Chinese Slowdown and the World Economy

Matias Vernengo

The Conference Board argues that Chinese official data should be taken with some skepticism. Nothing new there. They have adopted a new measure, which suggests that implies “Chinese economic growth at a more realistic 3.7 percent” for the recent past. In this scenario, interestingly enough, “it’s likely that the bulk of China’s slowdown has already taken place since 2011, even if unapparent in official statistics.” So the picture is probably worse than the official one (from The Economist)

So China will grow at about 4% and has already been growing at that pace for a while, if one believes the Conference Board (in the official data above one might think there is more space for a slowdown, but clearly it has gone already down too). The big questions are whether this will continue, and what would be the impact for the global economy.

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Let Them Drink Pollution?

The tragic crisis in Flint, Michigan, where residents have been poisoned by lead contamination, is not just about drinking water. And it’s not just about Flint. It’s about race and class, and the stark contradiction between the American dream of equal rights and opportunity for all and the American nightmare of metastasizing inequality of wealth and power.

James K. Boyce

The link between environmental quality and economic inequality was spelled out more than two decades ago in a memorandum signed by Lawrence Summers, then chief economist of the World Bank, excerpts of which appeared inThe Economist under the provocative title, “Let them eat pollution.” Starting from the premise that the costs of pollution depend on “the forgone earnings from increased morbidity and mortality,” Summers concluded that “the economic logic of dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.”

A different logic is supposed to underpin U.S. environmental policies. The Federal Water Pollution Control Act mandates that water quality standards should “protect the public health” – period. Its aim, as former EPA administrator Douglas Costle once put it, is “protection of the health of all Americans.” Under the law, clean water is a right, not something to be provided only insofar as justified by the purchasing power of the community in question.

Even when cost-benefit calculations are brought to bear on environmental policy, the EPA uses a single “value of a statistical life” – currently around $8.7 million – for every person in the country, rather than differentiating across individuals on the basis of income or other attributes.

In practice, however, the role of costs and benefits in shaping public policies often depends on the power of those to whom they accrue. When those on the receiving end are poor, their interests – and their lives – often count for less, much as the Summers memo recommended. And when they are racial and ethnic minorities, the political process often discounts their well-being even more.

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The Paris Climate Change Agreement: Beginning of “The Economics of the Coming Spaceship Earth”?

Edward B. Barbier

Edward B. Barbier is the John S. Bugas Professor of Economics at the University of Wyoming

Fifty years ago, in March 1966, Kenneth Boulding presented his landmark essay, “The Economics of the Coming Spaceship Earth” at a workshop in Washington, D.C.  With its vision of the “spaceship earth,” this short treatise has had a profound influence on thinking about the global economy and sustainability over the past half century.

In the most famous passage, Boulding describes the open economy of the past with its seemingly unlimited resources and contrasted it with the closed economy of the future.  He wrote:

“I am tempted to call the open economy the ‘cowboy economy,’ the cowboy being symbolic of the illimitable plains and also associated with reckless, exploitative, romantic, and violent behavior, which is characteristic of open societies. The closed economy of the future might similarly be called the ‘spaceman’ economy, in which the earth has become a single spaceship, without unlimited reservoirs of anything, either for extraction or for pollution, and in which, therefore, man must find his place in a cyclical ecological system which is capable of continuous reproduction of material form even though it cannot escape having inputs of energy.”

The essay was influential for two reasons.

First, as Boulding emphasized in his opening sentence, creating a more sustainable economy requires humankind rethinking its relationship with nature: “We are now in the middle of a long process of transition in the nature of the image which man has of himself and his environment.”  Boulding recognized that this change in worldview would be difficult, as “the image of the frontier is probably one of the oldest images of mankind, and it is not surprising that we find it hard to get rid of.”

Second, as an economist, Boulding recognized that the main impetus for change must occur in the basic production and consumption relationships of modern economies: “The closed earth of the future requires economic principles which are somewhat different from those of the open earth of the past.”

These central messages of Boulding’s essay are still relevant to contemporary debates over how best to reconcile global economic development with environmental sustainability.

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What We’re Writing, What We’re Reading

What We’re Writing

Sunita Narain, Wheels Are Turning

Matias Vernengo, A Comment on Dean Baker’s Comment on Paul Krugman’s Comment on Bernie Sanders’ Health Plan

What We’re Reading

Michael Ash, ‘Greenhouse 100 Index’ Names Top Polluters

Prabhat Patnaik, Growth Through Redistribution

Nicholas Shaxson, New Paper Makes Powerful Case Against Tax Treaties

Transnational Institute, Financialisation: A Primer

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Era of Financial Vulnerability

Martin Khor

The year 2016 started with a big bang, but the kind we would rather avoid. The Chinese stock market plunged for several days, causing panic around the world, with the markets also falling in many countries, East and West.

This is another wake-up call to alert us that finance has become inter-connected, indeed much too inter-connected, globally.

Many developing countries like Malaysia have been drawn into the web of the global financial system in manifold ways, and that has made them more vulnerable to adverse developments and shocks.

We are now in an era of financial vulnerability, which easily turns into vulnerability in the real economy of GDP growth, trade and jobs.

An immediate issue is whether the rout in China’s stock market will affect its real economy, in which case there will be serious effects.

One view is that it would contribute to a “hard landing” as the Chinese economy already has many problems.

Another view, more realistic in my view, is that the spillover to the real economy will not be significant. A paper by Brookings-Tsing­hua Centre shows that the inter-connection between the stock market and the economy is limited in China.

In the United States, half the population own stocks and corporations rely heavily on funds raised in the stock market, but in China less than 7% of urban Chinese invest in the stock market and corporations rely much less than American companies on the stock market to raise funds.

Nevertheless, China’s economy is expected to slow down this year. Other factors also add to a pessimistic outlook for developing countries.

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China’s Looming Care Crisis

Barbara E. Hopkins

Barbara E. Hopkins is an associate professor of economics at Wright State University.

The Chinese Communist Party has officially abandoned the “one-child” policy and now allows all married couples to have two children. However welcome this policy shift, it is unlikely to fend off the worsening care crisis associated with an aging population. The New York Times reports that only 12% of eligible couples responded to a recent relaxation of the rules. In urban areas of China, in particular, many families consider a second child prohibitively expensive.

The Party remains concerned about a shrinking workforce. Any given productivity level will yield a lower GDP per capita when a smaller percentage of the workforce is of working age. Although China’s natural rate of population growth is .5% per year, new workers are not replacing aging workers. While the share of the total population over 65 is one-half that of Denmark, the size of the elderly relative to the working age population has increased from 8% to 13% in the last 35 years.

Denmark has more policy options than China. Because a large percentage of its workers are in white-collar jobs, it may be easier to persuade them to postpone retirement longer. In contrast, a significant share of the Chinese labor force engages in physically demanding manual labor that elderly workers may not be able to sustain. Denmark can encourage immigration from low-wage countries like Syria to meet some of its labor needs. In contrast, the Chinese population is probably too large to rely on migration. Further, net outmigration is significant, especially among educated workers.China has a brain drain problem.

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2015: Monetary and Fiscal Policy Discord

Ann Pettifor

This post is our second selection from “The Cracks Begin to Show: A Review of the UK Economy in 2015,” by Economists for Rational Economic Policies (EREP), sent to us by EREP co-convenor John Weeks. This installment is by Ann Pettifor, director of Policy Research in Macroeconomics, and author of Just Money. The full report, whose contributors include Weeks, Pettifor, Richard Murphy, Özlem Onaran, Jeremy Smith, Andrew Simms, and Jo Michell, is available here.

The British Prime Minister declared at Davos in 2012 that he (and his Chancellor) were “fiscal conservatives but monetary radicals injecting cash into the banking system and introducing credit easing measures to make it easier for small businesses to access finance.”

Doubt can be cast over the “fiscal conservatives” claim, as well as the claim that small businesses would benefit from greater access to finance. The major beneficiaries of the government’s lop-sided approach to monetary and fiscal policy are big corporations and the rich – owners of assets whose value are inflated by QE. But the biggest victim of the ‘fiscal conservative’ approach is the government itself. For as we argued in a paper written in 2010 – The Economic Consequences of Mr Osborne – “fiscal consolidation does not ‘slash’ the debt, but contributes to it, as the extent of economic recovery becomes increasingly uncertain.”

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What We’re Writing, What We’re Reading

What We’re Writing

Patrick Bond, Why South Africa Should Undo Mandela’s Economic Deals

Alejandro Reuss, Debt and Development

Matias Vernengo, On the Job Numbers and More at the Rick Smith Show

What We’re Reading

Prabhat Patnaik, The Liberal Defense of Capitalism

Jomo Kwame Sundaram, Should the World Emulate US Crop Insurance?

Jeronim Capaldo and Alex Izurieta with Jomo Kwame Sundaram, Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement

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The Heavy Price of Economic Policy Failures

Jayati Ghosh

A lot of the media discussion on the global economy nowadays is based on the notion of the
“new normal” or “new mediocre” – the phenomenon of slowing, stagnating or negative
economic growth across most of the world, with even worse news in terms of employment
generation, with hardly any creation of good quality jobs and growing material insecurity for
the bulk of the people. All sorts of explanations are being proffered for this state of affairs,
from technological progress, to slower population growth, to insufficient investment
because of shifts in relative prices of capital and labour, to “balance sheet recessions”
created by the private debt overhang in many economies, to contractionary fiscal stances of
governments that are also excessively indebted.

Yet these arguments that treat economic processes as the inevitable results of some forces
outside the system that follow their own logic and are beyond social intervention, are hugely
misplaced. Most of all, they let economic policies off the hook when attributing blame – and
this is massively important because then the possibility of alternative strategies that would
not result in the same outcomes are simply not considered.

In an important new book, Failed: What the “experts” got wrong about the global economy
(Oxford University Press, New York 2015), Mark Weisbrot calls this bluff effectively and
comprehensively. He points out that “Behind almost every prolonged economic malfeasance
there is some combination of outworn bad ideas, incompetence and the malign influence of
powerful special interests.” (page 2) Unfortunately, such nightmares are prolonged and even
repeated in other places, because even if the lessons from one catastrophe are learned, they
are typically not learned – or at least not taken to heart – by “the people who call the shots”.

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Neoliberal Capitalism, Its Crisis, and What Comes Next

David M. Kotz

David M. Kotz is a professor of economics at the University of Massachusetts Amherst and the author of The Rise and Fall of Neoliberal Capitalism (Harvard University Press, 2015). This article originally appeared in the January/February 2016 issue of Dollars & Sense magazine.

Neoliberal capitalism had, at its core, a basic contradiction: Rising profits spurred economic expansion, but at the same time the source of the rising profits—the suppression of wage growth—created an obstacle to expansion. With wages stagnating, and with government spending rising more slowly, who would buy the output of an expanding economy? For a while, this simmering “demand problem” was forestalled, as risk-seeking financial institutions extended credit to the hard-pressed families whose wages were stagnating or falling. Debt-fueled consumer spending made long expansions possible despite the stagnation of wages and of government spending. Big asset bubbles provided the collateral enabling families to borrow to pay their bills.

The economic crisis of 2008 marked the end of the ability of the neoliberal form of capitalism to promote stable economic expansion. In the wake of the massive housing-bubble collapse and financial crash, the previous debt-and-bubble-based growth machine cannot be revived. The banks continue to find new speculative ventures and corporate profits remain high, but this process no longer brings normal economic expansion.

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