World is Fat And Slow: How the populist backlash to globalisation fuels more inequality
A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so new shoots can grow.
The United States’ recovery from the Great Recession recently turned 10 years old, matching the longest American expansion since records were first kept in the 1850s. The global recovery will also turn 10, in January, if it lasts that long – and that, too, would be a record.
But there have been few celebrations, in part because trade tensions have further slowed the pace of recovery. Since the end of the recession, the economy has grown at about 2 per cent a year in the United States and 3 per cent worldwide – both nearly a point below the average for postwar recoveries.
What explains the longest, weakest recovery on record? I blame the unintended consequences of huge government rescue programmes, which have continued long after the recession passed.
Before 2008, more open trade and better internet communications promoted strong growth by levelling the playing field, inspiring author and columnist Thomas Friedman to declare that “the world is flat”.
Once the crisis hit, however, governments erected barriers to protect domestic companies. Central banks aggressively printed money to restore high growth. Instead, growth came back but in a sluggish new form, as easy money propped up inefficient companies and gave big companies favourable access to cheap credit, encouraging them to grow even bigger.
If the world was flat and fast before 2008, today it’s fat and slow.
Central bankers had hoped that low interest rates would spur investment, increasing productivity and boosting growth. But a recent paper from the National Bureau of Economic Research shows that low rates gave big companies an incentive and means to grow bigger.
In the United States and Europe, 65 per cent of the major business sectors are dominated by the three largest companies in that sector, up from 40 per cent in the years before 2008. As the power of dominant firms grows, the share of national income that goes to workers has been shrinking, fuelling inequality – and anger.
Four airlines and three rental car companies account for more than 80 per cent of the American travel markets. Go into any American mall and you can buy jewellery at Zales, Jared, Kay and roughly a dozen other chains, all now owned by the same parent company.
As big companies grow bigger, life gets tougher for entrepreneurs. Start-ups represent a declining share of all companies in Britain, Italy, Spain, Sweden, the United States and many other industrialised economies.
The United States is generating startups – and shutting down established companies – at the slowest rates since at least the 1970s. These days tech insurgents aspire to be purchased by Google and Facebook, not to replace them.
The Bank for International Settlements, the global bank that serves central banks, says low rates are fuelling “the rise of zombie firms”, which don’t earn enough profit to cover their interest payments, and survive by repeatedly refinancing their loans.
Zombies now account for 12 per cent of the companies listed on stock exchanges in advanced economies and 16 per cent in the United States, up from 2 per cent in the 1980s. Companies are surviving in the “Zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labour.
These, then, are the trademarks of the fat and slow world: easy money feeding the rise of larger corporations, declining competition and fewer start-ups, all undermining productivity and slowing economies already hindered by falling growth in the working age population.
Global productivity growth peaked at 3.5 per cent a year before 2008 but has fallen by nearly a third. Over the same period US productivity growth has fallen by half to just over 1 per cent .
The bright side of endless stimulus, if there is one, is that recessions have become increasingly rare. Only 7 per cent of the nearly 200 countries tracked by the International Monetary Fund suffered negative growth last year; that is half the average share since records began. The IMF projects that share will fall to 3 per cent in 2020, close to a record low.
A global economy ruled by big, indebted companies looks sluggish but, in the view of many commentators, also very stable. Even as trade wars undermine economic growth, most investors assume central banks will ride to the rescue before it deteriorates into outright recession.
The problem, however, is that government stimulus programmes were conceived as a way to revive economies in recession, not to keep growth alive indefinitely. A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so new shoots can grow.
Lately, the cycle of regeneration has been suspended, as governments douse the first faint smoke of a coming recession with buckets of easy money and new spending. Now, experiments in permanent stimulus are sapping the process of creative destruction at the heart of any capitalist system, and breeding oversized zombies faster than startups.
To assume that central banks can hold the next recession at bay indefinitely represents a dangerous complacency. Corporate debt levels continue to rise, government debts and deficits continue to rise. If there is a sudden break in confidence, the damage will be that much greater, and governments may find themselves too broke to stem the damage.
Until then, we are in a fat and slow world.
(The writer is the author most recently of ‘Democracy on The Road’. )