Why It's Hard to Focus on Growth

The meeting of the G-20 finance ministers last week was not much of a confidence builder for the global economy. Other than obligatory handwringing, nothing substantial came from the meeting of the world’s 20 largest economies. This outcome is despite the barrage of reports and studies coming from groups such as the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) calling for a whole range of responses and reactions.

Many people want to know why it has become so hard to find a consensus on growth. It is not as if there is one side that opposes growth and another that favors it—every nation wants to see more economic progress. Analysts assert there are perhaps three barriers to any kind of coordinated approach.

The first problem is that no agreement exists about what the most urgent issue is among the G-20. Each country has its own set of preoccupations that distract from the issue of growth. These states have not failed to recognize the importance of addressing economic progress, but the issue has not yet reached the crisis point as it did in 2008-09. Right now, a massive immigration crisis has Europe distracted, and the EU is considering what life would be like if the British pull out. And the U.S. is in the midst of an election that promises to be the most divisive in decades.

This is the year of the angry voter, and this predicament is not limited to the U.S. All over Europe, the politics of austerity have created a ferocious anti-austerity movement. The politics of anger and frustration does not lend itself to cooperation and collaboration—even on something that everyone would agree is important. Even Asian states are struggling to focus as Japan has become disillusioned with Abenomics and China is trying to determine if its strategy of shifting to a domestically driven economy is going to yield positive results fast enough.

The second set of barriers is rooted in the fact that debt and deficit still rank as key worries. The assumption for years has been that nations can’t sustain debt levels more than 60% of national GDP. Virtually every state in the G-20 now has debt far beyond that level. The U.S. has a debt load that tops 100% of GDP; Japan is at 260%; and China is at least at 240%. Most of the European states are between 90% and 150% of GDP. The need to reduce that debt load remains a priority in these states; and for some, the politics of debt reduction has altered the political landscape. Years of austerity have not had the desired impact, and this leaves leaders in a quandary. The assertion had been that private investment would surge once the nations engaged in some level of fiscal responsibility, but that has not been the case. In all fairness, the states that have been engaged in austerity have not exactly conquered the debt issue, and investors are still not feeling confident. Real progress on reducing the debt has been halting at best, and the attempt to reduce it has created an inflamed electorate willing to punish anyone who tries to expand this austerity effort. Everybody supports debt reduction in the abstract, but nobody wants the spending important to them reduced.

The third barrier to growth is that there is no real engine the rest of the world can rely on to pull the system out of its funk. The U.S. has the strongest economy, and this is damning with faint praise as the U.S. economic growth numbers are far from impressive as compared with what they were even a few years ago. The bottom line is that there has been little recovery from the recession of 2009. There was no V-shaped bounce back after the fall, and most analysts have described the recovery as a “check mark”—a sharp reduction followed by a long and slow recovery. The Chinese are slumping to perhaps 6% growth, and Europe is mired in one crisis after another, which keeps dragging economic recovery down to less than 1%. Emerging markets that were supposed to fuel recovery are now staggering and trying to survive. Brazil is in full depression these days; Russia has been hammered by the collapse in commodity prices; and only India is still managing to hold its own.

As a number of organizations have suggested, the G-20 needs to form a real collaboration on key financial issues like interest rates and growth promotion. Currently, it’s every country for itself, and there is ongoing fear of devaluations and interest rate hikes. Fiscal stimulus—by far the most controversial step for recovery—has traditionally been the tool used by governments to get out of a recession. Fiscal players have been disengaged almost from the start as there was more worry about debt levels than growth. Central banks were left to do all the boosting, and they always have to work indirectly. The call from the IMF is to open the flood gates and introduce significant fiscal stimulus—both from spending and from tax reduction. This means creating an even bigger debt crisis; but the logic is that without growth, there is no way to ever reduce debt and therefore adding more makes sense to get that growth. The logic is impeccable if one finds a way to spend that really does boost growth. That is far harder than it would seem as there are many ways that stimulus money can go astray. The U.S. has experienced this itself. The $800 billion that was supposed to go toward stimulation through infrastructure development in 2009 was frittered away by states that used the federal cash to offset losses in the recession. All that happened is that states delayed their response to the recession by a year or two and made cuts in 2010 and 2011.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

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