Category Archives: U.S.Economy

Why History Matters

Lyndon-Baines-Johnson1

Published in the Telegraph-Journal 21st May 2013

A strong and activist state is a fundamental precondition for sustainable economic growth. That is not to say that the state is a sufficient condition, but it is a necessary condition. The converse of this fundamental precondition has been illustrated in every age and across geographies. State breakdown can result in civil war or interstate conflict but other, equally malignant versions can bring a slow economic degradation leading inevitably to political and social distress. There is a veritable library detailing the negative consequences for growth that spin off from the decline of the authority, influence or legitimacy of the state and its institutions.

But if the state and its institutions are so critical to the health of economies, why is so much energy being expended on reducing the scope and scale of government and its agencies at precisely the time when they are most needed? And what is the function of strong governance in the face of rapid and relentless change?

Commentators have emphasised that the reasons for the loss of confidence in the state has its roots in the rise of conservatism and libertarianism. Academics have additionally argued that the defining features of liberal and conservative thought have become blurred. Political parties increasingly have  emphasized the importance of employment and economic growth in the face of global pressures while the role of ideology has declined.

An important implication of the resurgence of the conservatism in the late 20th century is not merely that its adherents energetically seek to repeal the fundamental laws of math and economics. This resurgence began with Ronald Reagan in the 1970s. Before he became president and in his first term as governor of California, Reagan froze government hiring, signalling his early commitment to reducing the size of government. Reagan’s move would hardly register on the scale of contemporary conservative and libertarian anti-government initiatives. But in the 1970s, political expectations had been conditioned by the optimism of Lyndon B. Johnson’s “Great Society”, which highlighted the role of government in promoting civil rights, public broadcasting, medical care, environmental protection and aid to education. Johnson’s “War on Poverty” was predicated on the pervasive role of government as the engine of economic growth.

The decline of Johnson’s liberal America has taken generations to take hold. But the weaknesses of liberal thought have always had their origins in history. There is a substantial literature linking good governance to economic growth where governance means institutions building, rule of law and democracy. The problem is that it is difficult to isolate the correlation between governance and growth. Some argue that good governance is the product of economic growth. If that is so, a key explanation for weak governance in some jurisdictions is that they cannot afford the political institutions that backstop strong governance. Others argue that it was good governance that was responsible for growth.

This leaves open the matter of how changes in governance are initiated. The corrosive forces of globalization — trade liberalization, demographic shifts, changing capital flows and rapidly changing technologies — are placing increasing stresses on political leaders to focus on near-term economic solutions, even as societies are at enormous risk as a consequence of global warming. To reduce expenditures now, in the midst of the turbulence of an ongoing crisis precipitated by free-market ideology and that has resulted in widespread unemployment and the destruction of up to a decade of growth, would inevitably prolong the crisis.

The challenges presented by globalization should have precipitated an evolution of political and economic institutions to create new mechanisms of governance. That we have failed to do so speaks volumes about the urgent need to match the political, social and economic challenges of the 21st century with their appropriate governance institutions.

The idea that economics is subject to forces that exist in social and historical context or even that history matters is a recent amendment to the conventional body of economic thought. Only in the past two decades have governance institutions been viewed as worthy of study by economic development historians. And only more recently have institutions emerged to give this field of study the prominence it deserves.

Photo courtesy Yoichi Okamoto.

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Filed under Economics, U.S.Economy

Troubling Signs on the Economic Horizon

washington

Published in the Telegraph-Journal 3rd May 2013

We didn’t need to review the data to know that the New Brunswick economy has not fared well in recent years. The combined effects of the decline of traditional industries such as the forestry, weakened U.S. markets in the wake of the 2007-2009 financial crisis and cutbacks in government-sponsored construction have resulted in low or no growth across the province.

The output numbers tell part of the story. The province saw GDP fall by 0.6 per cent in 2012 after increasing only 0.2 per cent in 2011. According to Statistics Canada, goods-producing industries fell 3.6 per cent with declines in construction, mining and the energy sector, while manufacturing declined 1.6 per cent. Services output barely rose at 0.4 per cent in 2012 with marginal gains in finance, insurance and real estate services.

Unemployment has maintained a persistently high level and sits at more than 20 per cent in much of the province outside the three cities in the south. Despite the efforts by the Alward government to reduce its costs, the fiscal deficit continues to grow as does the net debt. The latter has climbed to more than $10 billion.

The U.S. is New Brunswick’s most important export trading partner. A particular concern continues to be the American economy which has effectively stalled since the financial crisis.

On the face of it, an American economic recovery seems to be well underway. The U.S. GDP expanded at 2.5 per cent on an annualized basis in the first quarter of 2013, following marginal growth for the previous three-month period. But even this apparently positive figure masks other more disturbing signs that an economy whose recovery has not matched the pace of past expansions could now be facing a deceleration in its own modest growth rate.

In fact, adjusted for those changes due to temporary fluctuations in inventories maintained by corporations, the U.S. economy’s annualized growth rate shows a steady deceleration over the past three quarters, falling from 2.4 per cent to 1.9 per cent to 1.5 per cent. Other economic measures, from retail sales to the index of leading economic indicators, exhibit symptoms of fragility or even outright declines. The alarm has been sounded by numerous investors who are now concerned that the U.S. has entered yet another spring slowdown.

It is possible that the U.S. economy is merely in transition. But this time may be different. First, after adjustment for inflation, wage compensation hasn’t increased since 2010 and in the absence of higher incomes, consumers have been reluctant to increase their purchasing to pre-recession levels, even with record-low interest rates.

The weakened EU economies have made it much more difficult for the U.S. to increase growth by boosting exports. Today export sales are barely growing, and sales to Europe’s hardest-hit economies have actually declined.

In the interim, Washington’s dysfunctional politics has resulted in numerous unproductive policy moves, instead of the reforms that are sorely needed. And while the U.S. federal deficit has been significantly reduced, the sudden contraction in growth will serve to slow the economy even further, reducing growth in America’s economic output this year by as much as 1.5 per cent. That loss in economic activity will equate to 1.5 million fewer jobs.

In spite of the weaknesses in global economies, the New Brunswick government has admitted its spending cuts and the lack of major infrastructure projects on the horizon will impede economic growth in the province.

“Reduced levels of public sector capital spending along with the absence of any new major projects in the private sector will limit the contribution of capital investment to economic growth. As well, fiscal consolidation at all levels of government will serve to weaken overall economic growth.” Mr. Higgs said.

In the circumstances, it is critical for the government to revisit its commitment to what has become a counterproductive push for austerity. The New Brunswick economy shows little capacity for sustainable growth in the short term. It is necessary now to ensure that the capacity of the economy to recover in the medium term is not jeopardized.

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Filed under Austerity, Fiscal Policy, Job creation, New Brunswick, U.S.Economy, Unemployment