The Sorry State Of The US Economy

Although reluctant to say it, a recent IMF report on the state of US economy makes clear that US policy makers have failed to protect majority living conditions.

When a country joins the IMF, it agrees to have its economic and financial policies evaluated, in most cases annually, by an IMF team of economists.  As the IMF explains:

The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. . . The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement.

The IMF recently concluded and published a summary of its Article IV consultations with the United States.  While the IMF generally pulls no punches in criticizing the policies of most member governments if it determines that they threaten to slow capitalist globalization dynamics, it tends to tap dance around disagreements when it comes to the policies of its more powerful member countries, especially the United States.  As Adam Tooze points out in his commentary on the IMF statement:

With respect to the US, the stakes are particularly high. The US has the largest vote on the IMF’s board and Congress controls the largest part of the IMF’s budget.

Not surprisingly, then, the IMF went the extra mile in finding nice ways of talking about the state of the US economy and even more importantly the wisdom of Trump administration policies. Even so, US economic challenges could not be completely hidden.  For example, after noting that the “The U.S. economy is in its third longest expansion since 1850,” the IMF goes on to comment:

However, the outlook is clouded by important medium-term imbalances. The U.S. economic model is not working as well as it could in generating broadly shared income growth. It is burdened by a rising public debt. The U.S. dollar is moderately overvalued (by around 10-20 percent). The external position is moderately weaker than implied by medium term fundamentals and desirable policies. The current account deficit is expected to be around 3 percent of GDP over the medium-term and the net international investment position has deteriorated markedly in the past several years. Most critically, relative to historical performance, post-crisis growth has been too low and too unequal.

To address these shortcomings, the administration intends a wide-ranging overhaul of policies, although a fully articulated policy plan has yet to emerge. The administration’s budget proposes to reduce the fiscal deficit and debt, to reprioritize public spending, and to revamp the tax system. However, during the Article IV consultation it became evident that many details about these plans are still undecided. Given these policy uncertainties, the IMF’s macroeconomic forecast uses a baseline assumption of unchanged policies. Specifically, it neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration’s budget. Under this forecast, growth is expected to rise modestly above 2 percent this year and next, driven by continued solid consumption growth and a cyclical rebound in private investment. Growth is forecast to subsequently converge to the underlying potential growth rate of 1.8 percent.

However, IMF concerns over an uncertain US economic outlook and an unclear Trump administration policy plan pale in importance compared to the decline in US living standards illustrated in the following chart that was also in the report.

In broad brush, the US ranking on most of the selected living standards indicators has declined, which means that the US economy is losing ground relative to the other OECD countries in the sample.  But what really cries out for notice is how low the US is on such key indicators as: life expectancy at birth, overall mortality rate, health coverage, poverty rate, and secondary school graduation.  On these indicators, the US is approaching the bottom of the group of 24.  And of course, Trump administration policies, which aim to reduce spending on Medicare and Medicaid, gut worker-protecting health and safety and labor laws, slash taxes on corporations and the wealthy, and weaken unions will only intensify downward trends.

The IMF could easily have pointed out that, because of competitiveness pressures, US policies harm the well-being of workers in other countries as well as in the US, and pressed the US government to reverse course.  But majority living standards are not the most important thing to the IMF or the US government, and that is not how consultations work.

If we want improved living conditions we are going to have to fight for them.  Perhaps greater awareness of just how bad things are in the United States will help speed the effort.

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The IMF’s Skewed Forecasts

The IMF, eager to defend the status quo, has consistently and incorrectly predicted recovery for the post-Great Recession world economy.

The figure below highlights the overly optimistic forecasting bias of recent IMF growth projections.  For example, the green line represents the September 2011 IMF forecast for future world GDP growth.  In each case illustrated, the IMF forecast is for a significant boost in future world GDP growth. And in each case not only did that boost not materialize, growth actually declined.

imf_growth

Sadly, it does not appear that this dismal forecasting record has led the IMF to engage in any meaningful reconsideration of their modeling assumptions.

Third World Countries Lose Ground

Globalization advocates celebrated the 2003-08 period, pointing to the rapid rate of growth of many third world countries as proof of capitalism’s superiority as an engine of development.  Overlooked in the celebration was that fact that growth and development are not the same thing, and in most countries the benefits of growth were only enjoyed by a small minority.  Also overlooked was the fact that this growth was achieved at the cost of ever increasing damage to the health of our planet.  Finally, these cheerleaders also minimized the unbalanced, unstable, and unsustainable nature of the growth process; some seven years after the end of the Great Recession most countries continue to struggle with stagnation, with working people disproportionately suffering the social consequences.

The following figures, taken from the World Bank’s latest annual Global Economic Prospects report, highlight the severity of the post-crisis growth slowdown.

Figures 1 and 2 illustrate the extent of the growth slowdown.   Emerging Market and Developing Economy (EMDE) commodity exporters have suffered the worst declines.  In terms of region, EMDEs in Europe and Central Asia and Latin America and the Caribbean recorded the lowest rates of growth.  Sub Saharan African countries experienced one of the sharpest declines in growth relative to the 2003-08 period.

Figure 1: Gowth By Group

Growth by group

 

Figure 2: Regional Growth EMDEs (weighted average)

regional growth weighted

This ratcheting down of EMDE growth rates means a significant setback in progress towards achieving advanced economy levels as shown in Figure 3 A and B.

Figure 3: Catch-Up of EMDE Income To Advanced Economies

catch up

The Financial Times discusses the significance of this development:

That downgrade [in world growth] came alongside a new analysis showing that for the first time since the turn of the century a majority of emerging and developing economies were no longer closing the income gap with the US and other rich countries.

Last year just 47 per cent of 114 developing economies tracked by the bank were catching up with US per capita gross domestic product, below 50 per cent for the first time since 2000 and down from 83 per cent of that same sample in 2007 as the global financial crisis took hold.

That, the bank’s economists warned, would have a meaningful impact on the future people in those countries could expect.

“Whereas, pre-crisis, the average [emerging market] could expect to reach advanced country income levels within a generation, the low growth of recent years has extended this catch-up period by several decades,” they wrote.

Leading International Monetary Fund officials have warned in recent months that the so-called process of “economic convergence” had slowed to two-thirds of its pre-crisis rate. But the warning from the bank paints an even starker picture.

In the five years before the 2008 financial crisis, emerging markets could expect to take an average of 42.3 years to catch up with US per capita GDP, according to the bank’s analysis.

But over the past three years, as major emerging economies such as Brazil, Russia and South Africa have slowed or fallen into recession, the slower average growth means the number of years it would take to catch up with the US has grown to 67.7 years.

For frontier markets, those more fragile economies further down the development scale, such as Nigeria, the catch-up period more than doubled from 43.1 years to 109.7 years.

And, it is important to add, even these projections are likely optimistic.  The IMF and World Bank have repeatedly overestimated future rates of growth and tend to downplay the possibilities of yet another global crisis.

The World Economy: Trouble Ahead

Economic conditions are not good and the signs are for more trouble.  The post-Great Recession recovery has been incredibly weak and it appears that it will soon come to an end.  And here I am writing about all the advanced capitalist economies, not just the United States.  Perhaps the key indicator: investment and productivity trends.

Here is the International Monetary Fund [IMF] writing in 2015: “Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since.”

More specifically, the IMF finds that:

The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies. For these economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.

The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward precrisis investment trends in either sector.

real private investment

The figure above illustrates how far advanced economy investment has fallen relative to the precrisis period and past forecasts and that there has been no recovery in investment spending (the log scale shows percentage change in investment).

The following figure, which covers only advanced economies, demonstrates that the investment slump has affected both residential and nonresidential investment.  And, as far as the latter is concerned, investment spending on both structures and real equipment are significantly down relative to past trends.

types of investment

These trends have real consequences.  As the economist Michael Roberts points out,  “Global industrial output growth continues to slow and in the case of the G7 economies (red line below), industrial production is now contracting.”

world IP

He also highlights the fact that “world trade . . . is in significant negative territory (red line below).  This is partly due to the collapse in energy and other industrial raw material prices.  But even when you strip out the impact of the deflation in prices, world trade volume is basically static (blue line) and well below even the low world GDP growth rate of around 2.5%.  Countries with low domestic demand can expect no compensation through exports.”

world trade

The investment slump has also taken its toll on productivity.  According to the Financial Times:

Output per person . . . grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.

Moreover, things are fast deterioriating in the US.  The Financial Times reports that productivity will likely fall this year for the first time in three decades. “Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year.”

us-productivity-growth

Sadly, as Roberts argues, most governments still seek to rejuvenate their respective economies by some combination of monetary easing, cuts in public investment, privatization, weakening labor rights, and new free trade agreements. These policies have not worked and there is no reason to think that they ever will.

Searching for the Global Middle Class

The latest hype, designed no doubt to take attention away from declining living and working conditions in core economies, is that a new global middle class is emerging.  The implication is that capitalist globalization continues to work its “magic,” although now it is happening in the so-called third world.  Reality doesn’t match the hype.  Search all you want—it is hard to find real evidence of the emerging new global middle class.

Steve Knauss highlights the talk:

Over half the world will be middle class by 2030, predicts the United Nations Development Program (UNDP) in its report on “the Rise of the South.” The Economist, not known to be shy, claims we’re already there, thanks to “today’s new bourgeoisie of some 2.5 billion people” across the global South that have become middle class since 1990. The OECD, perhaps the boldest of all, postulates that India – currently one of the poorest countries on earth – could find more than 90 percent of its population joining this “global middle class” within 30 years, from around 5 or 10 percent today.

It all sounds pretty impressive until you learn how membership in the new global middle class is determined.  It includes those whose real income (in purchasing power parity dollars) is at least $10 per day.  That means at least $3650 in annual earnings gets you membership in the new global middle class.

To appreciate how low that figure is one has to know what purchasing power parity means and how it is used to calculate income.  There are two main ways to make comparisons in earnings across countries, something needed for global claims.  One is to convert national earnings into dollars using the exchange rate.  However, this is not considered very reliable.  Exchange rates move all the time, making comparisons unreliable.  Even more problematic, many of the goods and services people consume are not internationally traded so changes in exchange rates do not affect their well-being.

The other method, the one most commonly used, relies on purchasing power parity calculations.  In brief, the World Bank constructs a basket of consumer goods and services and determines its dollar cost in the United States in a particular year; the most recent year was 2011.  Then, it determines the national cost of a similar basket in other countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these other countries using these relative costs.

An example: suppose that the constructed basket of goods costs $200 in the US.  And suppose that the “equivalent” basket of goods costs 800 Rupees in India.  We can then can construct a purchasing power exchange rate between the two currencies.  In my example, 1 Rupee equals $0.25.  Or said differently an Indian with 4 Rupees is said to be able to command the same value of goods and services as someone in the US who has $1.  Thus, an Indian earning 8000 Rupees would be said to earn the equivalent of $2000.

Of course this method has its own difficulties.  For example, imagine how hard it is to develop national indices that are equivalent.  How do we calculate the average price of a good or service in a country?  And are the goods and services in one country, say the US, really equivalent to the goods and services in another country, say India?

Regardless, putting doubts about the methodology aside, we can now return to our standard for reaching the global middle class.  Our international agencies seek to count individuals who earn the annual equivalent of $3650 in the US as middle class.  That certainly seems like a stretch!

The following chart highlights the distribution of global income in purchasing power dollars using development agency categories.

earnings

As Knauss explains:

Even taking the data at face value, 71 percent of humanity is poorer in real terms than the $10 PPP threshold. . . . This is compared to 79 percent in 2001, owing to a modest increase in families crossing the $10 PPP line but remaining concentrated very close to it . . . . There was consequently an expansion of those living on between $10 and $20 per day from 7 percent of humanity in 2001 to 13 percent today.

That’s it. That’s the whole basis for the “global middle class” hype. If one were to select even a slightly more reasonable standard – for example, $20 PPP, or the real living standard equivalent of a family of four in the United States with a total income above $29,200 – there is no global middle class to speak of whatsoever. Only 16 percent of humanity – 13 percent in 2001 – enjoys this standard of living, composed of the majority of the population across the West, where real substantial middle classes exist, and the elites in the South, very rarely more than 15 or 20 percent of the population, and much more often substantially less.

Still, a look at the chart does show a significant fall in the share of world population that made less than $3 a day.  This however appears largely due to “the historic wave of ‘depeasantization’ throughout the neoliberal era.”  In other words, as people are forced off the land and into urban areas they become part of the cash economy.  Whether their higher money wage compensates for their loss of access to land is another issue, one that should make us pause before declaring them better off.

More generally, the gains over the 2001 to 2011 period were driven by international processes that are now moving in reverse.  The global economy is clearly slowing.  Already declines in exports of manufactures and commodity prices are undoing past gains in poverty reduction in Asia, Africa, and Latin America.

Capitalist globalization does indeed appear to be working magic.  But, as Oxfam’s recent report shows, only for the benefit of those at the top of the income scale.

  • In 2015, just 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity. This figure is down from 388 individuals as recently as 2010.
  • The wealth of the richest 62 people has risen by 44% in the five years since 2010 – that’s an increase of more than half a trillion dollars ($542bn), to $1.76 trillion. Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period – a drop of 41%.
  • Since the turn of the century, the poorest half of the world’s population has received just 1% of the total increase in global wealth, while half of that increase has gone to the top 1%.
  • The average annual income of the poorest 10% of people in the world has risen by less than $3 each year in almost a quarter of a century. Their daily income has risen by less than a single cent every year.

inequality

 

The TPP: A Living Agreement

President Obama has called the TPP a “trade agreement for the 21st century.”  The implication is that this agreement goes a step beyond past trade agreements.  And in at least one critical way this appears true.

As Stan Sorscher explains, the TPP appears to be a “living” agreement, by which he means that the parties to the agreement are not bound by the specific terms of the agreement but in fact enjoy mechanisms that allow them to extend its reach as desired:

The recently released text establishes roughly 20 committees to manage trade in agriculture, government procurement, the Internet, food safety, financial regulation, and other topics covered in the deal. Some committees have narrow authority, but others have open-ended scope, such as the Committee on Trade in Goods which will “…undertak[e] any additional work that the Commission may assign to it.”

So, what is this “Commission,” established under TPP? It coordinates work among the Committees. It also interprets provisions of the agreement. In our tradition, that authority belongs to courts.

The Commission may also “take such other actions as the Parties may agree.” If we are unclear on what that means, we can let the Commission explain to us exactly what it has the authority to do. . . .

The charge and work of the Commission is described Chapter 27 of the agreement.  Here are its first two articles:

Article 27.1: Establishment of the Trans-Pacific Partnership Commission

The Parties hereby establish a Trans-Pacific Partnership Commission (Commission) which shall meet at the level of Ministers or senior officials, as mutually determined by the Parties. Each Party shall be responsible for the composition of its delegation. 

Article 27.2: Functions of the Commission

1. The Commission shall:

(a) consider any matter relating to the implementation or operation of this Agreement;

(b) review within 3 years of entry into force of this Agreement and at least every 5 years thereafter the economic relationship and partnership among the Parties;

(c) consider any proposal to amend or modify this Agreement;

(d) supervise the work of all committees and working groups established under this Agreement;

(e) establish the Model Rules of Procedure for Arbitral Tribunals referred to in Article 28.11.2 and Article 28.12, and, where appropriate, amend such Model Rules of Procedure for Arbitral Tribunals;

(f) consider ways to further enhance trade and investment between the Parties;

(g) review the roster of panel chairs established under Article 28.10 every 3 years, and when appropriate, constitute a new roster; and

(h) determine whether the Agreement may enter into force for an original signatory notifying pursuant to paragraph 4 of Article 30.5.1 (Entry into Force).

2. The Commission may:

(a) establish, refer matters to, or consider matters raised by, any ad hoc or standing committee or working group;

(b) merge or dissolve any subsidiary bodies established under this Agreement in order to improve the functioning of this Agreement;

(c) consider and adopt, subject to completion of any necessary legal procedures by each Party, any modifications of 1:

(i) the Schedules contained in Annex 2-D (Tariff Elimination), by accelerating tariff elimination;

(ii) the rules of origin established in Annex 3-D (Specific Rules of Origin); or

(iii) the lists of entities and covered goods and services and thresholds contained in each Party’s Annex to Chapter 15 (Government Procurement);

(d) develop arrangements for implementing this Agreement;

(e) seek to resolve differences or disputes that may arise regarding the interpretation or application of this Agreement;

(f) issue interpretations of the provisions of the Agreement;

(g) seek the advice of non-governmental persons or groups on any matter falling within the Commission’s functions; and

(h) take such other action as the Parties may agree.

3. Pursuant to paragraph 1(b), the Commission shall review the operation of this Agreement with a view to updating and enhancing this Agreement, through negotiations, as appropriate, to ensure that the disciplines contained in the Agreement remain relevant to the trade and investment issues and challenges confronting the Parties.

4. In conducting a review pursuant to paragraph 3, the Commission shall take into account:

(a) the work of all committees, working groups and any other subsidiary bodies established under this Agreement;

(b) relevant developments in international fora; and

(c) as appropriate, input from non-governmental persons or groups of the Parties. 

In short, if this agreement is approved, governments can transform its terms and reach at will, including adding new countries.  And the operating principles are clear: more privatization and freedom of action for corporations, resulting in more opportunities for private profit.

 

Signs Of Global Slowdown

There are growing signs that the global economy is slowly but steadily heading into another period of stagnation.

Global growth since the 2009 world financial crisis has largely been driven by the third world; developing Asia alone accounted for almost 60% of world growth over the period 2009 to 2014.

However, the economic fortunes of most third world countries, including those in developing Asia, are now being pulled down by weak core country growth.  And this development will in turn deepen economic problems in Japan, most Eurozone countries, and even the U.S.

For example, Asian growth has largely been fueled by exports to advanced capitalist countries, in particular the U.S.  However, as a result of core country economic difficulties developing Asian countries have seen their exports plummet. The following figure shows year-on-year export growth for developing Asian countries; the last data point (April 2015) is an average growth rate only for Korea, China, and Taiwan.

export growth rates

The next figure shows that all of Asia’s leading economies are suffering a similar fate, with their exports now barely growing in value compared with growth rates of over 40% in 2010.

NA-CA967_OUTLOO_G_20140427160604

The Wall Street Journal explains what is happening as follows:

For decades, Asia fueled its development by selling products to the West. That engine is now sputtering, threatening to sap the region’s economic expansion. . . .

Today, it is unclear whether exports can still provide that oomph. Overall growth is slowing in many Asian nations, forcing policy makers to ponder whether demand from their own consumers can fill the void.

“That model that Asia had of relying on the trade channel—that’s gone,” said Markus Rodlauer, deputy director for Asia and the Pacific at the International Monetary Fund in Washington.

The following figure shows aggregate exports by destination for six leading Asian economies: China, Hong Kong, Korea, Singapore, Taiwan and Thailand.  The declines in sales to Japan and the EU are especially striking.  However, even intra-Asian export growth has fallen, in large part because of China’s slowing economic activity.

asian-exports

To this point, Asian economic growth has not fallen as much as one might expect given the export trends highlighted above.  Perhaps the main reason is that China’s massive investment spending has, up to now, served to support Asian exports, although at a reduced rate.  But China’s investment first policy has largely run its course, leaving the country with a growing number of empty towns, shopping centers, theme parks, airports, and high-speed rail lines and its regional governments deep in debt.

Here is one illustration of the problem from the South China Morning Post:

When officials reopened the airport on the sparsely populated Dachangshan island off the mainland’s northeast coast after a US$6 million refurbishment in 2008, they planned to welcome 42,000 passengers in 2010 and another 78,000 in 2015.

However, fewer than 4,000 passengers – or just a 10 a day – passed through its gates in 2013, data from the civil aviation authority showed.

Since February last year [2014], China has approved at least 1.8 trillion yuan (HK$2.3 trillion) in new infrastructure projects to counter a slowing economy. The approvals come just as the full costs of the underused airports, expressways and stadiums built during the last spending binge are beginning to emerge.

While construction firms profited from the boom, it saddled provincial governments with US$3 trillion worth of debt, with the most over-exuberant seeing their local economies weaken and become imbalanced towards the building sector.

As noted above, some analysts believe that Asian governments are likely to try and compensate for the loss of demand from stagnate exports by supporting policies to boost domestic consumption.  However, this is extremely unlikely.

To put it bluntly, governments throughout the region remain committed to their export growth strategies.  This has left them locked in competition to attract and hold corporate investment and determined to keep labor costs as low as possible.  The Chinese government, for example, has decided to counter the recent rise in labor activism and wages by engaging in a massive push to replace workers with robots.

As the New York Times reports:

Chinese factory jobs may thus be poised to evaporate at an even faster pace than has been the case in the United States and other developed countries. That may make it significantly more difficult for China to address one of its paramount economic challenges: the need to rebalance its economy so that domestic consumption plays a far more significant role than is currently the case.

Another indicator of global fragility is the decline in commodity prices.  Of course this trend is largely a consequence of the previous one.  Asia’s export decline has translated into a decline in regional manufacturing activity and a fall in the demand for as well as price of most commodities.  The following figures from the Guardian illustrate this trend.

gold

crude

platinum

aluminum

copper

iron ore

These sharp declines in commodity prices threaten to dramatically slash rates of growth in sub-Saharan African and Latin American countries, most of whom depend on exports of these commodities to finance the imports they need to support domestic production and consumption.

In brief, growth prospects in core countries are poor.  As a consequence, developing Asia faces the exhaustion of its export-led growth strategy.  And the same is true for sub-Saharan Africa and Latin America.  Compounding global problems is the fact that Germany and Japan continue to embrace their own export-led growth strategies and U.S. growth is unlikely to prove strong enough to ensure sufficient global demand.

In sum, without significant structural changes in most economies, changes that include support for policies designed to boost majority living and working conditions or said differently privilege people over profits, workers everywhere are in for a long period of economic hardship.