An abundance of wealth and a scarcity of capital: resolving the paradox

One of the major economic phenomena of our time seems to be an enormous accumulation of elite wealth amidst rising inequality within nations, even while output and productivity growth, particularly since the Great Recession, have been mediocre across much of the world.

In his book Capitalism without Capital, Alan Shipman draws together a wealth of economic ideas, from the theory of the global savings glut and the Cambridge controversies in the theory of capital to Thomas Piketty’s writings on inequality, to argue that we are living in an era of abundant ‘wealth’ alongside a shortage of real productive capital assets. It is growth in the latter which remains the driver of rising living standards for the majority. Continue reading

A low-inflation world and what to do about it

The Economist magazine recently published a special report on the world economy, looking at the ‘problem’ of low inflation. More than ten years have passed since the beginning of the Global Financial Crisis and Great Recession, and inflation is now strikingly low in many rich economies. This is despite unemployment falling to historically low levels in countries such as the US, UK and Germany, although it remains much higher in a number of European countries that have yet to recover from the worst of the eurozone crisis.

Normally economists expect wages to rise faster as unemployment falls below some critical level and the labour market tightens, and at some point this has tended, at least in the past, to lead to higher inflation.

In the US and UK, wage growth has been picking up, but inflation has remained low, and has even undershot central banks’ inflation targets. Wage increases are relatively good news for workers after a decade of sluggish or stagnant earnings growth, but remain weak compared to those seen prior to the recession. Continue reading

Richard Koo on global stagnation, globalisation and the trade war

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.

Why US debt must continue to rise – Michael Pettis

Donald Trump’s signature policy of 2017, the so-called Tax Cuts and Jobs Act, cut taxes sharply for the richest earners and corporations. As so often in recent decades, many Republicans claimed that this would pay for itself via the increased revenue generated by faster economic growth, which would incorporate higher investment and higher wages for ordinary Americans. There would therefore be little need to cut spending to prevent the deficit from rising.

Such supply-side policies are part of the essence of ‘trickle-down’ economics, which boils down to the argument that making the richest members of society richer will make everyone richer, including those at the bottom. As with previous such policies, this remains to be seen, but the signs are not good.

On the other hand the US budget deficit is rising and is set to rise further. The national debt is also now growing faster than previously. While growth has been stimulated for a while, perhaps more from the demand-side than the supply-side, it seems that it is now slowing once more. This is a long way from the vaunted economic miracle from the President’s State of the Union address. Continue reading

Tax, redistribution and economic performance: the micro and the macro

Alexandria Ocasio-Cortez, the youngest woman ever to be elected to the US Congress, has made headlines recently with her arguments for much greater marginal rates of tax on the highest earners. Oxford University’s Simon Wren-Lewis yesterday posted this helpful piece on some of the economics and politics of such a policy. He is broadly in favour, and makes a good case for it.

Wren-Lewis is something of a New Keynesian, coming from the centre-left of mainstream thinking. The post covers plenty of ground, but tends to only focus on the microeconomics, while neglecting the macroeconomics, of higher taxes and redistribution. Continue reading

Chinese development – the end of the miracle?

800px-Chinese_draakThe Economist magazine has an interesting article this week questioning the sustainability of the Chinese growth model and drawing some parallels between it and the Soviet Union in the post-war period.

During the last 40 years, the rapid development of China has been perhaps the most extraordinary example of economic transformation in human history, both in speed and scale. The economy grew by around ten percent per year for three decades. Growth has in recent years begun to slow, but is apparently still humming along at more than six percent, a decent clip by any standard. Hundreds of millions of its population have escaped from poverty and the new ‘workshop of the world’ has flooded the world with cheaper goods.

But cracks have begun to show, particularly since the financial crisis of a decade ago. The Chinese government’s response to a collapse of exports was to ramp up lending from state-owned banks and embark on a massive spending spree on infrastructure. Continue reading