Edward Hadas

Why the global recovery is so slow

Edward Hadas
Aug 6, 2014 17:39 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.

Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former U.S. treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.

Summers’ complaints about monetary and fiscal policy seem excessive. Before the crisis, central banks were widely praised for generating steady, non-inflationary growth around the world. That does not make them sound too tough. And the fiscal deficits since the crisis in many developed countries have been the largest ever in peacetime as a share of GDP. That hardly sounds inadequate.

A more plausible financial explanation for the disappointing global recovery starts with balance sheets that have been distorted by more than two decades of increasing borrowing. Many households, companies and governments have been left under financial pressure. Their spending is likely to be restrained without a massive reduction in debt – whether through write-offs, repayments using newly created money, or inflationary erosion.

Growth in a rich and crowded world

Edward Hadas
Jul 23, 2014 14:23 UTC

Perky, productive robots, or nothing more than a few new smartphone apps? Cascading innovation, or just a few tweaks? Economists and technologists are debating what the future holds.

Pessimists like Robert Gordon of Northwestern University see decades of slow growth ahead, with little scope for big leaps forward. The optimists, among them Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology, expect new technological glories. Both sides are more wrong than right.

Everyone is wrong when the wrangling is numerical. Arguments based on GDP and productivity growth are too circular to resolve anything. A main cause of any slowdown in reported productivity numbers is a judgment that innovations are becoming less valuable. So a reported slowdown cannot logically be used to support the argument that technology is advancing more sluggishly.

Favour labour over consumption

Edward Hadas
Nov 13, 2013 16:09 UTC

Unemployment is a problem in most developed economies. Any politician, central banker or professional economist in the United States or Europe will admit that the published rates are unacceptably high, that too many people have left the paid labour force and that young people starting out have a particularly bad deal.

Americans often say their problem was caused by the 2008 financial crisis. That isn’t exactly wrong. After the failure of Lehman Brothers, many indicators of labour market depression – for example, the proportion of unemployed people who have been unemployed for more than six months – jumped to the highest levels on record (generally since 1948). Most of these indicators have improved, but remain uncomfortably high.

However, I think that the recession only uncovered longstanding structural weaknesses, and the problems I have in mind are not exclusively American. They just showed up in European statistics much earlier. Unemployment rates there have been persistently high, especially among the young, for decades. And the recorded unemployment numbers are flattered everywhere by the expansion of what might be called the non-labour force: those classified as suffering from incapacity, involuntary students and healthy retirees.

America says it has got poorer. That’s rich

Edward Hadas
Sep 25, 2013 14:45 UTC

The U.S. Census Bureau says the median American household’s income was 1.3 percent lower in 2012 than in 1989 after adjusting for inflation. That suggests stagnant American consumption for the last 24 years. That assertion is not as ridiculous as North Korean propaganda about the United States – “their houses blow down very easily and they have to live in tents” – but it’s still misleading.

To start, the country is currently enjoying the fruits of major technological advances in electronics. In 1989, there were almost no mobile phones. Today, more than 90 percent of American adults have one, according to the Pew Internet and American Life Project – and more than half of those phones count as “smart”. The same project estimates that about 70 percent of U.S. adults are daily internet users, compared to zero in 1989.

Considering the increased consumption of electronic goods, a typical American household could only be poorer now than then if there were matching declines in the consumption of other goods and services. But none of the statistics I could find shows this. On the contrary.

China’s wisdom on GDP growth

Edward Hadas
Jul 3, 2013 12:10 UTC

“We should no longer evaluate the performance of leaders simply by GDP growth. Instead, we should look at welfare improvement, social development and environmental indicators.” That is a fine piece of wisdom from Xi Jinping, China’s president. Leaders of developed economies can learn from it.

Xi was speaking to a domestic audience about the choice of leaders within the ruling Communist Party. The desire for people who are “devoted fighters for the socialism with Chinese characteristics” is distinctly local, but Xi identified a fact which transcends all Chinese characteristics: GDP is a poor measure of economic progress.

Actually, for China, GDP is modestly helpful. In a country still so poor, increases in output correlate well with genuine economic improvements: factories and farms producing more and better goods, enterprises offering more and better services, and so on. Still, Xi is right that China is ready to outgrow this crude indicator. The idea is all the more relevant in richer economies, where GDP growth is a terrible measure of economic progress.

Poverty and renunciation

Edward Hadas
Apr 3, 2013 14:10 UTC

“Go into the street, and give one man a lecture on morality, and another a shilling, and see which will respect you most.” Samuel Johnson said that in the 18th century, but the general preference for money over preaching is sufficiently strong and timeless that his wry quip remains pertinent. Most economists take Johnson’s sentiment too seriously. They assume that people always want more shillings and always resist wealth-denying morality. That is a serious error.

Consider, for example, the enthusiastic response from around the world to the material renunciations of Pope Francis. The crowds cheered when the new leader of the Catholic Church said he wanted a “poor Church for the poor”. His decision to stay in simple lodgings and wear simple clothes amounted to turning down shillings for the sake of giving a morality lecture, but few observers were bothered. On the contrary, it was welcomed as a pertinent comment on the excessively materialist values of modern society.

The need to be “for the poor” is eternal and universal. In every society there will always be people who cannot thrive without help from others. Despite Dr Johnson’s comment, the need for conscience-pricking discourses on the topic, papal and otherwise, is equally timeless. Otherwise, it would be too easy to find plausible but ultimately selfish reasons not to help out.

What to do about debt

Edward Hadas
May 30, 2012 15:11 UTC

Debt, a little like sex, is a two-sided relationship which, when used appropriately, pleases the partners and is good for society. But both are also intoxicating and can easily become excessive and anti-social.

The financial bubble of the 2000s was the financial equivalent of the 1960s enthusiasm for “free love”. The delights of nearly free debt set pulses racing. Since the financial collapse, the dangers of uncontrolled borrowing have been recognised, but the bad habits have hardly changed.

When debt is used as it should be, lenders receive a just return on their assets and borrowers pay a just price for the use of the fruits of other people’s labour. Loans finance helpful investments and assist governments and individuals to manage periods of adverse fortune. But debt can also be used for promiscuous pleasure-seeking, unaffordable consumption, unjustified corporate investments and excessive government spending.

For growth, focus first on jobs

Edward Hadas
May 23, 2012 14:48 UTC

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Why “suzhi” should go global

Edward Hadas
Apr 18, 2012 11:58 UTC

What’s the goal of development? A standard answer is higher gross domestic product. A few specialists prefer to talk about building capabilities. I have another idea: development should be about suzhi, a Chinese word usually translated as quality.

China has been worrying about development for a long time. Reformers in the 19th century wrestled with how to overcome the people’s backwardness without losing what was truly great and distinctive about the Middle Kingdom. They saw that development, as it’s now called, involved a major reworking of culture and society. It encompassed the economy, education, law, politics, the military, the arts and medicine.

Today’s international community has adopted a much narrower understanding. Leaders of poor countries and experts in the field pay often think of development as being centred on economic growth. Social and cultural changes are treated as little more than tools to help increase GDP.

Don’t obsess about GDP measures

Edward Hadas
Feb 22, 2012 14:57 UTC

An American, a Frenchman and a physicist were talking about some unusual weather. “It was twice as hot this afternoon as this morning”, said the American, “the temperature went up from 40 to 80 degrees.” The Frenchman interjected: “That’s in Fahrenheit. In Celsius, it was six times hotter.” The physicist was scornful. “On the only really scientific measure, the Kelvin scale, the increase was a piffling 5 percent.”

Who’s right? Well, all the measures are accurate and it certainly was hotter. But no single ratio – whether twice, six times or 5 percent – captures just how much hotter it actually felt. The feeling of hotness, like the feelings of pain or anger, cannot be measured with genuine precision.

It is the same for the feeling of prosperity – any measure will be arbitrary and quite possibly misleading. Consider gross domestic product, the most common index of economic success. GDP is the sum of spending on everything in the economy, from shoes to shoe-shines, from cars to child care. In comparing countries with each other or over time, GDP is usually adjusted for inflation to calculate what is ambitiously called “real GDP”. It is then often divided by the population, creating “real GDP per person”. This is usually measured in “constant dollars” and, for 2011 in the United States, becomes $43,149 of 2005 dollars.