Last week I was in Washington DC at the same time as the circus of the IMF and World Bank Spring meetings. Anyone paying attention to the headlines from those meetings would have been sullen. The World Economic Outlook, the IMF's six-monthly global economic health check, was titled 'Too Slow for Too Long'. One observer even mentioned to me that we are living in a repeat of the 1930s.
But while things could be better, they aren't terrible. Here is a graph of global growth from 1980 to today.
The main point of the graph is that since 2000 we have been spoilt, notwithstanding the small contraction of the global economy in 2009. Global growth since 2000 has been nearly three-quarters of a percentage point higher than during the 1980s and 90s. If we compare current growth rate to the post-2000 average, then things look somewhat weak. However, we are spot on the average for the 80s and the 90s.
So how should we view the post-2000 boom: something we should now always hit, or a one-off? I'm more inclined toward the latter. One reason for the post-2000 boom was the phenomenal growth rates achieved by India and China. India may be able to replicate those growth rates again, but the 10%-plus growth rates we saw in China are finished as they adapt to a 'new normal'.
In the developed world, we know growth is slow. One reason is that productivity growth rates are low. When a bureaucrat or a politician is confronted with sluggish productivity they will, in true Pavlovian fashion, call for structural reforms. But what structural reforms? And how much bang for the buck do they deliver? The details are harder. Economist still argue about what caused the Industrial Revolution, so expecting anyone to understand, with any kind of confidence, the kind of effect that (for instance) deregulating labour markets will have on productivity is heroic. [fold]
Our lack of understanding about productivity, which economist Moses Ambramovitz once dubbed a 'measure of our own ignorance', is quite well illustrated by looking at US productivity growth. The best work I have seen on this has been done by John Fernald of the San Francisco Federal Reserve. US productivity growth has fallen away since around 2004, thanks to a fall-off in growth associated with information technology. Why did that fall off? Who knows! All we know is that ten years ago, it became harder to exploit gains from those innovations.
While I was in DC I heard the argument that, actually, GDP does not capture the new gains that we are getting from the internet, so the slowdown is not as marked as we thought. Well, I don't buy that. Mis-measurement has always been a problem. Robert Gordon's recent book makes that point. You think the value of Wikipedia is substantial and not captured by GDP? Well, just think about the flushing toilet!
But John Fernald, with co-authors, wrote another terrific paper recently looking at this issue a bit more systematically. The authors calculated that the new technologies, at best, would have only a marginal effect on our measures of GDP growth. Moreover, corrections for them could reduce productivity growth. That's because productivity is a measure of the amount of output you get for a given amount of input. If we were underestimating what we were getting from IT-related sectors, we would also be underestimating the amount of inputs those sectors provide.
In any case, I don't expect the growth rates of the last 15 years to repeat themselves, so perhaps global growth a bit above 3% is the new global normal. That's not to say there aren't cyclical problems in the global economy right now. In particular, parts of Europe are clearly operating below capacity and some other economies have been hit hard by the commodity price downturn. Things could be better, but this is hardly 1930s material.
Photo by Flickr user Susan Koster.