As I write on Sunday, March 12, headlines are that there is a bank run in the U.S. and we will find out on Monday morning if it is going to spread. What I don’t quite understand from the coverage I have read and listened to so far, is what exactly is causing this. Is it that start-up companies the bank has lended to are failing because of higher interest rates, and depositors are therefore worried that if the bank fails, they may not be able to get their deposits back? That is my working theory. My other question is why, if the economy as a whole is so strong as measured by low unemployment, there seems to be a mini-recession confined so far to the tech industry. I hope this is not the beginning of a so-called hard landing for the U.S. economy.
Tag Archives: economic growth
IMF World Economic Outlook, October 2022
Here is what the IMF has to say, when we are in this weird time when pretty much anybody who wants a job can get one (in the U.S.), growth as measured by GDP is low or negative in the US and elsewhere, reported inflation is high but the shock has sort of worn off, and I can predict with total confidence that we may or may not be teetering on the edge of a recession, which if it happens might be either mild or severe and either short or long.
- “Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.”
- “Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024.”
- If this forecast is wrong, it will probably be wrong on the “downside”. The long list of risks includes monetary policy not working, US dollar appreciation disrupting trade, energy and food price shocks, emerging market debt distress, natural gas supply shocks in Europe caused by the Russia-Ukraine war, a continuation of the last pandemic and/or a new pandemic, a bursting of the real estate bubble leading to a financial crisis in China, and “geopolitical fragmentation could impede trade and capital flows, further hindering climate policy cooperation”.
- “successful multilateral cooperation will prevent fragmentation that could reverse the gains in economic well-being from 30 years of economic integration.”
I emphasized the word “will” above. Is that “will” like we think successful cooperation will happen, or “will” like if successful cooperation could somehow happen, then this positive outcome will happen. It’s hard to be optimistic these days. About the most optimistic thing I can say is that when almost everybody in the world is feeling pessimistic, maybe we have hit bottom and can start clawing our way back up.
stagflation?
The new era of stagflation is here, according to Nouriel Roubini.
It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed…
But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here.
Project Syndicate
But at the moment, pretty much everybody who wants a job can get one, whereas stagflation would imply high unemployment coupled with inflation that won’t go away.
So we will see what happens here. For people just a few years away from (planned) retirement, this must be nerve wracking. For those of us a decade or more away, we hope we can ride this one out (as the bumper sticker says, lord just give me one more bubble…). Or is this the one where we have a human-caused financial crisis, and then food supply and fires and floods and earthquakes and volcanoes and (nuclear) warfare prevent us from ever returning to the baseline? No, I’m not predicting that, but I think it is a possible outcome that we are not doing much to mitigate.
What was Abenomics
Bloomberg has a long article on the economic policies of Shinzo Abe. Basically, the Japanese economy stopped growing after the 1990s economic crisis. Not just low growth, but no growth in GDP for about a decade followed by a sharp contraction during the 2000s financial crisis. Deflation or declining prices were a symptom of this. At the same time, Japan had very low unemployment throughout. Part of the story is that the economy is starved for workers due to an aging economy, political resistance to immigration, and low participation in the work force by women. Some “Abenomics” was basically a policy of massive government borrowing and spending aimed at shocking the system back into a growth mode. It sort of worked, but it seems to be reverting to the mean now.
I think there are a few lessons. This helps me understand why central banks want to have a low but positive inflation rate. You don’t want to money supply to constrain growth. You want to have rational immigration and guest worker policies that allow in the workers with the skills your economy needs that your native population is unable or unwilling to fulfill. This can be politically difficult, obviously, and you want to do it humanely for the people involved. Governments can borrow and spend with reckless abandon in times of crisis, and then they need to be able to ratchet back quickly when the economy picks up and the private sector is able to pick up the slack. Also politically very difficult. Rational child care and health care policies to remove barriers to working women would help.
But finally, it does not seem like life in Japan is all that bad. So another lesson might be that there is a path to a low-growth economy where life is not that bad, people have meaningful work and their basic needs are met.
IMF World Economic Outlook
The IMF predicts a worldwide slowdown over the next 2-3 years, although not an outright contraction. Of course, we know these things are not predictable.
Global growth is projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.
Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. War-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January. Multilateral efforts to respond to the humanitarian crisis, prevent further economic fragmentation, maintain global liquidity, manage debt distress, tackle climate change, and end the pandemic are essential.
IMF
U.S. labor market growth
Axios has a brief piece on the demographics of the labor force in the U.S. A tight labor market is not just a short-term phenomenon during the pandemic recovery.
In the 2010s, the massive millennial generation was entering the workforce, the massive baby bo0m generation was still hard at work, and there was a multi-year hangover from the deep recession caused by the global financial crisis. But now, boomers are retiring, millennials are approaching middle age, and the Gen Z that follows them is comparatively small.
Axios
So combine this trend with anti-immigrant politics, and we may have a problem. It could lead to the double-edged sword of higher wages and inflation, a trend toward toward greater automation and technological innovation, a general drag on economic growth (which could ultimately lead to deflation), left wing politics, right wing politics, business pressure for more globalization/offshoring, or some combination of any of these (other than inflation and deflation, but maybe it is possible to have a sudden reversal between these and hard for policy to react quickly even if we knew what to do). It is hard to know what to do, but rational immigration policies based on skills and education to fill jobs available would be a start.
What’s new with “decoupling”?
Decoupling is the idea that environmental impact per unit of economic growth is declining. If it were to decline fast enough, in theory, it would be possible for growth the continue indefinitely at the same time absolute impact is declining. This article tries to measure the rate this may or may not be happening, and concludes the long term trend is not even close to being on a path where we could turn the corner and see absolute impact stabilize, let alone decline.
While globally, CO2 emissions per unit of GDP are declining, the decoupling rate from 1995 to 2018 was only -1.8 percent annually. To achieve net zero by 2050, the rate would have to accelerate to -8.7 percent, assuming population and GDP growth projections as given, or by a factor of almost five.
Bruegel.org
This seems about right to me. The idea that we need to choose between “growth” and sustainability in the long term, of course, is logically flawed. If impacts continue to grow, there will come a point where the system breaks and human welfare is no longer able to increase.
There are a few flaws in the decoupling argument. “Growth”, as usually measured by GDP, is a measure of gross economic activity, which includes both benefits and costs to humanity. So in comparing impacts (costs) to GDP (sum of benefits and costs), you have an equation with too many unknowns, unless you can come up with some agreed-upon reasonable measure of costs. If you can do that, you would simply subtract costs from benefits to get net benefits, and figure out whether those are growing or not. They may or may not be growing right now. Even if they are, you need to consider whether they can continue to grow in the future, or whether the underlying system is eventually going to break and no longer be able to support further growth. You also need to consider risks of really bad things happening, as well as the odds of really good things like major technological breakthroughs happening. I would also point out that at the moment we are using carbon emissions as a proxy for sustainability more generally, but there is a lot more that should be considered in a holistic view of a sustainable long-term human-planet system.
Did productivity triple during the pandemic?
I’m hearing claims that “productivity tripled during the pandemic”, and maybe this is the computer and internet and mobile chickens finally coming home to roost and deliver on the promises made way back in the 1990s. Maybe there is some truth to this, but it seems much more likely that the denominator contracted suddenly (hours worked) than that the numerator suddenly expanded.
Here’s one graph I have seen referenced.
What could be going on here? Well I don’t know, you should consult the experts. But of course I can speculate:
- Lower-productivity (economic output measured in dollars per hour worked, not in the worker’s sense of satisfaction, sanity, or self-worth) jobs suddenly disappeared, and higher-productivity ones (reverse caveats above) were left, so average productivity went up.
- I’ve heard it suggested tat workers who still had jobs suddenly had no commuting time, so they worked some extra hours, and got more done but didn’t necessarily report the extra hours worked to their employers. I might buy this as a marginal, short-lived effect. Maybe a few young go-getters did this, but certainly not us middle-aged parents who suddenly had small children bouncing off the walls 24-7.
- I will buy the idea that workers were more productivity with the new software (Microsoft Teams, Zoom, etc.) than they would have been in the same situation with software and communication options available a few years ago. I’m not sure I buy into the idea that they were more productive at home with these tools than they would have been in the office.
- Maybe there was a sort of mania of productivity for the work-from-home set at the start of the pandemic, for 2-3 months or so. Then it crashed back to earth, which you can sort of infer from the limited number of data points here.
So no, the data are interesting but I am going to say the singularity did not occur last year. I think there may have been a bump in average productivity per (remaining) worker when some workers just disappeared from the economy, which is not a net positive, and I think there may have been a short-term mania among work-from-home professionals that is now feeding into our widespread burnout situation a year and a half or so down the line, and that is not a long-term positive. I do think the rapid/non-voluntary adoption of new software and communication tools on a massive scale probably gave a bump to technological progress, which might pay longer-term dividends.
The pandemic also gave a sudden boost to biotechnology, which may ultimately end disease as we know it, create unimaginably horrible weapons that kill us all, or both.
why the development gap persists
The world’s technology, for the most part, is available to less developed, lower income countries. So why don’t they just reach out, grab it, and catch up? Well, a few have, particularly the so-called “Asian tigers”. Others have caught up on life expectancy and education, but not on income. This article by Ricardo Hausmann suggests a few reasons why it is not so easy.
- Restrictions on trade, competition, and/or property rights. (But the point of this article is that these are the traditional answers economists give, and they are not the only reasons.)
- University scientists are more interested in teaching, basic research, and scientific publications than in applied research that could help profit-seeking commercial firms.
- Businesses do not invest much in R&D, either internally or with university partners.
He uses patent filings as a proxy for technological innovation, and I am not so sure about that. For one thing, he makes this statement:
Countries like Austria, Germany, Denmark, France, Great Britain, Norway, New Zealand, and Singapore patent at a rate at least one-quarter that of the US. And other countries, such as Australia, Canada, Switzerland, Iran, Israel, Italy, the Netherlands, Poland, and Slovenia, come in at just above one-seventh the US rate.
Project Syndicate
The countries in the list above are doing quite well I believe compared to the U.S., and I know some of them have per-capita incomes greater than the U.S. Certainly, our per-capita U.S. GDP is not 7 times Norway’s and 4 times Singapore’s! (It’s lower in both cases per the CIA world fact book.)
Also, being healthy and well educated in a middle income country might not be all that terrible a life.
Those are my criticisms. But I do sometimes fantasize about how I would jump-start progress in a developing country. Certainly, I want to believe that big investments in research and education would pay off in the long term. Building universities, attracting talented professors, and then connecting them to private sector needs would seem to be important. I would want to bring in direct investment from private firms with high-tech know-how, and also seek expertise from development agencies like the World Bank, USAID and its equivalents in other countries. In all these cases though, you have to drive a hard bargain or you are likely to be exploited. I might hire Norway or Singapore to help me do that. Get the economy moving, then use the proceeds to build the infrastructure and keep the education and R&D thing going. At some point, you have to invest in health care, environmental protection, and labor standards if you want to provide a decent quality of life for people. I would probably follow Costa Rica’s lead and not bother with much of an army, but then I would probably be invaded by my neighbors or murdered by my own body guards.
a jumbo jet crashing every hour
Here are some disturbing statistics on child mortality worldwide.
Child mortality refers to the death of children before their fifth birthday. We live in a world in which 5.4 million children die every year. That’s ten dead children every minute.
Imagine what it means for a child to lose his or her life; imagine what it means for a family to see their child die. Ten families will experience that in the next minute. This will repeat every minute for the rest of the year. That is the horror of child mortality.
These daily tragedies do not receive the attention they deserve. Comparing it with those tragedies that do receive public attention makes this clear. A large jumbo jet can carry up to 600 passengers.3 The number of child deaths is equivalent to a crash of a jumbo jet with only children on board, every hour of every day of the year.
Max Roser, Our World in Data
It suggests a few points to me. One is that we are most scared and pay the most attention to new threats, like Covid or murder hornets. Meanwhile, old threats like car accidents, heart disease, and malaria cause suffering and death on a much larger scale. We are complacent and accepting of them either because they happen to other people far away (from the perspective of a prosperous country like the U.S.) or because they are so common we assume nothing can be done about them (traffic deaths).
Second, the enormous disparities between countries make it clear that something can be done about child mortality, and that it is a moral imperative to do so. It is not even high tech, it is just a failure of our civilization to recognize the problem, feel the responsibility, organize and act.
The plots of per capita income vs. child mortality are worth staring at. As the article drives home, there are no poor countries with low child mortality rates, suggesting that economic development is necessary in addition to direct interventions (nutrition, vaccination, sanitation, and health care are mentioned.) The U.S., of course, is in the group of richer nations with much lower child mortality rates than the poorer countries. But within its group, the U.S. is the clear laggard compared to the rest of the developed world. We are not applying our wealth and know-how effectively to keep our young children from dying.