(Anatole Kaletsky is an award-winning journalist and financial
economist. The opinions expressed here are his own.)
By Anatole Kaletsky
July 11 Confidence in the global economy is
steadily improving, as shown in the financial markets' bullish
behavior and confident comments from companies and policymakers
over the past few weeks. Though these columns have argued in
favor of a robust recovery, when investors get uniformly
bullish, the pessimistic case deserves attention.
Many distinguished economists believe that the current
improvement in global conditions is just a blip. They insist
that the world faces years, if not decades, of "secular
stagnation." How seriously should we take them?
The good news is that there is little evidence of secular
stagnation in global statistics. The "new normal" for the world
economy since 2008 has not been very different from the
pre-crisis period. The average growth of the global economy from
1988 to 2007, the 20 years before the crisis, was 3.6 percent,
according to the International Monetary Fund World Economic
Outlook database. The IMF latest forecast for 2014 is exactly
the same - 3.6 percent. Though Christine Lagarde, the IMF
managing director, hinted at a modest downgrade this week.
At first glance, this continuity seems hard to square with
the slowdown in economic activity in all major economies since
2008. The IMF expects only 2.2 percent growth this year in the
developed countries, compared with an average of 2.8 percent
during the two decades before the crisis. In the emerging
economies, meanwhile, growth is projected at 4.8 percent this
year, slightly below the average of 4.9 percent of the
Since both emerging and developed economies have weakened,
how can it be that the world economy as a whole has not slowed?
The answer is the shifting balance of economic activity from
slower advanced economies to faster-growing developing
The emerging economies now account for 51 percent of global
economic activity, compared with 36 percent in 1994. This means
that emerging economies, even as they slow down, contribute more
than ever to global growth.
China, for example is now growing at a rate of around 7
percent instead of the 10 percent it achieved in the pre-crisis
decades. But that 7 percent gross domestic product growth, from
a base of $10 trillion, adds $700 billion to global demand. This
is over three times more than China added 15 years ago, when it
was growing by 10 percent annually from a base of $2 trillion.
Now for the bad news. While the steady or slightly
accelerating global growth rates predicted by the IMF is the
most likely outcome, it may not be achievable because of three
imbalances: social, geographical and demographic. These seem
deeply embedded in the structure of global capitalism today.
They are weakening demand, creating excess savings and driving
the buildup of borrowing and lending that has been both a cause
and consequence of the global financial crisis.
The most dangerous imbalance is in the distribution of
wealth and income. Income disparities have become a source of
political and moral controversy, but their macroeconomic effects
have attracted less attention. The mechanism whereby income
inequality causes economic stagnation was recognized by Karl
Marx and other 19th-century writers.
If too much of the income created by capitalism's capacity
to increase production flows to people who are already rich and
likely to save rather than spend, then crises of
under-consumption become almost inevitable, as described by Marx
in Das Kapital and analyzed more rigorously by John Maynard
Keynes in the 1930s. The only way to avert such crises is to
create financial systems that recycle excess incomes from rich
savers to poorer consumers via a buildup of debt.
Geographical imbalances are a second major cause of weak
demand. The global imbalance that generated controversy before
the crisis was between the United States and Asia. This has
largely disappeared as U.S. consumption and borrowing have
subsided, while China and Japan have shifted away from
export-driven growth models.
In the meantime, however, an equally troublesome imbalance
has emerged between Germany and the rest of the Europe.
Germany's current account surplus of 7 percent of GDP is now
larger and more persistent than the Japanese or Chinese
surpluses before the crisis. Yet on the global stage, Germany is
not subjected to the same sort of pressures. Germany's political
dominance in Europe also makes it immune to the kind of demands
for policy changes that Washington applied to Japan and China,
while the existence of the euro rules out the currency
adjustments that ultimately removed the imbalances between Asia
and the United States.
The third imbalance is demographic. Believers in secular
stagnation have drawn attention to the downward pressure on
labor supply as baby boomers retire. But this is unimportant in
a period of high unemployment, when there is no shortage of
workers to limit economic output. The bigger impact of
demographic aging is on macroeconomic demand. Particularly when
this problem is aggravated by Social Security and labor policies
that shift incomes and economic opportunities in favor of
retirees and older workers at the expense of younger
Since 2008, governments the world over have protected or
even increased pensions and healthcare "entitlements," while
slashing spending on in-work welfare, education, family policies
and child support. This redistribution of income toward older
voters has been exacerbated by employment policies that favor
job protection for older workers, especially in Europe, over
flexibility and job-creation policies that would provide
opportunities for the young.
Because the aging baby boomers are already richer than their
children and grandchildren, this policy imbalance has widened
wealth inequalities, forced young people deeper into debt,
increased excess savings and added to deflationary demand
pressures. Given the electoral weight of older voters, however,
the political favoritism for baby boomers is deeply entrenched
in most modern democracies.
If the current cyclical recovery fizzles out and turns into
secular stagnation, these three imbalances will be largely to
blame. Unfortunately, the politics of income distribution,
geographic rebalancing and inter-generational equity are so
difficult that all these imbalances are likely to persist for