Event Summary by Richard C. Longworth
The developed world remains locked in a “contained depression” bedeviled by the same problem – too much money, not enough productive spending – that started the Great Recession five years ago, Martin Wolf told The Chicago Council on Tuesday evening.
Wolf, the chief economics commentator for the Financial Times, spoke on “the ‘new normal’ in the world economy.” Unhappily, he said, “the biggest worry we have is that the new normal would be Japan – a global Japan,” referring to the economic stagnation that has gripped that country for the past 20 years.
Wolf told a crowd of more than 500 persons that, while the developed countries aren’t in a “real depression” with falling output and prices, they suffer from an economy that is “remarkably weak” despite “the most aggressive monetary policies.”
“We’ve used the monetary system to the max,” with real interest rates virtually zero, he said. Normally, five years of zero rates would bring on “a huge boom and inflation,” but neither has happened.
Why? The reason isn’t a shortage of funds, but just the opposite – a surplus of capital coupled with weak demand, Wolf said.
“We still have far more money in the world economy than we can find assets” to spend it on, he said. “Everything today makes clear that we have a bigger problem with (capital) surpluses than before…..We have a very deep demand problem.”
The result is a weak growth that is even worse in Europe than in the United States. Of the six biggest Western economies, only two are actually larger than they were before the recession hit. The United States has grown 5 percent and Germany by 2 percent. The others – Italy, France, Britain, and the Eurozone – all have gross domestic products below the 2008 level.
The American performance, while better than most, is nothing to cheer about, Wolf said. Had the American economy grown by no more than its average post-war rate since 2008, it would be 15 percent bigger than it is now.
“We’ve lost a tremendous amount of output,” he said. “We’re operating vastly below the long-term trends,” with too much unused productive capacity and “a huge slack in labor markets” – that is, unemployment.
Wolf was asked if the political gridlock in Washington caused this continued economic weakness. Just the opposite, he said: “political gridlock is a symptom, a consequence, of economic failure, not a cause.”
He explained that economic weakness and global pressures have caused “a massive deindustrialization,” leading to changes in the nature of work, lower pay, and other pain. This leads to Tea Party-style reaction both here and in Europe.
“People feel cheated,” he said. “People feel despair and anger, and you can see this in our politics…There’s a profound disillusion of the populace with their elites. There’s always been a bargain – the populace will accept your [the elites’] status because you seem to know what you’re doing. But once you screw up monstrously…What we see in the United States and Europe reflects this disillusion with the elites, [who] retain power only if they deliver what the non-elites think is a fair deal.”
Wolf said the US should “calm down” its debt and deficit fears. The debt already is falling as a percentage of GDP, he said, and any potential problems are years away. In the meantime, Washington should focus more on stimulating growth, not practicing austerity.
Wolf is probably the world’s most respected economic journalist. A former World Bank economist, he has written for the Financial Times since 1987 and has written several books on global economies, including one near completion now.
He clearly views the current situation with alarm, and peppered his analysis with apocalyptic adjectives – “an appalling mess,” “massive austerity,” “a colossal transformation.”
But not all was gloomy. He foresaw the possibility of increasing growth for the US, if not for Europe, to the point that we could grow out of the federal debt crisis.
The recession, he said, was caused by a combination of surplus savings, both in developing countries like China and in corporations, with too few investment opportunities. This left it up to governments and households to prop up economies. When the mortgage crisis hit, households stopped spending and the recession began.
Now everybody – China, corporations, households – has savings and nobody is spending, he said. But he saw some bright spots.
One is the slack in capacity and labor markets, creating room to grow. Also, corporations are gaining confidence and households have begun borrowing again. In addition, western companies are discovering export opportunities in the developing world.
But these solutions “may be very difficult to handle,” he said. “We haven’t solved the balances problem, so the financial system remains unstable.”
“I’m optimistic about the supply side,” he concluded, “but I’m unclear whether at the world level we can create the demand side.”