Economic growth around the world is below expectations. In particular, the Western economies are not generating the kind of recovery needed to solve the problems accumulated over the past decades. Yet despite missing forecasts, the gross domestic product figures themselves are not dismal. In 2015, GDP growth will be better than 2 per cent in the United States and well above 4 per cent in the developing countries. Both sets of data will probably improve next year.
Future growth scenarios depend heavily on the pace of productivity gains, which have been declining for decades in the developed Western economies. However, measuring productivity is a difficult task, and the methodological problems it raises lead to rather unreliable statistics. This makes any effort to fine-tune policy-making by using these figures ineffective and harmful. Such attempts are ineffective because, regardless of the quality of the data, the standard policy tools for stimulating growth – monetary easing and deficit spending – do not affect productivity. They can even be positively harmful, because the uncertainty created by hesitant and inconsistent policies ends up paralysing entrepreneurial decision-making and investment.
Following this reasoning, one can say that the growth outlook is constrained by two variables. One is future productivity gains, which do not seem likely to diverge much from the present rate, at least in the developed Western countries. The other is policymakers’ reactions to unexpected events. If these responses look hesitant, financial markets will suffer, investment projects will be shelved and the prospects for growth will deteriorate.
Many policymakers are worried by low economic growth, both in the West and in the so-called developing countries. In truth, the situation is far from dramatic. According to the World Bank, this year GDP growth should reach 2.8 per cent globally, and 4.4 per cent in developing countries. The forecasts for 2016 are even brighter: 3.3 per cent and 5.2 per cent, respectively. Yet it cannot be denied that these figures are below expectations. In 2015, GDP growth will probably be about 1.8 per cent in the European Union (and 1.5 per cent in the eurozone, despite the weak euro and cheap oil), 2.3 per cent in the US and around 7 per cent in China. Many governments had been hoping for more vigorous rebounds on both sides of the Atlantic to help sustain large public debts and take the pressure off the banking sector, which is still fragile.
As a consequence, financial markets are jittery. Are these fears justified? We maintain that new scenarios are unlikely to open up, and that observers who expect marked improvement will probably also be disappointed. We may be out of the crevasse, but that does not mean the sun is shining. During the past few years, public opinion has been induced to think that the resumption of economic growth would provide an easy way out of the crisis that began in 2007. It should therefore come as no surprise that investors pull in their horns whenever they read about disappointing data, or fret when unpleasant contingencies appear on their radar. They expect action from policymakers, which only introduces an additional element of uncertainty and shortens time horizons. The next few months promise more of the same, except that financial markets will be even more susceptible to doubt and disillusionment about policy responses.
In this light, statistics on economic growth are part of the problem, and it is perhaps high time that governments stop being obsessed with them. This does not mean that growth is irrelevant. What it means is that market sentiment should not be driven by quarterly figures, and that governments should not engage in – or revert to – generous monetary policies whenever the data fail to meet hopes or expectations.
More importantly, we should not forget that the variable that will affect our future is productivity, rather than economic growth. During the past 150 years, living standards have risen not just because we have been using more inputs, but also – and mainly – because we have made better use of the resources available. In other words, we have become more productive.
The data on productivity explain why there is so little sunshine in the GDP outlook. For example, productivity in Germany grew at a yearly rate of close to 6 per cent until the early 1970s; it then slowed to about 3 per cent in the 1980s, and halved again to 1.5 per cent during the past two decades. This trend applies to many other Western European countries, some of which have done far worse than Germany. And it also characterises the United States, where productivity growth averaged close to 3 per cent per annum from 1995 to 2005, only to fall to 1.3 per cent over the past 10 years.
It follows that, if these broad trends in productivity continue, rekindling fast GDP growth is an illusion. Western economies will need much more than low interest rates to achieve a painless recovery. It is hard to imagine that monetary fine-tuning and deficit spending will affect productivity growth. Flooding the market with liquidity will merely create distortions: asset bubbles and dormant inflationary pressures will follow.
Put differently, any ‘new’ scenarios that appear may only confirm that the problems afflicting many developed economies are not going away. Unless the West is ready to reduce the size and regulatory burden of government, which it can already barely afford, productivity will not accelerate and the current problems will persist. Social tensions might temporarily subside, but future shocks will inevitably redistribute income and wealth, both within and between countries, causing those tensions to re-emerge.
So should we treat productivity as the determinant of future economic scenarios, or perhaps use it as a policy-making benchmark? As noted before, the data is not immune to problems. Productivity should figure prominently on our dashboards only when input and output markets are not overly distorted, for example, by regulation or questionable accounting methods. It is difficult to assess the value of innovative goods and services that did not exist before, or those which are marketed for free.
Measuring inputs such as labour is also problematic. Workers’ skills and motivations do not always fit employers’ requirements and expectations. This phenomenon, which is intensifying in the developed economies as a consequence of lower educational standards, is equivalent to the depreciation of the human capital embodied in each worker. Should we then rejoice if output remains constant, implying that the productivity of each unit of depreciated human capital is actually increasing? Or should we worry that the output of the average worker is stagnant? In the same vein, should we regard the time office workers spend on social media during working hours as a productivity loss, because less work is being done? Or is it a gain, since people have more fun in the workplace, enjoy a richer social life and thus improve the quality of their existence, which can be regarded as a kind of ‘output?’
We need to reconsider the very notions of productivity and economic growth. The dynamics of productivity can help us draw the big picture. In the short run, however, there are better policy predictors than GDP. Currently, more attention is being paid to the rate of inflation, data on employment and investment, and to the business cycle in specific industries such as construction. Financial markets react accordingly. In the case of China, new estimates of true unemployment (more than 10 per cent as opposed to the official rate of 4.1 per cent, according to a paper cited by The Economist) and the authorities’ panicky reaction to a long-overdue correction in the stock markets have been regarded as much more worrying than the lower GDP figures themselves.
In the past, we took it for granted that technological change would necessarily lead to innovation, which in turn would generate new investments, thus increasing productivity and output. This was the theory of unavoidable growth. Today, technological innovation no longer guarantees new investment and expansion. It is still a necessary condition, but it is no longer sufficient. In this light, the role of policy-making does not consist in reaching certain productivity and GDP targets. Bureaucrats are neither innovators nor entrepreneurs. Instead, the latest crisis has shown that regulation, high public expenditure and macroeconomic policies are part of the problem, rather than solutions, and that the situation is further aggravated when policymakers send out contradictory signals.
Regrettably, governments still feel compelled to react to disappointing growth figures. Their responses create uncertainty and increase market volatility. We have already mentioned China, where the authorities seem at a loss. The next example might be the US, where the Federal Reserve now seems to be having second thoughts about its future course of action – as if American productivity depended on fluctuations in Chinese stock prices. This loss of bearings suggests more uncertainty and financial tensions to come.
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