Tuesday, October 17, 2017

IMF says Global Economic Upswing Creates a Window of Opportunity

The International Monetary Fund publishes a world economic outlook every six months. The latest one was just published this month (https://blogs.imf.org/2017/10/10/global-economic-upswing-creates-a-window-of-opportunity/ ) and is entitled "Global Economic Upswing Creates a Window of Opportunity".

This report is not for the faint-of-heart as it is long and treacherous and filled with words and phrases like "raising potential output" and "strengthening international cooperation". Far be it for me to summarize the most current document but I thought I would copy a key table (see the bottom of this post) and then go on and on a bit about some of that.

First, notice that the title of the table says the global recovery is continuing at a faster pace. Yet, the top of the table says that after growing at 3.6% in 2017 (technically this is a forecast since we have not yet shopped for Halloween much less Thanksgiving or Christmas in 2017) we will grow at 3.7% in 2018. For those of you who know a little about statistics, I doubt that 3.7 is statistically different from 3.6.  For those of you who were never punished by a Stats class and don't know a standard deviation from your local neighborhood deviant, this means that the entire publication is suspect. While the thousands of words in the report support this view of faster growth, we all know that the main table of the report says the world will not grow faster next year. It might grow faster. It might grow slower. And Humpty Dumpty had a great fall.

Read down farther and you will learn the following world areas/countries will grow slower in 2018 than in 2017:

Advanced Nations
Euro Area         
Emerging Europe 

Given the title of the report and table say that world  growth will be faster, there must be some places that will grow faster in 2018.   The table says these places will grow faster -- the US by a smidge, France, CIS less Russia, India, Brazil, Saudi Arabia, Nigeria, South Africa, and Low Income Developing Countries.

How you can average the growth rates of the slower list with the faster list and come up with faster world growth is a mystery to me. If I was writing this report based on this table I would say that the world seems to be on its last JD of the night. Or maybe -- "While growth in our bigger world markets is stuck in first gear, we see some hopeful spots for growth in some developing countries."
Second is the part of the title that claims that 2018 is a window of opportunity. I recall being in high school and thinking that my bedroom window provided a great opportunity to escape in the wee hours of Sunday morning. But when was my bedroom window not a window of opportunity? And so it goes for the IMF -- why is 2018 going to be a window of opportunity that wasn't there in 2017? And the answer is that  the IMF thinks we have kicked the policy can down the road long enough because growth was too weak in too many countries. But now that so many countries are doing so much better, they will button down, quit kicking cans, and attend to important things like economic growth.

Wow --- what is the IMF smoking because I would like some of it. No, the world is not growing any faster according to their own numbers and mostly is growing faster in places like Kokomo (fictional one of the song and not the one in Indiana), Gotham, and Atlantis. And in what places will politicians in 2018 resoundingly decide that long-term economic growth is their number one priority? Watch France. Their child Prime Minister is trying such things and every union in France is suggesting that statues of Emmanuel Macron be broken into tiny little pieces.

If that isn't enough, the IMF has the audacity to imagine that this is a great opportunity for countries to get together in a pro-growth fit and further reduce trade barriers and expand international economic cooperation. Really? Have they looked around? What part of the world is not cracking up? Have they read about Spain or Brexit?  What free trade agreement is universally loved?

From the above you would think that I am either into my third JD of the morning or that I am pessimistic about 2018. I won't comment on the former since children might be reading this but I am not pessimistic. My reading of the world economy is that modest growth is good since it doesn't create huge imbalances and threaten high inflation. Momentum is our friend as more and more countries attach to a slightly stronger world economy. The biggest risks arise from the absence of what the IMF predicts -- that we will continue to kick the growth policy can down the road and countries will outdo themselves with counterproductive protectionist policies. That is -- the economy is fine -- it is the politicians that we have to worry about. Let's hope they take an extended vacation.

Tuesday, October 10, 2017

Economic Growth Anemia

Many of my friends cannot remember which one was Laurel and which one was Hardy. I do remember which one was Sonny and which one was Cher. And so it goes with economic growth and business cycles. In truth, growth and cycles are as different as Simon and Garfunkel but you would never know it.

Economic growth has become the Cinderella of macro. Pushed into the back room and assigned to the lowliest cleaning duties, economic growth is hardly heard of in favor of business cycles. The Fed has never been more neurotic. Are we at full employment today? Are we too strong? Is inflation too low? Should I drink JD or Scotch?

Whew. I feel a lot better now. Let’s start at the beginning. Macro has two main areas – growth and cycles. Growth is a long-run concept. It is all about how the capacity to produce changes over time. Imagine the economy as one big factory. What makes the factory able to produce more (or less) as a long-term or permanent outcome? You can imagine the kinds of things that affect the capacity to produce – better equipment, new structures, a more efficient layout, better training of the workforce, are just some of them.

The second part of macro – cycle theory – is very short-run-oriented and poses questions about why the nation’s output deviates from the capacity to produce. That is where things like recessions come into play. Most recessions are over in a matter of months. Their impacts can go on for a while, but the large and sometimes sharp turns in output are usually limited to half a year, plus or minus. Policies designed to reduce these cyclical changes are very different from those that augment long-run capacity changes. Typically the causes of such short-term cyclical events have something to do with the ever-fickle desire to buy – or what we refer to as demand changes. Suffice it to say, the things that cause short-term changes in demand are very different from the things that impact long-run capacity – and so too are the policies different.

With all that behind us, let’s think more about Cinderella -- i.e., long-term or capacity growth. While capacity growth sounds like engineering, the reason we emphasize it is that capacity growth is the key to improving both the standard and the cost of living. The evidence is around us. Whether it is a rich country like the USA or a dramatically growing country like China or Vietnam, the evidence is that producing a larger pile of goods brings permanently higher incomes and lower poverty incidence to the citizens of those countries. With those higher incomes come safer and more environmentally friendly production. While there are some who would argue against growth, most of those people are on the fringe.

We usually use sustained real GDP growth to measure capacity changes. Not focusing on short-term changes, I present some figures for the time period from 1955 to 2016 – 61 years.

Average Annual Growth in U.S. Real GDP
1955 to 1970           4.8%
1970 to 1985           4.1%
1985 to 2000           4.4%
2000 to 2016           2.0%

The US economy expanded at an annual rate of over 4% for about 45 years from 1955 to 2000. After that we saw a pronounced slowing to 2% per year. It is true that we had a major recession in 2008 and part of 2009, but it is also true there were many recessions between 1955 and 2000. If we look at shorter time periods after 2000, we see 2.7% annual growth from 2000 to 2005, slower growth of 0.7% per year in 2005 to 2010, and then 1.9% per year in the six expansion years from 2010 to 2016.

While anything is arguable, the data seem clear that something changed to permanently alter the growth rate of the US economy after the turn of the century. Left to its own course, this slowdown threatens our ability to increase our standard of living and reduce poverty.

What causes economic growth to slow? To answer that question, economists use growth models. These models ignore many things that cause short-term deviations in demand and output to instead focus on capacity-altering events. Growth models boil down to two sets of factors – those that impact the supply of labor and those that impact the productivity of labor. A retiring baby boom, global competition, government regulation, tax rates and other policies towards business are often discussed in the context of waning capacity.

The surprising thing is that most legislators ignore the bull in the china shop. Maybe it is too complicated for them. Instead they would rather spend their precious few working hours heatedly debating social policy. Policies relating to regulation and tax reform are a case in point. Such policies have the potential to raise the growth of output yet few of the public discussions focus on output, instead pointing fingers about how they might harm social goals and income distribution.

Social goals are critical to a nation. But so is growth. If we continue to relegate serious growth discussion to the background, we will suffer the consequences as we become a stagnant economy with few resources for much of anything including solving difficult social problems.

Tuesday, October 3, 2017

The National Football League

I had to do it. I had to get sucked into this mess. I am a card-carrying global macroeconomist and here I am writing about the NFL. Does the NFL cause inflation or recessions? No, I think not. Does the NFL cause productivity or wages to rise? I doubt it. But here I am writing about it.

As one of my friends wrote me recently, why would anyone be interested in macro when there is all this other stuff to talk about? He told me that only the elites care about the usual macro policy issues. So, on to the NFL.

So what do I say? I thought long and hard and here is what I could come up with: The NFL is the canary in the mine shaft. The NFL is the beginning of a road that leads directly to chaos and eventually bloody revolution.

That’s a big statement, right? I just watched part of the Vietnam film on PBS, and it reminded me that we are not immune to violence and revolution in the USA. People my age participated in mistakes in Vietnam and were glad when the Cold War seemed to end. We also experienced the Civil Rights protests and were glad to see that situation improved. But it has been a while since all that transpired and it is not unbelievable that we have come full circle. It is quite possible that what we are seeing in the NFL is just the beginning of some very tough times ahead.

The end of the Cold War and the Civil Rights Revolution brought positive change. In the 1970s, one would have expected a great period of healing to follow – and maybe it did. It is one thing for whites and blacks and capitalists and communists to be ignorant of each other. It might follow that as we joined closer together, as in any marriage, many problems would be solved. But what we did not expect is that when we got to know each other a little better we would sometimes get on each other’s nerves. As we all became more equal, some got equal faster than others and some got less equal.

A half a century later we find that the world might be fairer than it was in 1960. But we also find as we become more familiar and equal, we have new and larger problems between capitalists and communists, blacks and whites, gays and heteros, JD and Scotch drinkers. (I had to get JD in somewhere!)

Conservatives can defend their records and describe how much minorities have gained in the last half-century. Liberals can point out the vast inequalities that remain. This is not an argument that can be resolved easily. Major progress on income distribution, job discrimination, crime, policing, immigration, national security and defense will not come easily. These are tough nuts to crack. Solutions won't reduce to ”my way or the highway.”

Reasoned approaches to our most difficult challenges are not to be had. And the NFL is the beautiful example of why. Our President said horrible things about our players and our players responded in kind. Is this stupid or what? We have proper forums to work through sensitive national issues. Why are those fleet of feet and marbled by muscle feeling the need to make their political desires known at NFL games? Why do actors do the same at award ceremonies? Why do college students wear masks and beat each other with sticks on campus?

I think this is because the answers to the questions are tougher than we are. We either want or don't want dramatic change. We want to be on the right side. We want to curse at those who disagree with us. But the truth is that the more we act in these ways, the less headway we make and the more entrenched our adversaries become.

That all this has come to the NFL shows how far we have come down a very bad road. Does it seem far-fetched that these behaviors will come to baseball? To college athletics? To Macy’s holiday parade? To a local music concert? To your next family gathering? It does not seem impossible that, in light of the lack of any real leadership in this country, we will keep playing out our demand for a better world outside of regular political/government frameworks. It also does not seem impossible that those who are the most frustrated will bring their impatience and hatred to situations that will give them notoriety. With all the sides hardening, it is not difficult to imagine even more violence in even more places.

Where is the national leader who will tell us that these behaviors are counter-productive and convince us of the following: First, our situation today in the USA is enviable compared to most places around the world. Second, we made a start to become the shining light on the hill. Third, some of the hardest challenges are ahead of us. And finally, we are good enough to meet those challenges.  Can you think of one politician today who could pass this muster?