So glad for so little

So this is what is has come to: anything other than outright recession is cause for rejoicing!

Here is one triumphant quote: “The eurozone’s recovery has moved up a gear,” said Chris Williamson, chief economist of Markit. “Not only has the pace of growth picked up to the fastest since the second quarter of 2011, but the recovery is also becoming more broad-based, encompassing core and so-called ‘periphery’ countries alike.”

Here are some of the growth figures for the last quarter (Q4 2013) in Europe that just came out on Friday:

For 2013 as a whole, growth was a NEGATIVE 0.4% in the Euro currency zone, and a barely positive 0.1% for the entire European Union (including the UK).

To me, that is a dreadful result five years on from the 2008 market collapse; things should be picking up much faster by now.  Unemployment remains at depression levels in several countries still.

However, the fourth quarter looked relatively better:  The Eurozone had 0.3% positive growth, up from 0.1% in the Q3 2013 (after an 18 month “double-dip” recession).  But that is still growth at an annual rate of only 1.2%

Even the strongest countries in Europe did not look much better.  Germany’s economy grew by 0.4% in the last quarter of 2013, France by 0.3%.  This means annual growth of around 1 to 1.5%. However, the one ray of light in the report is that even formerly weak countries had a positive quarter:  Growth in the Netherlands was a very strong 0.7%, Spain and Portugal 0.3% and 0.4%, and even Italy had positive growth of 0.1% in Q4 after showing negative or zero growth the first three-quarters of the year.

Still, for me the news is that Europe’s recovery remains weak and precarious, and is far from resuming a robust rate of growth.  Given Europe’s demographics, one cannot expect growth to return to 3%, perhaps ever.  Still, in order to reduce unemployment, raise wages, and give people hope for the future, steady growth of 1.5% -2% is necessary, and at present hardly any countries in all or Europe look to be reaching that level.

Yes, growth of any kind is better than further contraction, but that is like saying a patient in critical condition should be glad because she’s not dead.  Europe’s economy is still in danger.

On February 5th, we had the following report, warning on retail sales and deflation:

Retail sales in the eurozone fell sharply over the Christmas period, with their biggest monthly fall in two-and-a-half years. December’s sales fell by 1% compared to the same time a year ago, and by 1.6% compared to November. Both figures were much worse than analysts expected.  … Germany saw the biggest annual fall in sales for December.  The drop in consumer demand followed a surprise fall in eurozone inflation to 0.7% in January.

The U.S. has had several wonderful quarterly reports on GDP, only to have growth falter in succeeding quarters.  Besides, quarterly data is prone to revisions, so differences of one-tenth of a percent over or under expectations may simply be measurement error.

So a very faint hooray from me for the Q4 European growth figures; a bigger cheer will be deserved when we get a full year of growth at 1.5%.  Until then, policy needs to be proactive for growth and to fight off deflation, and no assume that the trajectory from one quarter is ever upwards.

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A magical place


The picture above, of a large village on an otherwise barren sand-spit, is Dubai as it was roughly when I was born, in the early 1950s.  As you can see, there is not much there.  At that point, the United Arab Emirates, of which Dubai and Abu Dhabi are the main economic engines, did not yet exist.  The emirates of the region were British protectorates.  Prior to 1950, Dubai had benefited from its inlet to become the main re-export hub in the Persian Gulf, while Abu Dhabi had just started exploring for oil.  Both had been weakened by the Great Depression and the collapse of their local pearl industry (after the Japanese began large-scale production of cultivated pearls).  In the late 1960s, both Dubai and Abu Dhabi began to produce oil, and after the departure of the British in 1971, the emirates developed a federation which became the UAE.

After the massive increase in oil prices that followed the formation of OPEC, the emirates found themselves with astonishing sums to invest.  The result has been the creation — virtually from nothing and within one lifetime — of modern mini-Manhattans by the sea, as both Dubai and Abu Dhabi are now marked by soaring modernist skyscrapers and developments that stretch for hundreds of kilometers along the shores of the gulf.  Here is what Dubai looks like today:

Dubai today

Dubai is home to the world’s tallest building, the Burj Khalifa, and both Abu Dhabi and Dubai are chock-a-block with modernist glass towers in a bewildering variety of shapes, colors and designs.

And of course, shopping.  The UAE is home to many of the world’s grandest malls, including the Emirates Mall with its glass-enclosed four-story ski slope; the Dubai Mall with its Bellagio-style fountains and every shop known from home, from Potbelly Sandwiches and IHOP to ultra-chic designer boutiques; and the brand new World Trade Center mall, which is beautifully done in dark wood latticework that at least makes you feel like you are visiting the Middle East, as opposed to having been blindfolded and dropped into Las Vegas.

I had the opportunity to visit the UAE this past weekend to lecture at the New York University campus in Abu Dhabi.  While it is hard to form impressions in just a weekend, one cannot but be jaw-droppingly amazed at how much has been built, and how fast, and in such an odd place.  After all, the climate (120 degrees F in summer) is the most absurd that you can imagine for building endless walls of glass-skinned towers.  And there are few natural resources (other than oil and gas) to justify building thousands of office and residential towers to create an expat community many times larger than the Emirates’ own native population.  So Dubai and Abu Dhabi stand as tributes to the power of imagination and money to reshape reality, no matter how unpromising or unlikely the place.

But as a good capitalist, who believes that money should be invested at least in part in things that will continue to produce value, one has to ask — is all this sustainable?  And who is it all really for?  The UAE economy is built mainly on oil, of course, but is seeking to diversify.  Using their cheap energy, they are engaging in such energy-intensive industries as aluminum smelting, using imported bauxite ore.  Using their central location midway between Europe and Asia, they are seeking to become the major air hub and marine re-export center for Eurasia.  And taking advantage of the political chaos in Lebanon and Iraq, and of their own tax-free and duty-free status and political stability, they are seeking to become the financial capital of the Islamic world.  There are also various consultancies and management and advising agencies, most focused on the energy industry and regional commerce, and as is typical in boom towns, a huge construction industry and firms to sell, lease, and resell real-estate.

In addition, of course, as befits a modern pleasure-palace, the UAE markets itself as a tourist destination to the world for luxurious hotels, shopping, even golf courses and beaches (though these are usable only a few months of the year because of the intense heat and humidity).  They are staging events from Formula 1 to a Rolling Stones concert, not mainly for their own citizens, it seems, as much as to create a magnificent party place to attract the world.

Still, the oil will not last forever, and what then?  Oil and gas fields have been discovered in the Mediterranean, the Artic, and in East Africa, while fracking is expanding the output of oil and gas in older producers such as the U.S.  So there is plenty of oil in the world and more on the way every day.  Meanwhile, cars are becoming more efficient, populations are becoming more urban and so more amenable to rapid transit, and global warming is leading to the search for alternatives to fossil fuels.  No doubt, as Chinese and Indians and Africans acquire cars, and the world is tied together by huge fleets of jumbo and regional jets (many of which will fly from Abu Dhabi and Dubai), the demand for petroleum fuels will continue.  But at some point in the future — maybe in 50 years, maybe in 100 — it is going to be cheaper to use solar generated electricity to power vehicles than gasoline, and at that point the revenues from pumping fluids and gases from wells will fall to nearly zero.

At that point, will the glass tower villages on the shores of the gulf have generated enough self-sustaining momentum to carry on?  Or if deprived of their steroids from oil revenues, will growth stall and decline?  (The cost of air-conditioning alone, if not subsidized or replaced by solar power, will make these offices too expensive to compete with space elsewhere).  It is too early to say today.  All I can suggest is that you try to visit to see a phenomena of hot-house force-fed economic growth unlike any other on the planet.  It is ecologically insane, economically questionable, and at times garishly over-the-top.  Yet it commands respect for the audacity of its vision.  Ozymandius redux!

Yet in another way, one has to give thanks for the UAE. As much of the Islamic world tears itself apart, from Libya and Egypt and Syria to Iraq and Afghanistan, the Emirates demonstrate that the Arab world can be open, and incredibly economically successful. Other places have had immense oil wealth but not achieved nearly so much. Open markets, encouragement to entrepreneurship, and generous investment combined with stability and sound laws and restrained (if non-democratic) government has produced urban centers without equal in the developing world, except perhaps for Shanghai.

Of course history and demography help. There are no old sectors of town or decaying buildings, no visible slums, and the cheap and exploited labor from the Philippines, Pakistan, and India that make everything run are kept healthier and better paid than they would be at home and always under threat of deportation if they should cause disorder. So the recent history and demography are as artificial and constructed as the buildings themselves.

Of course one has to ask, can this artificial construct be sustained politically? Again, as long as the oil and gas money allow the rulers immense leverage over everyone, most likely yes. The real question is what happens when the non-oil economy becomes larger than the oil economy, or when the oil revenues cease. Will the non-native population simply return home, leaving empty shells? Or will they demand a role in running the new Oz they have created with their labor? It will be an interesting future for the UAE in the generations that lie ahead.

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And the jobs report is …. (ugh, don’t ask)

As I expected, the jobs report released by the BLS today was terrible — at least terrible for those clinging to the belief that America’s economy is roaring back, and not great either for workers seeking jobs.  Yes, unemployment went down to 6.6%; but that was a genuine advance for reasons I will cover below.

The big number was a tiny number — the revision to the December jobs report.  That report was so anomalously awful: 74,000 jobs created in the month, about one-third the number in the preceding months, that it was widely expected to be revised upwards significantly when more data came in.  In fact, the revision was only 1,000 more jobs, to a still awful 75,000.  What’s more the bounce-back in January was very modest: 113,000 new jobs in January was only one-half the average level of 2013.

So we have now had two back-to-back months of truly dreadful job creation numbers.  And the Fed is determined to continue to taper (as they probably should; the economy needs fiscal stimulus, not monetary), and the European Central Bank is not going to aggressively fight the signs of possible deflation there.

The unemployment number went down.  That is because of an annual population adjustment that the Bureau makes to its estimate of the number of workers.  Based on these adjustments from the household survey, the nation had 499,000 more people in the civilian labor force, and 616,000 more who were employed, than were counted in the previous year.  These adjustments led to an increase in the estimate of people in the labor force, raising participation by a few tenths of a point, and the percentage employed, reducing the unemployment number by a tenth of a point.  But these are technical adjustments, not evidence of real growth.

Here are some other, more informative numbers on what is going on in the real economy from this morning’s report: In January the average work week (hours worked per worker) was unchanged, but the manufacturing workweek declined by .2 hours, and factory overtime was down .1 hour.   Over the year, average hourly earnings for all private employers (non-farm) rose by 1.9%, or a bit under inflation.  These are hardly indicators of an economy that is catching fire.  Rather it is a picture of an economy comfortably under full capacity.

So what have we got? — the main motor of the global economy (the US) is sputtering; Europe looks to be  stalling out in its recovery; and the central banks are continuing to very slowly ease off the monetary accelerator.

Secular stagnation indeed!

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Worry Beads, Anyone?

Readers of this blog know that I have been a pessimist on the “real” economy of the world. With population growth slowing or declining in Europe, the US, Japan, Korea, China, India, and Brazil, it seemed to me the demand for cars, houses, and other major goods that depend on the formation of new household could not continue to grow at the rates common from the 1960s through the 1990s. Growth could only continue based on productivity pushing up wages, and people replacing older goods with newer and more expensive, higher-quality ones.

But we have not seen anything like that. What we have seen is productivity growth, but with the gains going to the top 1% of rich country consumers, although more generally to emerging market consumers. Still, it has become clear that in emerging markets much of the growth has been driven by government and private investment, not growth in consumption (except for the top 10-15% who have entered the global middle class). And that investment, in turn, was driven by cheap money provided courtesy of the Federal Reserve and state policies to funnel funds into urbanization, transportation, mines and factories.

All of this managed, surprising me, I will admit, to drive up stock market prices by 30% last year. But I had to wonder — how could such a price increase be justified when underlying consumption and production was not growing at anywhere near that rate. Indeed unemployment remained way too high in Europe, people were dropping out of the labor force by the millions in the US, and wages in both were stagnating. Brazil, Turkey, and India remained badly managed, with inadequate infrastructure high government spending and dependence on external financial flows. Japan’s aging and debt are starting to catch up with it and reach critical levels. Still, all of these underlying problems were happily ignored, obscured by the flood of cheap money issuing from the Fed and the ECB. With unlimited funds available at negative real interest rates, why worry?

All this has started to change with the Fed’s tapering off from its stimulus. Will we get a soft landing, in which the stimulus being withdrawn is substituted for by real growth? Despite some recent good news on US and British GDP growth, it seems doubtful. Signs of the slowdown in China keep growing; much of the US GDP gain was inventory build up and spending of savings, not gains based on improvements in employment and income; European unemployment remains well over double-digits and deflation risk is again growing. Add to this that emerging markets are now beginning to feel a panic as to whether they can continue growing when cheap outside finance starts to dry up. This panic has already led to major drops in the Turkish lira, Russian rouble, South African Rand and other EM currencies.

So which is more likely — that this month’s market drop is a just a blip, a correction in what is an otherwise happy story of rising output and growth that will continue? Or that last year’s market rise was a credit-fueled uptick that hid but did not cure underlying restrictions on growth? We should know more by the end of this year, but in the meantime, I’d keep some worry beads handy.

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Is Inequality a Moral or Economic Issue?

There is so much talk about inequality these days — it is clear that no consensus has arisen because parties are simply talking past each other.

Most of those who argue that inequality is NOT a problem argue from economic grounds. They state that inequality provides strong incentives for economic effort (the bigger the carrots for success the better the incentives), and that capitalism inevitably produces inequality as certain people produce more goods and services and add value to society. Inequality is thus necessary and unavoidable in a well-functioning competitive economy; and to some degree the better it functions the greater the inequality.

Most of those who argue that inequality IS a problem argue from moral grounds. They start with the conviction that a person’s opportunities to deploy their skills and efforts and reap the rewards should NOT be limited by the income of their parents; to the extent that large inequalities of wealth favor the children of the wealthy in getting education, jobs, health, and opportunities, such inequalities undercut the moral basis of a society that professes equality of opportunity for all its citizens. Moreover, they argue that democracy requires all citizens to have a stake in their society and the ability to participate in political dialogue and decisions; if inequality is so great that the wealthy can drown out the voices and interests of ordinary citizens, what is left of democracy in practice? Finally, in a wealthy society of equal citizens, can it be tolerated that even families with adults who work full-time and contribute their efforts to the economy and society are nonetheless unable to secure housing in safe neighborhoods, sound schooling for their children, access to recreation, nutritious and adequate diets for their families, and necessary health care without constant stress and dependence on private or public charity?

These alternative positions tend to polarize and by-pass each other in frankly foolish arguments about inequality, looking at all or nothing positions. I actually heard a commentator on radio condemning the absurdity of having a society in which the “government redistributes all income to make everybody equal” — even though no sensible critic of inequality would ever make that request and such extreme socialist practice has disappeared by common consent. At the same time, defenders of inequality treat ANY even minor effort to balance social obligations and wealth — such as taxing the income earned by workers as salary at the same rate as income earned by wealthy investors from dividends and capital gains at the same rate — as a Nazi-style attack on the principles of humanity.

We need to leave such absurdities on both sides far behind. What we need is a temperate, thoughtful debate on just HOW MUCH inequality is compatible with BOTH a strong economy AND a functional and legitimate democracy. That is a debate we have not yet begun to have.

Arthur Laffer gained fame by drawing a picture on the back of a napkin noting that if taxes are too low, then government cannot function to regulate and defend society and society will fail; but if taxes are too high, then effort is discouraged, capital flees, and society will fail. So there must be an optimal point in between at which taxation is sufficient to support vital government services, but low enough not to impede entrepreneurial and business effort.

The same is clearly true of inequality. If there is too much inequality, a minority will dominate the economy and politics and democratic society will fail; if there is too little inequality effort will be discouraged and government interference will be too high and society will fail. So there should likewise be an optimal point (or range) in the middle where inequality is sufficiently high to call forth business, worker, and entrepreneurial effort, but not so high as to discourage efforts by those at the bottom and undermine the value of citizenship and democracy.

Where are we now in the United States? Here are a few bits of evidence: overall inequality as measured by the Gini coefficient is the highest for any advanced industrial society in the world; the portion of national income going to the top 1% is at all-time historic highs; and the rate of participation in the labor force and in elections is at historic lows. Economic growth, however, is not very strong. So it seems pretty clear that we are at a point where inequality is high enough to discourage effort in job-seeking and voting; but not doing much of anything to promote strong economic growth. That seems to me to argue for taking some measures to reduce inequality, and see if things improve!

There are many ways to improve equality without undermining all rewards for business: raising the minimum wage; equalizing capital gains and earned income taxes; increasing inheritance taxes; all of these make it bit harder to accumulate vast fortunes, but not impossible. People have become rich in America during periods when all these measures were different in real terms than they are today.

Reducing inequality a little bit from the historically highest levels in our history and among the highest in the world will not eliminate inequality; it will just push it back to historically more common levels. If we cannot even pursue that goal, we are far from a democracy indeed.

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To anyone who has been waiting (anyone?) — my latest book is now available at the terrific price of under $10 (even less for the Kindle edition).

Revolutions: A Very Short Introduction (published by Oxford University Press) examines how revolutions differ from other kinds of upheaval; why revolutions are so hard to predict and foresee but seem so inevitable in hindsight; and what are the normal trajectories that revolutions follow.

With coverage of historical revolutions from ancient Greece and Renaissance Italy up through the Arab Revolutions of 2011, all in just over 150 pages, it’s a quick tour of everything you wanted to know about revolutions, up-to-date through the election of President Hassan Rouhani in Iran and the overthrow of Mohamed Morsi in Egypt.

I hope you enjoy it!

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Will 2014 be the year of social justice?

Back in 2009, when it was becoming clear that bankers had crashed the world economy but were going to be spared the worst effects, while ordinary folks took the brunt of the hit, people asked why there was not more social outcry. Yes, the Occupy Wall Street movement pilloried the 1%, and the 99% gained a catch-phrase but not much else. OWS then faded from view while the Tea Party dominated political debate and pushed the U.S. government into shutting down and to the brink of default.

I wrote then that in the 1930s it had taken a good seven years after the market crash of 1929 before people gave up on mainstream conservative measures — budget cuts, tolerating high unemployment, and waiting for recovery — and a large enough wave of social support built up to support major reforms. So I speculated that it might take seven years again after the current crash, that is up to late 2014, before we similarly gave up on conservative austerity measures and started implementing reforms aimed at improving the income distribution to restore some dignity and opportunity to middle-class workers.

Has the new day dawned? In the last few months we have seen talk about inequality move to front and center in the President’s speeches, in articles in Foreign Affairs and the debates of the Aspen Institute. Even at Davos and major academic conferences, inequality has become the main theme.

Yet talk is cheap.  So far, we have yet to see any major moves in Europe or the US away from the austerity and budget-balancing that have prevailed toward real measures to redistribute income and support the poor, working, and middle classes.    Obamacare and the latest US tax reforms did make some small efforts to increase taxes on the rich (top rates tweaked a bit, medicare taxes extended on high earners), but these were more than taken away in the stopping of long-term unemployment benefits and the massive, extended cuts in government employment and the real wage declines in government jobs.

Probably the most important indicator of how most people view the current economy is that the number of people who want to find work — who believe that jobs exist where the pay is worth the work — has continued to drop to levels not seen in half a century.

Yes, technology and globalization and education have been driving these trends; but there is no reason to simply sit back and let the minimum wage stagnate and decline for decades while the rewards for top earners increase manifold.  Squeezing labor and generously rewarding the highest echelons of management and finance is a social decision, not an automatic and unavoidable outcome of global economics (in Germany and Japan the ratio of top pay to average earnings is still a fraction of that in the U.S.).

What could be done?  The answers are simple — there is plenty — yes PLENTY — of loose cash in the US economy waiting to be deployed.  Corporations are sitting on trillions in financial assets that they have not deployed due to slow growth in demand.  Turning that money over to the public sector for rebuilding roads and bridges, hiring teachers and funding pre-school and subsidizing public higher education (as we used to do generously in this country) would simply restore the American business model of the 1950s and 1960s, when we built the interstate highway system, went to the moon, and raised the living standards of ordinary Americans even as high taxes and limited stock market gains moderated the income gains of the very rich.

So can we go back to this model?  The only reason we have not done so is political.  But this is 2014, not 2007, so let us see if things change.  The true indicator will be in President Obama’s State of the Union speech.  Will he ask for new investments in American opportunity?   Will he get them?  These simple facts will tell the story of social justice in America for the future.

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