Last G20 meetings in Lima or IMF downgraded forecasts for the world economy have completely baffled governments and observers and put in doubt the relevance of economic decisions, whatever their origin, governments or central banks. Why, with such a favorable environment, raw materials prices fall, low interest rates and emergence of new technologies, world growth get nowhere and cannot recover the pre-financial crisis level?
Situation is particularly embarrassing in Europe, with a high unemployment rate, except in countries with a significant demographic decline (Germany) or where legal provisions allow a reduction of the official unemployment rate (England). Situation is not better in Japan, where, in spite of Abenomics, the country is returning to the stagnation it endured since the end of the eighties, and in the U.S. where massive deficits of public accounts and balance of payments are still a threat to the global financial stability. The reduction of the unemployment rate there is more the consequence of unemployed people discouragement, measured by the historically low activity rate, than by a rebound of job creations.
These uncertainties come at a time where China is rebalancing its growth model and will not play anymore, in the future, the same role of driving force on other economies, through exports of raw materials (Russia, Brazil, Australia) or capital goods and luxury products (Germany, France).
Economists are split regarding this new situation. Lawrence Summers, former Bill Clinton Treasury secretary is in favor of a recovery plan through public deficits, considered as easier since it wouldn’t cost a lot because interest rates are near zero in developed countries. His proposals are strongly opposed by rigor advocates, who are not only located in Germany. They recommend a return to budget equilibrium and reforms to improve competitiveness of the countries with a high public sector deficit, without explaining the details of these reforms.
On their own side, central banks, in developed countries, after reducing their interest rate at a level close to zero, initiated a very loose monetary policy which failed to have any impact on investment. On the opposite, this policy was accused of generating more speculative bubbles than jobs. The degraded economic situation is in contrast with the good health of financial markets. Wall Street is in a better situation than Main Street. These debates are not without consequences on Fed indecision to raise interest rates and on divisions inside its Board.
The only undisputable fact is that no policies have, until now, produced conclusive results. Germany, so frequently presented as an example, stagnates and the recovery of its public finances is the consequence of its demographic situation which has the advantage to generate less public expenditures. France is not recovering, in spite of a pronounced supply side inspired policy, supposed to give enterprises the means and the taste to go further. And Japan is returning to its old devils and sinks again into stagnation.
However, in all these countries, oil price fall and price stability should have increased purchasing power and created a favorable environment for growth. On the same way, the near-zero level of interest rates should have durably reduced public and private debt costs. They should have generated new margins of maneuver to prop up investment and activity. Nothing occurred. Neither supply side inspired policies accompanied by structural reforms, nor demand stimulation through public deficits or ultra loose monetary policies gave expected results. China was a credible scapegoat. Prophets of doom of last summer will be disappointed since financial markets regain their equilibrium and the yuan has stabilized just 2% under its level before August “devaluation”. Our political establishment and our CEOs would be better inspired in trying to identify the opportunities the new Chinese growth model will provide to their companies.
So why such a cacophony, so many failures and the global misunderstanding created by the current situation? Our ruling classes started their carrier during the eighties or the nineties. They were educated by professors imprinted by ideas and theories elaborated to cope with problems of the previous half-century. But the world has changed and with it, the problems we are facing. Who should have had the boldness, twenty years ago, to claim that price stability was a threat? It was, on the opposite a target to reach. Three breakings off came up and disrupted mechanisms and economic behaviors to the point that analysis and policies which are still based on them, became obsolete.
The first one is, of course globalization, with the opening of borders and the expansion of the exchanges of goods and services, thanks to the fall of transport costs and the mass communication revolution. Theories related to prices formation and labor market equilibriums, applied to economies which borders were strictly regulated, became ineffective.
The second is the technological rupture which has occurred in the treatment and the transmission of information. Production processes and services have been disrupted with a reduction of costs, and so prices, in an international climate of tough competition, with massive consequences on jobs. To imagine that new technology industries will create enough jobs to compensate these they will contribute to destroy is as absurd as to think that agricultural machinery industry has in the past compensated the consequences of the mechanization of agriculture.
The third is the enrichment of a large part of developed countries population which came with the indebtedness of those who were left out of this trend. Post-war economics were concentrated on flux analysis, production, consumption, and goods and services exchanges. Balance sheets of economic agents, their assets, their possible debts were ignored in economic models and in the theories supposed to command economic policy decisions. This is this huge loophole which explains sub-primes crisis : the real estate debt of American households, the numerous debts of Irish and Spanish people were not mentioned in economic diagnostics, when their countries were considered by economists as good models to follow.
Globalization, innovation and financial situation of households and institutions have modified economic behaviors and changed the nature of problems states were confronted with. Economists have not yet analyzed and integrated in their theories all the consequences of these changes. It is their duty to adapt their way of thinking and to transfer their knowledge to politicians in different domains as, for instance, the consequences on labor market and growth of a demographic situation, the impact of innovation on labor supply or the relationship between public debt and private wealth inside a nation. It is in improving the understanding of these phenomenon that significant progress will be accomplished in the conception of economic policy and that we will see the results in the situation of each country.