Neil Irwin and the New York Times Miss the Real 'Low-Growth World' Story
In modern times, recessions have been stripped of their essential meaning. While painful in the very near term, they signal the looming economic boom since they quite literally are a sign of market forces cleansing out all the misuses of labor, bad investments, and lousy companies holding the economy down in the first place.
All this and more requires mention given a New York Times front page story from Sunday which puzzled over our "low-growth world." Not mentioned by author Neil Irwin was that all the government and central bank intervention since 2008 has deprived the global economy of the major cleanse that would have made abundant growth more of a reality. The recession is the certain cure, but since recession has become a dirty word to world leaders and economists on the way to excessive governmental response, we've been robbed of a more robust rebound that would have long ago revealed itself.
Beyond that, Irwin mixed cause and effect in his valiant effort to explain the alleged mystery of slow growth. Operating from incorrect first principles, his analysis was blinded to what is presently holding the global economy back.
Irwin suggests that low-growth trends are "behind the cheap gasoline you put in your car." This gets things backwards, plus it's belied by recent history. Whatever the good or bad of present economic activity, no one (including Irwin) would suggest that we're worse off today relative to 2008-20013. This is important simply because the global supply of oil surged during the time in question alongside a surging oil price. The world economy wasn't booming then as much as the dollar in which oil is priced was a great deal weaker. Oil has never been scarce (not in the ‘2000s, not in the ‘70s) in modern times; rather the dollar was weak in the ‘70s/'2000s, while strong in the ‘80s and ‘90s. There's no story there.
Furthermore, as evidenced by the ability of backwards countries like Saudi Arabia, Venezuela and Nigeria to supply abundant oil to a marketplace reliant on it, nominally expensive crude was a sign of economic weakness in the developed world. It was simply because it signaled a rush of investment in developed countries into extraction of what was already plentiful, and that could once again be supplied by the less economically advanced. The rush into energy was a sign of the developed world moving in the wrong direction, while cheaper oil is itself the boom simply because it means the developed world will ignore extraction of the prosaic while focusing on higher value, higher margin economic pursuits.
Irwin points to "ultra-low interest rates" on savings as another sign of slow economic growth, but this too misses the point. With or without the Fed's influence, banks would presently be paying very little for savings simply because capital requirements and regulations meant to reduce risk-taking have made it difficult for banks to pay anything but a low rate. If they can't take risks they logically can't afford to pay high rates of interest, but then banks are and have long been a minor economic player.
Let's not forget that most lending - 85 percent at present - in the U.S. economy takes place well away from stodgy, superannuated banks. Only among economists, politicians and central bankers untouched by the real world is there such thing as easy credit provided by banks to the economic concepts of today and tomorrow. Lending and investing are certainly taking place at higher interest rates (and savers earning higher yields on savings), but traditional banks have little to do with this.
Let's also not forget that credit never sits idle. When we borrow dollars (most of our borrowing once again having nothing to do with banks) we're borrowing what dollars can be exchanged for in the market economy - trucks, tractors, computers, desks, chairs, labor. That's still happening, but since most businesses in the U.S. (and around the world) don't rate bank loans as is, the truly dynamic lending and investing has nothing to with banks that scream yesterday's news as a source of economic vitality.
Irwin points to central banks "keeping their feet on the economic accelerator" while wondering why growth is somewhat slow, but this is logical. The more central banks intervene, the more credit that is being channeled through the least likely source of economy-boosting lending: the global banking system itself. The previously mentioned regulations and capital requirements don't help, but the main thing is that banks operate with razor-thin margins that disallow the risk-taking that powers economic growth.
Simply put, failure driven by intrepid investment is the source of information that drives growth, yet central banks are feverishly working to filter always limited capital through banks whose business models don't allow for much failure. Silicon Valley isn't the world's richest locale because all of its start-ups succeed; rather it's the richest precisely because most of its start-ups go bankrupt. That is how economies evolve. Silicon Valley's ideas rarely rate bank finance, and that's a feature, not a bug. In working to empower banks, central banks are redirecting capital away from the riskier commercial surprises that always and everywhere power economic growth.
Irwin points to studies from entities like the McKinsey Global Institute that reveal wage stagnation, and there it should first be said that the happy inflow of poor immigrants into the U.S. and other countries likely distorts these numbers. Indeed, if wages in the U.S. alone were truly stagnant, does anyone seriously believe that non-U.S. companies would still have aggressive market-share expanding initiatives focused on a declining U.S.? The more realistic answer is that measures of income are flawed.
Still, what Irwin and others can't get around is that income is always and everywhere an effect of investment in people, along with productivity advances. This rates mention mainly because the dollar (along with other global currencies) has been very weak for much of the 2000s; the greenback's revival in recent years a signal of the dollar gaining back some - but not all - of its previous losses. When investors invest, they're tautologically buying future currency income streams, so amid global currency weakness in the 2000s it's no surprise that investment has become quite a bit more careful to the detriment of businesses and workers alike. Irwin never mentioned the dollar or any other currency, and the fact that he didn't reflected in his analysis.
Searching for answers, Irwin instead went to Larry Summers. Summers' proposed growth solution is that governments should sharply "expand investment in infrastructure which might provide a jolt of higher demand," but Summers' analysis is entirely backwards too. Missed by the eminent economist is that infrastructure spending from governments is a certain effect of private-sector economic growth, not a driver of same.
Evidence supporting the above is the former Soviet Union itself. As of the year 2000, what became the Russian Federation had less paved roads in a country comprising 11 time zones than did the U.S. state of Ohio alone. What this reminds us is that governments only have the resources to build roads insofar as the private economy is booming first. The U.S. is infrastructure abundant precisely because it's a rich, economically advanced nation, as opposed to infrastructure being a driver of its staggering wealth. Irwin's column would have been enhanced had he looked beyond the usual economic suspects for answers to what is not very mysterious.
Summers points to "secular stagnation" as his explanation for a low-growth world, but explicit in such a view is that individuals around the world have run out of ideas such that there's lots of capital vainly in search of a home. His reasoning couldn't be more incorrect.
Implicit in Summers' thinking is that global poverty has been solved, that everyone in the world has the commercial comforts enjoyed by the developed world, and that advances like the internet and air travel are the final frontier for entrepreneurs in rich nations. Nothing could be further from the truth. The U.S. and the rest of the world have barely scratched the surface of human potential, and this is a reminder that "secular stagnation" is nothing more than a naive myth.
Ignored by Keyensian thinkers like Summers is that demand always springs from supply, and as such, producers are ever in search of capital to fund their ideas. The global economy doesn't suffer a demand problem simply because demand is the easy part: our wants are unlimited. What the world logically suffers is barriers to production, and since that's true, the answer to stagnation is a reduction in the tax, regulatory, unstable money, and trade tariff barriers to production. It also wouldn't hurt if central bankers were to take long vacations so that precious credit could be re-channeled in greater amounts to growth concepts, and away from banks that can't take the risks necessary for booming growth.
Irwin made a valiant effort to explain "low growth," but that was the problem. There's no mystery here. In an economy of individuals, meaning the only kind, wants are unlimited and are only held back by a failure to supply. Global governmental efforts to erase failure, mis-allocate capital, and erect barriers to production have logically led to lighter economic growth than is the norm. In that case the answer to stagnation is simple: get governments out of the way. If so, what is mystery to some will no longer be one.