Why has the biggest coordinated set of stimulus packages the world has ever seen failed to drive a strong economic upturn?
Before we look at the causes, let’s document what happened.
In the wake of the global financial crisis, China implemented the world’s largest stimulus followed by massive American money printing and Europe’s wide array of stimulus gymnastics. And of course, Australia joined the bandwagon. Part of the stimulus in all countries involved moves by central banks to reduce interest rates to token levels and, in some cases, historic lows.
It’s true all these activities averted transforming the global financial crisis into a severe global recession and more likely a depression. But they did not start the massive wave of consumer spending and business investment that restored the developed world to economic health.
On the other hand, asset values led by the share market and often followed by the dwelling markets did very well. That’s where the stimulus had its biggest impact.
The US, helped by spectacular oil and gas production, has performed better than most other countries, generating its strongest employment growth in eight years. But as Callam Pickering points out, that has not translated into a big rise in consumer expenditure, so there has been no repeat of the American consumer-driven booms (Cautious consumers aren't helping the US recovery, September 1)
China’s manufacturing sector has struggled to regain momentum and its planned switch to a consumer-driven economy has a long way to go. Europe is on the brink of falling back into recession while Australia is set for a big fall in growth as mining subsides amid falling investment and revenue (reflecting falling prices).
In the case of Europe, the underlying structural problems (including broken banking systems, huge country debts and an inappropriate common currency) are yet to be addressed. China’s banking structure and its system of creating wealth out of property (which led to corruption) also held back the country. Paradoxically the flood of corrupt Chinese money leaving the country has helped boost Melbourne and Sydney residential property values (How Obama pushed Chinese property investors to Australia, August 21)
But there are deeper reasons why the stimulus has not boosted consumer spending. We are experiencing an enormous reduction in corporate costs as a result of new technologies and the globalisation of employment. These twin forces have extended into the big employers such as banking and retail. This is leading to regular labour shedding over a wide range of companies and a rise in the profit share in the economies of developed economies.
High profits boost share prices and dividends. Too many of the new jobs that are created are at the lower paid end of the spectrum. Job loss fear abounds in many sectors and pay rates are not increasing at anything like former times in most areas. In other words, the stimulus did not restore the economic conditions that promoted a big surge in consumer spending. From time to time, there are signs of improvement, but they haven’t gather momentum.
Despite low interest rates, consumers in this environment are reluctant to borrow to buy consumer goods and are keen to reduce their mortgage where possible.
As a result, people hang onto their jobs, which cuts labour churn and multiplies youth unemployment. The youth get jobs when older people swap jobs.
Then in countries like Australia and across Europe, there are labour laws that keep young people out of work and help older people keep their jobs.
Obviously there are other reasons, but given the unprecedented size of the global stimulus, we are going to need a different approach. I had a try at crafting one (How to solve Australia’s youth unemployment crisis, August 29). But there will be others.
What I fear is that in the two areas where life is toughest -- the Middle East and Europe -- there are now wars developing. Historically that is what has happened during sustained bad economic times.