Last year looked like the time when President Trump had delivered on his promises to strengthen the economy. His tax cuts appeared to juice growth above 3%, a pace The United States had not topped since 2005. But recently the Commerce Department revised 2018 growth downward to below 3%, even as forecasts for 2019 were also trending lower, toward 2%. It all has triggered another wave of disappointed commentary about doggedly “slow” growth in the United States.
But it is not just an American story, and it’s not just Mr. Trump who won’t deliver on promises of 3, 4 or even 5% growth. Across the world, economists have had to downgrade growth forecasts in most years since the global financial crisis of 2008. Defying the hopeful projections, Japan has rarely grown faster than 1%. Europe has struggled to sustain growth faster than 1.5%. No one quite knows how fast China is growing, but it’s clear that there; too, the economy is slowing.
So why the dismal science is suddenly guilty of issuing overly optimistic forecasts that set the whole world up for disappointment?
Economists keep basing forecasts on trends established during the postwar miracle years, when growth was boosted by expanding populations, rising productivity and exploding debt. But population and productivity growth had stagnated by 2008, and the financial crisis put a sudden end to the debt binge. This miracle is over. Politicians often promise to bring back a golden age, but serious economists also are encouraging a similar illusion.
Even during the Industrial Revolution, In the 19th century, the world economy rarely grew faster than 2.5% a year, until the post – World War II, baby boom began to rapidly expand the labor force. After 1950, the combination of more workers and more output per worker lifted the pace of global growth to 4%. Economists came to think 4% was “normal”.
Yet by last decade, the baby boom had faded out from Europe to Japan and China. Even in the United States, younger and faster – growing than most developed countries, growth in the working – age population slowed to a mere 0.2% last year from 1.2% in the early 2000s. Because fewer workers correlate directly with slower growth, that decrease implied a 1- point drop in economic growth.
Roughly, economists should have expected that the United States economic growth would slow to 2% from 3% – and it has. This is in our opinion the new “normal” for the American economy. Stimulus measures like the Trump tax cuts can lift growth above this path, but at best temporarily, at the risk of higher deficits and debt. For political leaders, the new age of slow growth is not a problem to solve; it’s in our opinion a reality they need to accept and explain the same to the public. Because it’s just not that bad as the history proofs.
When populations are growing slowly, the economy doesn’t need to grow as fast to keep incomes high. Thus in the United States this decade, growth in gross domestic product per capita has slowed much more gradually than the overall economy, by half a point, to an average of 1.4%. And though Mr. Trump likes to boast about how well the United States is doing against developed rivals, Europe has been growing just as fast in per capita terms this decade, and Japan has been growing slightly faster. In a rich country, that is fast enough to satisfy most people: Indeed, surveys show that Americans have rarely been more confident about the economy.
Slower growth in the working age population also means less competition for jobs worldwide, which goes a long way to explaining why unemployment is now at record lows not only in the United States but also in Germany and Japan. Surely that’s not a bad thing. Whatever politicians tell the public; their attempts to bring back the miracle years are ill advised.
Growth in the economy is driven by growth in the number of workers and in output per worker, or productivity. But since the post war surges of 1950s and 60s, productivity growth has slowed, also defying government efforts to lift it. For a time, the global economy kept motoring along anyway, fueled by a surge in debt. In the 1980s, central banks began winning the war on inflation, which allowed them to drop interest rates sharply.
Lower borrowing costs unleashed a worldwide binge that saw debt surging from 100% of global gross domestic product in the late 1980s to 300% by 2008.
of all the reasons given for the slowdown in the global economy, it seems that the world’s ballooning debt load has fallen to near the bottom of the list for some reason. Perhaps it’s because interest rates haven’t shot higher as many expected, but large amounts of debt have other negative implications that may now be coming to light. In 2012 Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff wrote in a paper published on the National Bureau of Economic Research’s website that economies with high debt potentially face “massive” losses of output lasting more than a decade, even if interest rates remain low. Could that be happening now?
The Institute of International Finance (IIF) issued a report saying that the mountain of global debt expanded by 3.3 trillion USD last year to 243 trillion USD, or more than 3 times worldwide gross domestic product. Total debt in the US grew by 2.9 trillion USD to more than 68 trillion USD in the largest annual increase since 2007. What’s truly disturbing in our opinion is that the IIF said US non-financial corporate debt stands at 73% of GDP, close to its pre – crisis peak.
After debt growing faster than the economy for 3 decades, debt growth in many countries, including the United States, has fallen back in line with economic growth. Even China, the one major country that dodge the crisis and experienced a surge in lending after 2008, is now reluctant to build on the mountain of debt that already weighs down its economy.
So, in our opinion the postwar miracle is finally over. Economic growth is weighed down by the baby bust and the debt hangover. Yet because economists continue to base forecasts on miracle rates of growth – 4% for the world, 3% for the United States – policymakers keep fighting to hit these targets. This is in our opinion very risky.
There are growing calls from economists on both the right and the left to lower interest rates, or increase government spending, to boost growth even if that risks higher inflation. At the Federal Reserve, too, there is an emerging view that letting inflation rise above 2% long considered a red line may not be unwise. The underlying assumption seems to be that policymakers must take action because 2% GDP growth is intolerably slow. But must they? The confidence surveys suggest Americans are quite content with record – low unemployment, benign inflation and 1.4% growth in gross domestic product per capita. Why then the rush to pump more money into the economy, which risks rekindling its debt problems and inflation? The world in our opinion does not need more debt and more inflation to counter trends of declining population growth and high indebtedness. Instead, economists need to adjust their forecasts and politicians need to rethink their policies to match this reality. Because trying to recreate a bygone golden age is a shaky way to build the future.
Those who believe that cryptocurrencies will someday take over the global financial system have been pretty quiet for the past year as prices collapsed. But they were out in full force as the market suddenly spiked.
No matter how we expect the future to occur, changes are going to happen.
