An exchange on the perspectives for the world economy

A reader from Holland has sent us some questions for José Tapia on his article, “Towards a New Global Recession? Perspectives for 2016 and Beyond,” which appeared in the February, 2016, issue of Field Notes:

I searched the Internet for an article on the economic situation that is understandable for the non-economist I am. I found your article “Towards a New Global Recession?” in the February issue of the Brooklyn Rail. I was interested because you started with wages, profits, and unemployment; the relations between these have been puzzling to me all my working life. The article is indeed understandable but it leaves me with some questions—some small, some huge:

You may be right not to go into different economic policies, but the article doesn’t say anything about the general policy of massive injections of money into the world economy, and its apparent failure. The G20 summit a month ago seemed to say that this policy doesn’t work anymore. Why?

Are oil prices low due to the low level of economic activity? The article seems to presuppose the existence of a free market in oil, where we see in fact an OPEC cartel and a successful policy of the U.S. to be independent from Middle East oil and gas, for obvious geopolitical reasons. At the same time, we hear in the media that the whole energy sector is largely overrated. Its collapse could have enormous impact. And generally, is capitalism nowadays really a free market economy, as you say in the first paragraph?

The article has its particular focus, of course, but what about the dramatic situation in the BRIC countries and the decline of stock markets? Analysts are very worried about this.

I am retired now, but after my years as a student I found it hard to find a job in the 1980s. After years of several jobs too small to earn a living, I was lucky to find a decent job. But what about the many unemployed people I see now? Will my kids find work? What can workers do? Work much harder for much less, as all economists have been telling us for years? The article says the workers are “indecisive.” Do you mean to suggest that workers have a choice “on the labor market” and that, if they find work, they can control the workload or the intensity of work? Most of the time I had to accept working more and more in less time, and in the last years for less money because wages in Europe are no longer linked to changes in productivity, and not even to prices. I don’t recognize these changes over decades in the statistics you show based on annual changes (as stock analysts do). How can there be a recession when the productivity of labor is as high as ever in human history?

Best regards,
Fredo

Dear Fredo:

You ask about general issues, which have many economic and political implications. First you ask about the general policy of massive injections of liquidity in the world economy, and its apparent failure. The policy of the U.S. Federal Reserve has been to purchase assets (mostly bonds of national debt) owned by private banks to enhance the banks’ ability to extend credit to business firms. In recent years the Bank of Japan and the European Central Bank have followed similar policies of “quantitative easing”which, as expected, would stimulate business activity. It seems, however, that that did not happen, as there has not been much demand from businesses to borrow from banks and, furthermore, banks are not enthusiastic about lending, as they prefer to have cash at hand to respond to possible eventualities. I am no expert in financial markets, but considering recent reports it seems many major banks (say Deutsche Bank, Bank of America, and Santander, to cite three examples) may presently have strong exposure to bad debt. The global financial crisis of 2008 – 2009 was never properly closed in the sense that, because of massive government bailouts, many financial institutions, which were actually insolvent, were kept alive—some economists called them zombie banks—in spite of tons of “toxic assets” in their portfolios. Then massive bailouts raised the level of indebtedness of many governments, which are now wary about the possibility of getting into further bailouts if a new recession starts. Thus banks, insurance companies, and investment funds might start having major problems at any time and the situation of the global financial “system” looks generally worrisome, so that even a mild shock (such as Greece or any other country that ceases paying) might trigger strong turbulence. But it is clear that many extant debts of national governments, corporations, and private individuals cannot be and will not be paid.

You also ask about international oil markets and whether they can be thought to be free markets in spite of the existence of an OPEC cartel and a successful policy of the U.S. to be independent from Middle-East oil and gas. Well, it seems to me that the Organization of Petroleum Exporting Countries has presently very little ability to influence oil and gas prices. Indeed, today’s low prices are hurting OPEC countries, which find their oil revenues severely reduced, causing major budget problems in these economies that are largely subsidized by oil sales. In 2015, OPEC agreements on production ceilings to keep prices from falling were totally ineffective; OPEC members were not following them, and the ceilings were finally removed by OPEC last December. On the other hand, increases of U.S. production of oil and gas since 2009 can hardly be conceptualized as “a successful policy of the U.S. to be independent from Middle-East oil and gas” because these developments are largely independent of any U.S. governmental policy. Furthermore, as the graph shows, the U.S. continues to be largely dependent on oil imports, as national production is presently less than 60% of national demand. On the other hand, low prices of oil and gas in international markets are hurting oil and gas production in the U.S., which is costly. Indeed, crude oil and gas production in the U.S. has been falling quickly in recent months, and producers have been forced to cut thousands of jobs, with U.S. bankruptcies of oil and natural gas companies rising by 379% in 2015. I interpret all this as showing that, to a large extent, the international oil market with its cartel and all the big corporations which suggest an oligopolistic structure (a market with only a few sellers) is still a free market in which none of the sellers have significant power to modify the price.

The BRIC group—Brazil, Russia, India, and China—and many other economies that had been growing at relatively high rates after 2010 are now quickly slowing down, which is probably one of the reasons explaining the drop in oil prices. This is also a basic reason to expect a global recession in the near future. High-income countries are generating stagnant or decreasing demand for consumption goods produced by countries like China, Korea, and Japan; world demand for energy and raw materials produced by Africa, the Middle East, Latin America, Russia, and Australia is stagnant, as is demand from China and other producers of manufactured commodities for capital goods produced by Germany and other high-income countries: these three effects feed each other and it is difficult to imagine what source of demand could appear so that the situation does not evolve toward an open crisis—that is, a new global recession. The present turbulence of stock markets seems to me a reflection of the uncertainties of the present situation; in the end stock markets will drop, as it always happens immediately before a recession manifests.

According to the World Bank, in 2014 there were 200 million people unemployed worldwide, 5.9% of the world labor force of 3.4 billion. A new recession would produce a few hundred million more. Of course this would bring much hardship: unemployment causes major personal distress in our free-market economy, in which what is essential for individuals and families is not that goods to satisfy basic needs exist, but the cash to purchase them—in contrast to other eras, when locusts or droughts caused famines. That said, it is a mistake to think that a new recession is the worst thing that may occur, so that everything should be done to prevent this possibility. Indeed, many major social problems right now are caused not by lack of economic growth, but by open or latent wars, like the ones presently happening in many parts of Latin America, Africa, the Middle East, and Central Asia. I am not optimistic about the future. It seems to me that the present century is pregnant with possibilities, but two possible outcomes—climate disasters and a new world war—would be very bad. People who are now younger than thirty or even forty should be very worried about what will happen, say, in the 2030s or 2040s. The physicist Stephen Hawking recently said that with the present technology, in which machines may produce everything we need, the outcome will depend on how things are distributed, so that everyone could enjoy leisure if the machine-produced wealth is shared, “or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution.” For Hawking the trend seems to be toward ever-increasing inequality. But even Hawking seems to me too optimistic, as machine production and leisure based on consumption depends on energy consumption, which implies burning fossil fuels and is linked to the other major risk for humanity in the next decades: climate change. Levels of consumption in high-income countries are unsustainable. In China, the ratio of automobiles to people is 1 to 30 while in the United States it is 1 to 1.3. In 2010 the daily consumption of petroleum per person in China was about a tenth of the consumption in the United States.

So, what is to be done? Well, I do not know. I agree with Albert Einstein that we need a socialist system based on cooperation between human beings, and I agree with Karl Marx that the present society generates the forces that can bring it to life. But attempts to build socialist societies have been major failures; social change is indeed very difficult. Just 150 years ago full-scale slavery existed in the United States. To prevent war and to prevent burning the fossil fuels, which are destroying our climate, are obvious tasks; but they cannot be accomplished without fighting at the same time for the basic needs of everyone, which include basic liberties as well as having a job, decent housing, decent health care, and conditions in which we are relatively sure not to be killed by organized crime or organized government. Besides that, what else can we do? Perhaps we should be uncompromising in opposing despots, zealots, and governments that break their own laws, pay more attention to the views of people who have different values and cultures, cultivate our ability to live with the basics—need less stuff (which humanity cannot afford)—and enjoy the human relations that can be very abundant and extremely gratifying, if based on the trust and empathy that are persistently denied by the workings of our market economy. It is indeed because we live in a free-market system that the economy fluctuates between booms and busts. Economists such as Karl Marx, Wesley Mitchell, Henryk Grossman, and Jan Tinbergen thought that it is the decrease of profits that generates and triggers the bust, and I agree with them. This is because when profits fall, money is hoarded and goes into the speculative sphere, investment drops, markets flood with unsold goods, and crisis erupts.

Thanks for your questions, and good luck.
We all need it.

—José Tapia