Still Squeezed
Austerity and inequality hold back the global economy.
By Matthew Budman
Matthew Budman is editor-in-chief of TCB Review.
It’s been a frustrating year, both economically and politically. And 2012 looks to be much the same, only more so.
Bart van Ark, chief economist of The Conference Board, sees continuing slow growth, exacerbated by social and political conditions, most importantly income inequality. The widening wealth and income rift not only divides society—it misallocates capital and resources and shows in stark detail how much is wasted.
And then there’s the euro crisis, Japanese poverty, and the growing pains of the emerging economies. By any standards, these are interesting times. Much to the chagrin of many.
First of all: You’re projecting 2012 growth in the advanced economies to fall to only 1.3 percent. Is this a low point in a cycle, or are we looking at a slower global economy?
We’re looking at a slow economy, but in the advanced economies, I think we’re going to see a low point in 2012. We’ve spent four years operating way beneath our capacity, given the amount of labor, capital, and technology we can employ, and this next year will still be difficult. But in 2013 and 2014, I expect we’re finally going to see some real recovery, as the housing sector begins to recover and unemployment stabilizes at a lower rate than today.
Still, though, that’s not going to get us back to where we were in 2008, before the level of output dramatically dropped after the fall of Lehman. We lost about a trillion dollars in output due to the recession, and we’re not going to recover all of that, but at least we may get back to trend growth, a rate in line with the amount of labor, capital and technology that we have in place. So that will give us some faster growth in the 2013-16 period, and things will look somewhat better.
Perhaps more surprisingly, you’re forecasting 5.1 percent growth in the emerging economies, down from 6.4 percent in 2011.
We are seeing a gradual slowdown in the emerging economies, basically because the big countries—China, India, and Brazil—have all been growing beyond their trend. Now they’re facing inflation and need to slow their economies.
So globally, we’ll see growth slow to around 3 percent in 2012. That is still a reasonable growth rate. Some people call this a new normal, but I think this is actually, well, pretty normal. What we saw between 1995 and 2008 was abnormal. We had both rapidly emerging economies and high technology kicking in, and that’s the kind of recipe we cannot quickly repeat.
Is the divide between the advanced and emerging economies widening?
They’re actually converging, in terms of both growth rates and levels of output per head—the emerging economies are slowing in growth as the advanced economies are beginning to recover, and their per-capita income levels are catching up. That’s why an open, ongoing process of global coordination of economic policies is so important: As these economies are becoming more aligned, they will have to be much more involved with each other.
How much longer will China and India and Brazil be “emerging”? Haven’t they emerged yet?
They’re still transitioning. They’ve been growing very rapidly in recent years because of investment in their economies, with a lot of older, inefficient companies leaving and new companies coming in. Now they’re starting to mature and become balanced, and it’s a process that could last for years. These economies will retain emerging characteristics well into the next decade. We started including South Korea on lists of advanced economies only about five years ago, after it completed that process of transition.
In every economy, obviously, what’d be ideal is increasing growth while reducing debt. But, of course, lowering spending shrinks the economy rather than expanding it. Is the trend toward austerity, in Europe as well as the United States, counterproductive?
Of course, if you are on the brink of collapse, like with Greece, you may have no choice. But in general, in the short term, radical austerity is a high-risk strategy. A country can reduce its deficits—and, long-term, its debt—partly by reducing growth in expenditures and increasing revenue through tax increases. But government also needs to invest in growth. And government has a role to play there in some of the basic functions, such as education, infrastructure, research and development, health care, and good government in general. All of that is necessary to create the environment for businesses to flourish. Austerity programs risk pulling back on some of these functions and actually make it harder rather than easier for business to operate in a conducive environment. The United Kingdom made that choice and is currently seeing considerably slower growth than many other advanced economies.
At the same time, there’s no obvious strategy to pursue in finding the right balance between managing the government budget and investing in the economy. There’s going to be a lot of wheeling and dealing between political parties and political philosophies and trying out of different policies, some of which may work better than others.
