A more plausible financial explanation for the disappointing global recovery starts with balance sheets that have been distorted by decades of increasing borrowing
The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.
Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former US treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.
Summers’ complaints about monetary and fiscal policy seem excessive. Before the crisis, central banks were widely praised for generating steady, non-inflationary growth around the world. That does not make them sound too tough. And the fiscal deficits since the crisis in many developed countries have been the largest ever in peacetime as a share of GDP. That hardly sounds inadequate.
A more plausible financial explanation for the disappointing global recovery starts with balance sheets that have been distorted by more than two decades of increasing borrowing. Many households, companies and governments have been left under financial pressure. Their spending is likely to be restrained without a massive reduction in debt — whether through write-offs, repayments using newly created money, or inflationary erosion.
In any case, whether or not Summers is right about monetary and fiscal policy, the debate can overshadow the main source of the post-crisis GDP growth slowdown: the durable decline of good jobs.
The loss is not captured fully in measured unemployment rates, although those rose dramatically after the financial collapse, for example from 6.8 percent to 10.9 percent in the euro zone. There are also too many people who left the labour market unwillingly or who are unhappily stuck in part-time or low-paid jobs. The US Bureau of Labour Statistics counts 5.9 percent of the working-age population as “marginally attached to the labour force” and “employed part-time for economic reasons”. The real number of discouraged workers is probably much higher.
These trends hold down incomes and GDP. For the whole economy, which includes labour as well as production, the degradation of workers’ skills and dignity does more damage than the meagreness of the GDP recovery.
The secular stagnation theory’s explanation of inadequate job creation by inadequate investment looks backwards. It is more likely that the inadequate spending power of underemployed workers leads to caution on capital investment, whatever the interest rate.
Indeed, the biggest problem with labour markets has little to do with finance and much with the asymmetry of job creation and destruction. It is easy to destroy or devalue jobs, through new technology and efficiency drives. It is hard to create good new jobs, especially in bureaucratic developed economies which already meet so many needs and desires.
This asymmetry has been a threat in many places for generations, but governments and business leaders used to fight hard to mitigate it, through the creation of what Germans eventually called the social market model.
The model had a simple goal — to make the economy work for society. To achieve that, wages were generally kept fair and time spent in the workforce declined as industrial productivity increased. Government job-creating programmes helped keep unemployment under control. And laws and the social consensus supported the development of such labour-intensive industries as tourism and healthcare.
Unfortunately, the system became calcified by the 1980s, especially in Europe. Jobs became so safe and so expensive to employers that hiring became a major gamble, while workforce reductions became highly profitable. In addition, politicians and business leaders started to pay less attention to the social challenges of unemployment and underemployment.
The financial crisis showed the painful results of the combination of excessively restrictive laws and official neglect. In both the United States and Europe, companies and governments were quick to lay off workers and to use part-time work and outsourcing to cut pay. However, employers were, and remain, reluctant to hire.
While unemployment rates are now falling, much more can be done. A term like secular stagnation gives the wrong impression. Slowing population growth is a secular trend. Excessive unemployment is largely the result of poor policy choices.
The social market model could work again. The mostly successful German labour reforms of the last decade provide some hints of how to proceed. The list of helpful changes includes reduced taxes on labour, increased government subsidies for hiring, big infrastructure programmes and financial restructuring to take away the inhibitions created by excessive debts.
Such efforts would lead to faster GDP growth, but that should not be the prime goal. The fight against labour asymmetry should be at the centre of economic policy simply because the loss of good jobs does more harm than the loss of a few percentage points of GDP. And right now, governments are losing that fight.
*The author is a Reuters Breakingviews columnist. The opinions expressed are his own.