Are we in danger of slipping back into another global financial crisis,
one even more dangerous than the one that scared us so in two thousand
eight? Michael SPence and Simon Johnson say it depends on whether we’ve learned
the right lessons.
A stimulus package that temporarily restores demand isn't the answer.
Many have expressed shock at the recent U.S. employment data. But
9.1% unemployment shouldn't be a surprise. To address the jobs
challenge, we must stop pretending that this is only a difficult
cyclical recovery. The root of the problem is structural. During the two decades before the
crisis of 2008-09, the U.S. economy added 27 million jobs, primarily in
government, health care, construction, retail and hospitality. This
employment growth was almost all in the "nontradable" side of the
economy—sectors generating goods and services that must be consumed
where they are produced. But several factors will depress these sectors.
Government budget woes, a likely leveling-out of the dramatic growth in
health-care consumption, and a permanent reduction in domestic
consumption as asset prices reset downward and debt-financed purchases
are reduced, will all have effects in the short-to-medium term.
Risks in the market is heightened by the situation in Greece. The
spreading crisis will drive down the Euro but the affects will not be
devastating says Michael Spence, NYU Stern Professor of Economics/Nobel
Laureate 2001; with James Rohr, PNC Financial Services Group.
The global economy’s most striking feature nowadays is the magnitude
and interconnectedness of the macro risks that it faces. The post-crisis
period has produced a multi-speed world, as the major advanced
economies – with the notable exception of Germany – struggle with low
growth and high unemployment, while the main emerging-market economies
(Brazil, China, India, Indonesia, and Russia) have restored growth to
No wonder the rest of the world is so worried about our future.
Sadly, other regions won't be able to help us out, as happened in 2008.
Europe is in the middle of its own debt crisis. And emerging markets
like China, which helped sustain American companies by buying everything
from our heavy machinery to our luxury goods during the recession, are
now slamming on the growth brakes. Why? They're worried about inflation,
which is partly a result of the Fed's policy of increasing the money
supply, known as quantitative easing. Much of that money ended up in
stock markets, enriching the upper quarter of the population while the
majority has been digging coins out from under couch cushions. Investor
money also chased oil prices way up (which hurts the poor most of all)
and created bubbles in emerging economies. Now these things are coming
back to bite us.
All this sounds complicated, and it is. But it's important to
understand that our economy has changed over the past several decades in
important and profound ways that politicians at both ends of the
spectrum still don't get. There are half a billion middle-class people
living abroad who can do our jobs. At the same time, technology has
allowed companies to weather the recession almost entirely through job
cuts. While Democrats may be downplaying the bad news, Republicans,
obsessed with the sideshow that is the debt-ceiling debate, haven't
offered a more cohesive explanation for the problems or any real
solutions. Rather, both sides continue to push myths about what's
happening and how the economy will — or won't — recover. Here are five
of the most destructive myths and why we need to figure out a different
path to growth.
Myth No. 1: This is a temporary blip, and then it's full steam ahead
True, only 12.2% of economists surveyed in the past few days by the
Philadelphia Fed believe that the current backsliding will develop into a
double-dip recession (though that percentage is up significantly from
the start of the year). Avoiding a double dip is not the same as
creating growth that's strong enough to revive the job market. In fact,
there's an unfortunate snowball effect with growth and employment when
they are weak. It used to take roughly six months for the U.S. to get
back to a normal employment picture after a recession; the McKinsey
Global Institute estimates it will take five years this time around.
That lingering unemployment cuts GDP growth by reducing consumer demand,
which in turn makes it harder to create jobs. We would need to create
187,000 jobs a month, growing at a rate of 3.3%, to get to a healthy 5%
unemployment rate by 2020. At the current rate of growth and job
creation, we would maybe get halfway there by that time.
Myth No. 2: We can buy our way out of all this
While a third round of stimulus shouldn't be off the table in an
emergency (Obama has already indicated it's a possibility if things get
much worse), the risk-reward ratio isn't good. For starters, our
creditors — the largest of which is China — would squawk about the debt
implications of doling out more money, not to mention the risk of
creating hot-money bubbles in their economies. That's almost beside the
point, though, because the stimulus — which has taken the form of Fed
purchases of T-bills designed to reduce long-term interest rates and
make homeowner refinancing easier — isn't much help if homeowners don't
have jobs that allow them to make any payments at all. Although
foreclosures are declining, the supply of foreclosed homes for sale is
undermining the real estate market, which is dampening consumer spending
and sentiment. "It's time to move beyond financial Band-Aids," says
Mohamed El-Erian, CEO of Pimco, the world's largest bond trader. "It's
clear that the stimulus-induced recovery hasn't overcome the structural
challenges to large-scale job creation."
Myth No. 3: The private sector will make it all better
There is a fundamental disconnect between the fortunes of American
companies, which are doing quite well, and American workers, most of
whom are earning a lower hourly wage now than they did during the
recession. The thing is, companies make plenty of money; they just don't
spend it on workers here.
Half of Americans say they couldn't come up with $2,000 in 30 days
without selling some of their possessions. Meanwhile, companies are
flush: American firms generated $1.68 trillion in profit in the last
quarter of 2010 alone. But many firms would think twice before putting
their next factory or R&D center in the U.S. when they could put it
in Brazil, China or India. These emerging-market nations are churning
out 70 million new middle-class workers and consumers every year. That's
one reason unemployment is high and wages are constrained here at home.
This was true well before the recession and even before Obama arrived
in office. From 2000 to 2007, the U.S. saw its weakest period of job
creation since the Great Depression.
Nobel laureate Michael Spence, author of "The Next Convergence",
has looked at which American companies created jobs at home from 1990
to 2008, a period of extreme globalization. The results are startling.
The companies that did business in global markets, including
manufacturers, banks, exporters, energy firms and financial services,
contributed almost nothing to overall American job growth. The firms
that did contribute were those operating mostly in the U.S. market,
immune to global competition — health care companies, government
agencies, retailers and hotels. Sadly, jobs in these sectors are lower
paid and lower skilled than those that were outsourced. "When I first
looked at the data, I was kind of stunned," says Spence, who now
advocates a German-style industrial policy to keep jobs in some
high-value sectors at home. Clearly, it's a myth that businesses are
simply waiting for more economic and regulatory "certainty" to invest
Myth No. 4: We'll pack up and move for new jobs
The myth of mobility — that if you build jobs, people will come — is no
longer the case. In fact, many people can't move, in part because they
are underwater on their homes but also because the much heralded
American labor mobility was declining even before this whole mess began.
In the 1980s, about 1 out of 5 workers moved every year; now only 1 of
10 does. That's due in part to the rise of the two-career family — it's
no longer an easy and obvious decision to move for Dad's job. This is a
trend that will only grow stronger now that women are earning more
advanced degrees and grabbing jobs in the fastest-growing fields.
A bigger issue is that the available skills in the labor pool don't
line up well with the available jobs. Case in point: there are 3 million
job openings today. "There's a tremendous mismatch in the jobs market
right now," says McKinsey partner James Manyika, co-author of a new
study titled An Economy That Works: Job Creation and America's Future.
"It runs across skill set, gender, class and geography." A labor market
bifurcated by gender, skill set and geography means that unemployed
autoworkers in Michigan can't sell their underwater homes and retool as
machinists in North Dakota, where homes are cheaper and the unemployment
rate is under 5%.
Myth No. 5: Entrepreneurs are the foundation of the economy
Entrepreneurship is still one of America's great strengths, right?
Wrong. Rates of new-business creation have been contracting since the
1980s. Funny enough, that's just when the financial sector began to get a
lot bigger. The two trends are not disconnected. A study by the
Kauffman Foundation found an inverse correlation between the two. The
explanation could be tied to the fact that the financial sector has
sucked up so much talent that might have otherwise done something useful
in Silicon Valley or in other entrepreneurial hubs. The credit crunch
has exacerbated the problem. Lending is still constrained, and the old
methods of self-funding a business — maxing out credit cards or taking a
home-equity loan — are no longer as viable.
So where does it all leave us? With an economy that still needs a
major shake-up. There are short-term and long-term solutions. Job No. 1
is to fix the housing market. While the government is understandably
reluctant to get deeper into the loan business, it's clear that private
markets aren't able to work through the pile of foreclosures quickly
enough for house prices to stabilize. If the numbers don't improve in
the next month or so, it might be time for the government to step in and
either take on more failing loans (a TARP for homeowners as opposed to
investment banks?) or pass rules that would allow more homeowners to
negotiate better terms with lenders.
And let's not forget the youth-unemployment crisis. There's now a
generation of young workers who are in danger of being permanently
sidetracked in the labor markets and disconnected from society. Research
shows that the long-term unemployed tend to be depressed, suffer
greater health problems and even have shorter life expectancy. The youth
unemployment rate is now 24%, compared with the overall rate of 9.1%.
If and when these young people return to work, they'll earn 20% less
over the next 15 to 20 years than peers who were employed. That
increases the wealth divide that is one of the root causes of growing
political populism in our country. While Republicans have pushed back
against spending on broad government-sponsored work programs and
retraining, it would behoove the Administration to keep pushing for a
short-term summer-work program to target the most at-risk groups.
But these are stopgaps. The real solutions, of course, are neither
quick nor easy — making them especially challenging for Congress. It's a
cliché that better education is the path to a more competitive society,
but it's not just about churning out more engineers than the Chinese.
The U.S. will also need a lot more welders and administrative assistants
with sharper communication skills. There's an argument for a good
system of technical colleges, which would in turn require a frank
conversation about the fact that not everyone can or should shell out
money for a four-year liberal-arts degree that may leave them
overleveraged and underemployed.
The other major issue is bridging the divide between the fortunes of
companies and the fortunes of workers. Democrats and Republicans argue
about whether and how to get American corporations to repatriate money
so it can be taxed, and again they are missing the point. For starters,
it's hard to imagine that crafty corporate lawyers won't find ways
around any new rules. (That in itself is an argument for tax
simplification that would reduce the loopholes that allow the 400
richest Americans to pay 18% income tax.) The bottom line is that we
have to find ways to make the U.S. a more attractive destination for
One way to do that is by considering a third-rail term: industrial
policy. It's a concept that needs to be rebranded, because Democrats and
Republicans alike shudder at being associated with something so
"anti-American." In fact, good industrial policy can be a useful
economic nudge. It's not about creating a command-and-control economy
like China's but about the private and public sectors coming together at
every level, as in Germany, to decide how best to keep jobs at home.
The lesson of Germany is a good one. Back in 2000, the Germans were
facing an economic rebalancing not unlike what the U.S. is experiencing.
East and West Germany had unified, creating a huge wealth gap and high
unemployment at a time when German jobs were moving to central Europe.
The country didn't try to explain away the problem in quarterly blips
but rather stared it directly in the face. CEOs sat down with labor
leaders as partners; union reps sit on management boards in Germany. The
government offered firms temporary subsidies to forestall outsourcing.
Corporate leaders worked with educators to churn out a labor force with
the right skills. It worked. Today Germany has not only higher levels of
growth but also lower levels of unemployment than it did prerecession.
In our politically polarized society, such cooperation may seem
impossible. But Germany after the fall of the Berlin Wall was perhaps
far more polarized. It is worth remembering that economic change tends
to happen only during crises. We've survived the banking crisis. How we
deal with the longer-range crisis — the crisis of growth and
unemployment — will define our economic future for not just the next few
quarters but the next few decades.
In one chapter of his sharp
new book "The Next Convergence," the economist Michael Spence
asks a simple yet evocative question: Why do we want our
economy to grow? Spoiler alert: He does find a few good reasons. It's rare,
though, to hear an economist raise even theoretical doubt over
such a deeply ingrained assumption in Western economies; one
may as well ask why we want electricity.
In the United States, we hear that economic growth should
trump nearly all other social and political considerations (a
position held by some on the right), or that growth should be
tempered by other important values -- environmental protection,
health and safety, wealth redistribution -- which is widely
believed on the left.
But almost no one anywhere on the modern political spectrum
argues that we should try not to grow the economy, or that
never-ending growth is impossible.
Yet it's a curious consensus since, as Spence notes, "for
most people, the main goal is a decent level of income." We may
associate growth with providing material comfort for ourselves,
but growth is primarily a means to an end, rather than an end
Many people will quite reasonably say that they want the
economy to grow so that standards of living can improve for the
worst off. Yet there is ample evidence that in the world's
largest economies, the growth that has occurred in recent
decades has made economic inequality worse, not better.
At a minimum, if raising living standards for the poor is a
society's main goal, there are faster paths to getting there
than waiting for that old rising tide to lift all the boats.
Moreover, our automatic assumption about the virtue or even
feasibility of growth is hardly universal. John Stuart Mill, a
towering philosopher of the 19th century, assumed that advanced
societies would grow their wealth until they reached a
"stationary state," a point at which all basic human needs had
been met and the accumulation of greater capital would be
unnecessary. He viewed this evolution not only as inevitable,
"The best state for human nature is that in which, while no
one is poor, no one desires to be richer, nor has any reason to
fear being thrust back, by the efforts of others to push
themselves forward," Mill wrote.
Such a view is obviously hard to square with American
conceptions of liberty and self-determination. Most Americans
accept that the state has a right to tax them, but would never
accept the idea that they or their businesses could be coerced
to stop increasing their wealth. And a glance at the Forbes 400
list of billionaires suggests that voluntary wealth caps aren't
very popular, either. ( here
Even in America, however, economic growth has not always
been as reflexive a political goal as it is today. Particularly
before trade became truly globalized, there were usually easier
ways for corporations to increase profits than to invest in the
capacity to grow. In the 1940s and 1950s, many industrial
businesses prioritized lower taxes and price stability over
growth, and the Eisenhower administration largely agreed.
It was in fact the political left -- trade unions and the
liberal economists who came into power under John Kennedy --
who urged the country to adopt a stance of permanent economic
growth. They saw sustained growth as a way to create jobs and
to pay for social goods, such as poverty reduction.
As Daniel Bell noted in his classic book The Cultural
Contradictions of Capitalism: "The idea of growth has been so
fully absorbed as an economic ideology that one no longer
realizes how much of a liberal innovation it was."
There have, of course, been challenges to this world view
in subsequent years. The most prominent came from the "Club of
Rome," whose 1972 book Limits to Growth laid out much of the
critique that is today widely associated with the slow-to-no
growth philosophy of many environmentalists.
Yet no major government on a national level has seriously
tried to pursue a strategy of keeping its economy from growing.
So long as competition exists among nation-states, the failure
to grow will be associated with a fear of being overtaken,
economically or even militarily.
That competition may be one reason that Mill's idea of a
stationary state seems so distant to a modern reader. Another,
discussed by Spence, is that innovation inevitably fuels
economic growth, and so long as humans innovate they will
create growth, even unintentionally.
Still, history and nature provide precious few examples of
anything that grows forever. Increasingly as we integrate into
what Spence calls a "multispeed world," we will encounter
instances in which growth itself is not sufficient. The recent
election in Peru, for example, saw the victory of an
anti-poverty leftist, even though Peru's per capita gross
income has risen 82 percent in the last five years. (The Wall
Street Journal cited an economist's study title as summing up
the national mood: "It Isn't the Economy, Stupid: Economic
Growth Does Not Reduce Political Discontent in Peru." --here )
And so the challenge for the West is: Can we channel our
thirst for economic growth into something more effective, like
better distribution of wealth?
James Ledbetter is the op-ed editor of Reuters. He is the
author of the new book "Unwarranted Influence: Dwight D.
Eisenhower and the Military-Industrial Complex," published in
January 2011. The opinions expressed here are his own.
The Stanford economist and
author of "The Next Convergence" talks to Newsweek’s R. M. Schneiderman
about American inequality, the Chinese economy, and how to score a
How sustainable is the economic growth we’re seeing in China and India?
We don’t have any examples of advanced countries growing at 7 percent
for an extended period of time. So China will slow down, but it can
probably keep this up for at least another decade. India is about 13
years behind China.
What are some of the global challenges posed by this rapid growth?
China and India represent almost 40
percent of the world’s population. When they finish this process, they
will be economic giants. The world will have a global GDP of three to
four times of the one we have now. This will put an awful lot of
pressure on natural resources and the environment.
Is this battle for resources a zero-sum game?
No, unless you assume that technology is stagnant. The high
prices are part of the solution as well as part of the problem. To have a
future that works, we’re going to have to live with considerably higher
energy efficiencies. High prices create pretty big incentives,
especially if they stay relatively high. There are a lot of alternative
energies that become economic with $60 to $70 barrels of oil.
Who will lead the charge on energy efficiency?
Asia, I would guess, because it is in their direct self-interest.
What’s the biggest problem facing the U.S.?
Getting our fiscal house in order and restoring some civility to that
process. Then a pattern of underinvestment, especially in the public
Is our tax structure getting in the way?
It’s a major problem. We have a tax system that is like Swiss
cheese: there are loopholes of all kinds. And it could create stronger
incentives for domestic investment.
Are we too focused on economic growth, rather than, say, happiness?
I think there’s been an overemphasis on growth. We tend to think that
employment is employment, and we don’t ask the question: is this
rewarding employment? Research establishes pretty clearly that typical
notions of happiness—that more is better—really don’t correspond to the
way people think and feel.
Any advice on how to win a Nobel Prize?
There’s no way to win it in the active sense; you sort of end up
receiving it if you’re lucky. It’s not a reasonable goal in life.
Conversations host Harry Kreisler welcomes Nobel Laureate Michael Spence
for a discussion of his new book, The Next Convergence. Professor
Spence discusses his intellectual odyssey focusing on his Nobel Prize
research on information and market structure. He then explains how his
work as Chairman of the Commission on Growth and Development led him to
write his new book "The Next Convergence". Tracing the impact of the internet, globalization,
and domestic and international policy on the trajectory of economic
growth in the emerging economies, he highlights the implications of the
resulting high speed economic growth for the global economy and global
Professor Spence also discusses how the advanced economies
should respond to the changing balance of economic power and the 2008
economic collapse focusing on the policy choices confronting the
American economy. Throughout the discussion, he emphasizes the
implications for political leaders navigating the transitions in
emerging economies, advanced economies and in global governance