the international system governing the environment and economy is under pressure. Globalisation itself is wobbling, to the chagrin of governments in rich and emerging economies. What’s less talked about is the effect on the world’s 47 least […]
‘The Glorious Thirty’ was originally coined by the French demographer Jean Fourastié in 1979 to describe his country’s unprecedented economic boom between 1945 and 1975. Lasting from the end of World War Two to the first oil shock of the 1970s, it saw growth in output, productivity, wages and consumption faster than before or since, and significant structural change, as resources moved from the agricultural sector and luxury artisan products towards industry.
France rapidly closed the gap in living standards with the US over the period, more or less matched West Germany’s performance, and overtook the UK. It managed an average growth rate of 5.1% throughout the 1960s.
This was in many ways the heyday of state intervention in the major capitalist economies, and the use of various forms of industrial policy was widespread. Post-war France, as elsewhere in Europe, required a major rebuilding of infrastructure and industrial capacity after the damage wrought by conflict. These included transport, the utilities, capital goods and heavy industry.
Beyond this, the government felt that a high standard of living and strong national defence to preserve relative independence required industrialisation. It was decided that this could not be wholly left to the uncertain outcomes associated with market forces. After the experiences of economic planning in many countries during the war, state intervention was felt to be both necessary and effective for the purposes of accelerating recovery while preserving freedom, democratic institutions and private property as far as possible. Continue reading
According to a recent piece in The Economist, economic convergence with the US among so-called emerging markets has slowed in the ten years since the great recession. The difference in the growth rate of GDP per capita has slipped since the 2000s from an average of over six percent in emerging Asia to about four percent. Emerging Europe has slowed less, but from a lower rate, while Latin America, North Africa, Sub-Saharan Africa and the Middle East are now beginning to fall behind again, at least on average.
This is disappointing for champions of economic theories of convergence resting on the globalisation of the world economy. It is also bad news for those still living in poverty in the countries slipping back. Of course, slowing convergence need not mean that absolute poverty is no longer falling. But it does mean that the prospects for reducing inequality between rich and poor nations and more widely-shared prosperity are for now receding. Given that the US has not grown particularly fast since it emerged from recession, it means that only emerging Asia continues to be a truly dynamic region in economic terms. And even this mantle may be under threat as growth slows in China, affecting supply chains throughout Asia. Continue reading
In the video below from the Real News Network, former economist at UNCTAD, Heiner Flassbeck, discusses some of the problems besetting today’s global economy and claims that they have deep historical roots. Germany may be heading for a recession due to shrinking exports linked to the ongoing US-China trade war and weak demand in Europe.
Flassbeck argues that the cause of sluggish global demand lies in the weakness of corporate investment compared to corporate saving alongside stagnant wages and the insufficient response of governments in Europe to counter this with more expansionary fiscal policy.
This has been brewing since the 1970s. The US under Reagan, Bush junior and most recently Trump has on a number of occasions responded to sluggish growth with higher fiscal deficits. The exception came under Clinton, when a booming economy and fiscal tightening produced several years of budget surpluses, which ultimately proved unsustainable.
In contrast, many European economies have remained wedded to tighter fiscal policies and austerity in the run-up to the creation of the euro. Since 2000 Germany has relied on foreign demand to drive growth, and now runs, in absolute terms, the largest current account surplus in the world.
Corporate surpluses are also excessively large in Japan, but the government continues to run a moderately large budget deficit which absorbs some of these savings and sustains aggregate demand to a degree. The German government is now running a budget surplus, which withdraws demand from the economy, leaving net exports as the driver of growth.
Ideally, corporations would use more of their retained earnings for investment, rather than running up surpluses as they are doing at the moment, particularly in Germany. This would increase spending on the demand side, and the capital stock on the supply side, boosting growth in output and some combination of employment and productivity.
In the absence of strong corporate investment growth, sufficient demand to support economic growth has to come from household consumption, net exports, or from the government. With insufficient household income growth, Germany has relied excessively on growth in exports enabled by sluggish wage increases for twenty years. In a weakening global economy, it is now suffering again and could be on the brink of recession.
A more sustainable return to healthy economic growth and fuller employment with rising living standards would see household incomes rising for the majority through significant wage increases, stimulating consumption and providing greater incentives for companies to increase investment in new capacity and employment. Also needed is some degree of fiscal expansion which includes public investment in necessary infrastructure and support for those on the lowest incomes.
The corporate sector surplus (the excess of savings over investment) in a number of large economies needs to shrink as wages and household incomes rise alongside corporate investment. This would lessen the need to rely on large and persistent fiscal deficits, which have supported demand in Japan on and off for well over two decades but have not by themselves created the conditions for a return to more balanced economic growth over the longer term. It would also lessen the need for consumption to be excessively dependent on rising debt, as in the UK and US.
More balanced global growth and reduced inequality within countries which have seen the latter soar since the end of the 1970s can be achieved together.
Flassbeck does not really discuss the reasons behind excessive corporate savings relative to investment, aside from a brief reference to neoliberalism, and he ignores the problem of private debt in China, but the interview is interesting and worth a watch.
Last Friday, the US real GDP growth figures for the second quarter of 2019 were released. The annualised rate of real GDP growth slowed in Q2 to 2.1% from 3.1% in the first quarter. This was the slowest growth rate since the end of 2016. US real GDP was 2.3% higher than in the same […]