The IMF’s Christine Lagarde presented the results of IMF’s latest consultation with the US, in which it cut its 2016 growth forecast from 2.4% to 2.2% and endorsed the Fed’s newly cautious stance on interest rate increases. Press stories focused on her discussion of the “four headwinds” that threaten to impede US growth over the long haul: declining labor force participation, high poverty rates, rising inequality, and falling productivity growth.
What Lagarde has done is describe some of the drivers of what is already acknowledged as the “new normal” or “secular stagnation”. And to the agency’s credit, it did not treat inequality and poverty as inevitable result of technological change, which is often the excuse invoked to put a Panglossian face on an economic system that has been reengineered to favor the few at the expense of the many.
The report recommends a set of policy changes, but not surprisingly, is unwilling to flag underlying drivers, like a lack of labor bargaining power; the serious cutbacks of government investment in research and development; weak anti-trust enforcement, which allows businesses to extract economically unproductive rents; and overfinancialization, which the IMF has called out in earlier reports. Nevertheless, for an analysis from an authoritative body that does not break neoliberal china, this is still pretty stern stuff.
The report is more pointed than the media summaries and I encourage you to read it in full. For instance:
3. Despite the ongoing expansion, the U.S. faces a confluence of forces that will weigh on the prospects for continued gains in economic well being. A rising share of the U.S. labor force is shifting into retirement, basic infrastructure is crumbling, productivity gains are scanty, and labor markets and businesses appear less adept at reallocating human and physical capital. These growing headwinds are overlaid by pernicious secular trends in income: labor’s share of income is around 5 percent lower today than it was 15 years ago, the middle class has shrunk to its smallest size in the last 30 years, the income and wealth distribution are increasingly polarized, and poverty has risen.
4. These secular forces both interact and reinforce each other. Demographic changes are slowing potential growth, delaying the renewal of business equipment, and depressing labor force dynamism. Reduced dynamism in the corporate sector has the potential to diminish innovation, deepen the loss of middle income jobs, and further polarize the income distribution. Income polarization itself can prevent productivity-improving investments in education by poorer households, lessen social mobility, add to economic insecurity, and limit consumption prospects. The causes of and interactions between these various forces are complex and not well understood. However, what is clear is that these trends are coinciding with a well-documented decline in potential growth (from above 3 percent in the early 2000s to below 2 percent today) that is being mirrored across a range of advanced and emerging economies. If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.
However, the recommendations are a dog’s breakfast of what I liked to call at McKinsey, “cutting edge conventional wisdom,” including ideas that clearly do not work, like cuts in corporate and individual income taxes to “revitalize business dynamism and investment”, and worse, greater use of “indirect” meaning sales taxes, which are highly regressive. If you want to address poverty and inequality, this the polar opposite of what you’s want to implement. It also has a big plug for the TPP and “fundamental reform” of Social Security, which consists mainly of cutting benefits (raising retirement age, implementing chained CPI, and “increased progressivity of benefits” which sounds like code for “means testing”. Not surprisingly, it also gives bromides about dubious health care cost containment measures like “greater cost sharing with beneficiaries,” when that often leads people not to get care until they are really in distress and treatment is more costly and more use of electronic health care records, when we’ve explained how they are actually making matters worse as implemented in the US. Of course, the IMF recommends higher Medicare premiums.
The agency similarly regurgitates the myths of the policy elite, that the US has a shortage of STEM graduates, when it that were true, you’d see it reflected in pay levels. And for at least the last ten years, Slashdot regularly runs posts by new computer science grads seeking employment advice because they can’t find yeoman jobs. (See here for a debunking of the “STEM shortage” myth).
And earth to IMF, the hollowing out of junior and mid-level technical experts is a significant driver of the slide in productivity growth. It’s harder to come up with process improvements when you have extended supply chains and have outsourced components that involve either real skill or a lot of the customer interface to third parties.
But some of the IMF’s ideas are not bad:
• Increase state and federal infrastructure investment…
• Expand the Earned Income Tax Credit combined with an increase in the federal minimum wage.
• Upgrade social programs for the nonworking poor.
• Deepen and improve family-friendly benefits including paid family leave and childcare assistance.
So even though the IMF’s assessment is a mixed bag, it’s an indicator that reality is beginning to penetrate the Beltway bubble and that there is a real need to tackle inequality and distress, not just for the sake of those down the food chain, but for the benefit of the capitalist classes. But when will they take that message to heart?
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I’ve created a database with 24 macro variables (gdp, gross gov’t debt, private non-financial sector debt, population, employment, hours worked, etc) for 39 countries from the Americas, Europe, Asia, Middle East, Africa, Oceania) spanning 1950 to 2015 at annual time steps (I made it for my own amusement, and yes, I do have a life, it’s just that like the guy from the story the other day, I’ve coded some part of my work so …).
I am looking now at a plot of labour productivity per hour and per worker in the states. There is in fact a long term declining trend in productivity, from around 3% growth per year in 1950 to less than 1% growth per year currently, both per hour and per worker.
Employment per capita on the other hand, is much higher now, from a low of 38% in 1960 to a high of 48% just before the great recession. It plunged again just after the great recession but it has been rising since 2010, currently reaching ca. 47%.
GDP per capita growth shows a similar trend as productivity per worker growth and productivity per hour growth, with a long term decreasing trend to just one 3rd what it used to be at the start of the series.
It looks that the long term decline in GDP growth is driven by the long term decline in labour productivity growth, probably highlighting the role of workers over capital in the USA?
Earth to IMF: How about we stop the endless military occupations, bombing campaigns, and funding of surrogates doing same, and spending instead on domestic infrastructure? Oh. Not your thing…
In a discussion this morning I noted that we’re doing our damnedest to saturate the planet with guns. You’d think there’d be much better uses for all that steel. Economic analyses never mention the enormous resource wastes of war as a factor in the declining fortunes of the US and it’s victims.
The insular logic of guns is that once you’re hooked on them you seem never to have enough. Be it individuals or nations, the idea of sufficiency eludes those who go down that path. And we’ve learned that Clinton can never get enough intervention or fail to find some “freedom fighters” to arm, whereas Trump told us yesterday that he’s going to increase defense spending as a jobs program (economists have shown that defense spending is one of the worst ways to create jobs and boost an economy because it is so capital intensive and produces goods that are stockpiled rather than enter the productive economy, but it will get a few middle aged white guys high paying jobs so Trump is all for it).
Disarmament will come only when the governments are so bankrupt and the global trading system so disrupted that it will simply be the only choice available.
“The insular logic of guns is that once you’re hooked on them you seem never to have enough.”
Agreed. Same with money.
I haven’t had the time to read it through, but it would seem typical that you get an official report with lots of good things in it, but they still just can’t resist adding in the usual evidence free ‘conventional wisdom’ about markets. Of course, those are the bits that will be reported in the media uncritically. Its amazing how incredibly tenacious bad ideas can be when they suit people in power. I’ve given up listening to political talk radio because I feel like eating the table every time I hear some talking head mention ‘flexible labour markets’, ‘more competition in health’, etc.., etc. I could never have the patience to debate with people like that, my pacifist convictions would fly out the window and I’d want to throw punches.
Me too!! Sounds to me like Yves is too kind to the report.
@Yves Smith – Hi Yves! As a young graduate, I would like to ask you, how was it like working at Mckinsey? My superficial view of them from their marketing material and website seems like they are a boring but very well paying company but full of soulless management speak.
I worked there 30 years ago, so I can’t help much. They do seem to like jargon more now than they did then.
Right. Any insight into companies you have worked at recently?
I have been self employed since 1989 so I can’t help you. Please don’t use this site for career advice.
Diving into the deep end again…
With reference to productivity growth, I’ve been trying to reconcile Mosler with Odum and Herrnstein. Steven referenced Soddy, and re-reading Odum shows that Soddy had a fundamental impact on Odum’s thinking.
First, the definition of productivity. Soddy distinguished durable v consumable wealth, aligning durable wealth with capital that can catalyze more wealth. I misread a sentence of his in a way that still works:
“… if any class in the community desires to live upon interest, it must encourage and not discourage the production of consumable wealth, and discourage the production of capital except as required to produce perishable wealth.”
I read this as prescriptive for the interested class, distinct from those living off of wages from the time spent in labor. If humans can have unlimited wants, uncoupled from tangible products, then by increasing the reinforcement value of the intangible objects Bernays-wise, the demand for productive wealth decreases in the targetted subjects. Laborers thus do not gain the capital to project themselves into living off interest. And anything which decreases labor costs result in increased profits for the interested parties.
Entertainment is a valued consumption of time. My wife loves rocks, has many, but now spends more time looking at pictures of rocks than looking for them, a substitution of the intangible for the tangible. A million people marched against the war on February 15, 2003, and there was no impact. A million people just gathered to celebrate the Cavaliers and an aMazing Game 7 of Wondrous Basketball! Political kayfabe seems to count also.
A problem I may be misunderstanding is that given the current ‘MMT for me, and austerity for thee‘ free money for the FIRE sector, inflation of intangible assets is counted as increases in productivity. Stock buybacks are a primary case. This sequesters the dollars to the interested class, and provides another mechanism for suppression of laborers. By inflating the value of property and then taxing at the assessed value, those without access to free cash are driven out of ownership.
A couple of questions:
Can the unequaled class reverse its fortunes by localizing production with direct investment in durable capital?
Business schools teach techniques of creating monopolies on inelastic goods and jacking the price. This is beyond corrupt, teaching profit from the imposition of suffering. What is a mechanism to change conditions such that these algorithms are not rewarded?
(Hat tip to Amusing Ourselves to Death.)
The International Capital is saying it needs to inflate big time and that’s the only option.
H1-B its all about cheap labor .Intel the digital chip maker ,whenever there’s a economic downturn RIF .Not just Intel but all tech firms lay off older workers all them naturally born Americans and replaced With H1-B workers .It has been going on since the H1-B was implemented . Also it happens low level tech workers i.e. Electronic techs and other employees
I suspect this will come off as cynicism and/or as criticism but it seems to me that this is an IMF “nudge” report. My view is that “nudging” may sound good but it is essentially ineffectual in producing a positive result.
I am cynical enough that my big question isn’t how much they will ignore this but how soon someone will twist this into another reason we need TPP, TTiP and TiSA, even though we all know they will make the problems even worse.
Funny how often things that seem to be pointing out reality to our owners seem to be ignored or turned into yet another reason to stay the course. This will be no different.
is the low productivity growth more a problem with measuring it? after all the economy has changed a lot, trying to measure productivity the way it was done with an industrial economy to one thats not, is just a way to fail. and maybe its the over riding desire of wall street for cheap labor that leads to income inequality? and lower sales?
IMF in latest update to report also asks for a pony for Christmas.
Is there a connection, and if so, what is it, between Marx’s view of the tendency of the rate of profits to fall over time, and the current slow declines in GDP and productivity. (This assumes some degree of acceptance of Marx’s controversial view, of course)
Good post Yves. It looks like the IMF acts as the wise doctor capable of good analysis and diagnosis but provides unsuited treatments because he has to please his big-insurance big-pharma bosses.