I make a depressing lunch date.Posted: August 11, 2010
I’ve been away from my writing for two months now. The purchase and gutting of a house, on top of my regular day job, has been hectic. It also coincides with a period of real intellectual confusion that I’ve experienced over the past several months as the reality of global economic patterns, as well as political rhetoric, swirl to create a rather depressing outlook.
That outlook (which contributed to a rather famous author calling our lunch meeting the most depressing he’d ever had) builds on several announcements, pronouncements and trends that have much smarter men than I very confused as to where the global economy is going.
Much of this began, or was highlighted by the late June G20 meetings in Toronto, where the leaders of the G20 + agreed to make deficit reduction an immediate to mid-term priority (admittedly a decision that lacks any teeth whatsoever and comes with repeated allowances for “national priorities”). This despite the fact that the global economy shows no fundamental signs of real recovery.
Sure the markets have rebounded but this has been on the basis of corporate profits rather than economic data. What’s the difference you ask? Corporate profits increase as companies reap the benefits of decreased wage costs. Thus with large layoffs, as experienced during the past two years of crisis, profits are the first thing to accompany a return to stability.
Unfortunately such positive profits can be short-lived if there isn’t a commensurate increase in employment levels and exports.Hence why fundamentally the North American economy is still mired under a rather ominous economic cloud. To be sure, Canadian job numbers have ebbed positively since the spring, however when 75% + of your exports go to a market whose economy shows little sign of revival one must be concerned, especially when the world’s fastest emerging markets (i.e. China) have yet to show real signs of economic stability.
Thus the G20 commitment to deficit control might be seen as premature. Sure, quickly increasing debt levels pose a real long-term risk but is prolonged recession, and the possibility of deflation, a risk worth taking? And heck, is default such a bad thing? The experience, and subsequent rebound, of Latin American defaulters of the 80s and 90s might make us envy the risks of such moral hazard.
And as others have noted, playing cheap today might be worse in the long run.
Krugman, for example, whom perhaps I think too much alike on this topic, thinks that it’s too early to stop stimulating the US economy, and that doing so will pre-empt recovery and lead us towards a long-term recession/depression.
If, for arguments sake, one accepts his theory, then one must ask “why would we think of stopping the flow of stimulus?”
The answer lies in bond markets where rising deficits are likely to see a continued devolution of trust between bond traders and the US treasury, one that could lead to increased borrowing costs (i.e. higher interest rates) and a subsequent drop in consumer spending (as we tend to save more when rates go up).
Conversely, keeping the deficit and total debt under control would send a message to bond traders that the economy is under control, a message that should, in theory, keep interest rates low and continue to incent spending.
If rates go up, we save more, thus we spend less, thus overall demand decreases and thus we raise the risk of short-term deflation. However, given that this will have been caused by stimulus spending, in theory the mid- to long-term outlook turns positive as stimulus lays the foundation for increased employment and, hopefully, new competitive industries.
If rates stay low (they can’t go lower…), we continue to spend at current levels, thus opening us up to some risk of increased inflation but fundamentally doing little to affect the future path of the economy – we’d thus be choosing to stick to the current deck of cards we’ve acquired. Short-term gain for long-term pain. Is this what we want? Given that it would mean continuing to rely on a mix of aged and crumbling infrastructure, mature and struggling industries and a highly valued currency, I’m not so sure.
For while policy makers contemplate cutting stimulus spending as soon as possible in order to keep deficit and debt levels under control, the much bigger issue is the health and future sustainability of our economies. In particular, the question of whether they are healthy enough to compete against faster, more mobile and cheaper emerging economies?
In a world of free trade, I simply struggle to answer in the affirmative. For given the high-cost wage structures of most Northern economies, slowed productivity, and the absolute size (population/share of global exports) of emerging economies in Asia and Latin America, I can’t help but think we’re looking at what Lenin coined as the paths of uneven development that cause countries to overtake one another.
We’re growing slower than someone else, thus we’re bound to be overtaken.
And what does that mean exactly?
As I’ve written previously, it likely means we need to recalibrate our wage structures to match/compete with the rest of the world. But doing so would mean either massive wage deflation or a massive devaluation of our currencies. Both would hurt but both might represent the only ways of keeping near full employment in an increasingly competitive and open global trade environment.
Conversely, trying to maintain current wage levels, let alone expectations of wage increases, will either render us bankrupt given the inevitable inability to compete globally, or it will mean a break in the system of free trade in favour of a closed network of allies, likely regional friends, for whom globalization will melt away as its associated benefits begin to accrue elsewhere.
Either way, I can’t help but look ahead and see little bright light ahead.
Choosing to turn the stimulus taps off as early as possibly as desired by the G20 will might just bring that pain to bear earlier on, whereas continuing to pump funds into strategic areas might just give us a chance to develop new industries and innovations that prime the next stage of economic development in our mature economies.
However, no matter if we keep spending or not, a truly globalized and interdependent system is likely to bring about a great deal of economic pain to a people who were once its primary beneficiaries.
We’ve taken it for granted that we ‘deserved’ a certain lifestyle and quality of life. Well now the rest of the world wants its fair share.
The author was right, I make a depressing lunch date.