With Election Risk Behind Us, Can Our Global Economy Be Rejuvenated?

What is the prudent response? Monetary tools have been exhausted. The IMF and others have been calling for fiscal stimulus, i.e., more infrastructure spending and increased borrowing from the government sector. Early signs from Trump sound favorable, as per this analyst: “Keynesians may now get what they wished for, perhaps not exactly in the form they wanted, but nevertheless. The incoming Trump administration is likely to embark on a combination of large tax cuts and substantial public spending increases, on things like infrastructure and defense.”

Business leaders and financial commentators frequently cite high taxes and abusive regulations as the cause for slow growth. Rates may appear high, but loopholes and deductions have effectively reduced rates on taxable income for decades. One expert notes, “It's hard to argue for a convincing link between high taxes and a lack of investment, growth and dynamism in the economy when corporate taxes amount to just 2% of GDP, when profits are near record highs and interest rates at record lows. There certainly isn't a lack of funds to invest. In fact, companies do invest, but much of it goes to share buybacks and dividends.”

In the aftermath of the banking crisis of 2008, regulations like the Dodd-Frank Act were adopted across the globe to curb banking extravagances and ensure that a repeat of bad behavior did not occur. Access to credit was restrained for smaller entities, but this trend has been long term, especially in the U.S.. Per one report, “The economy is engaged in a steady, secular decline in business dynamism. New business creation per capita fell by 50 percent between 1977 and 2011. Similarly, the firm entry rate - firms less than one year old as a share of all firms - fell by nearly half between 1978 and 2011.”

This last section is a catchall for everything else, if you will. Age demographics and birth rates have a way of slowing down an economy and cutting productivity when it is needed most, but a perplexing study was released a few years back by two economists at MIT that revealed that technology, for the first time in long memory, is destroying jobs more quickly than it is creating them. Automation and the Internet have redesigned the workplace and put an emphasis on skill sets that are not in abundance.

Millennials are now scoring lower on skill assessment surveys than expected, leaving the business world groping for talent. According to Erik Brynjolfsson, one of the authors of the MIT study, “Productivity is at record levels, innovation has never been faster, and yet at the same time, we have a falling median income and we have fewer jobs. People are falling behind because technology is advancing so fast and our skills and organizations aren’t keeping up.” The problem with this form of “slack” , however, is that new investment will not necessarily create jobs that can be readily filled. This type of structural issue is at the heart of many of our challenges.

The issue of shortsightedness by business leaders and families, alike, is also disturbing. Savings on both a corporate and household level are piling up, as if saving for that rainy day that every doomsayer on the planet has been predicting since the Great Recession ended. To some degree, longer life spans have also encouraged more savings, another demographic issue. Companies have cut back on investments, a fairly shortsighted approach, since the very future of their earnings stream depends upon it. Profits have piled up as cash on the balance sheet, propped up by stock buy-back programs that minimize the denominator when it comes time for performance reporting.

There are two aspects of secular stagnation that have been happening for decades. Yields across the board have been in decline since the eighties (see chart below). This trend adversely impacts the attractiveness of investment projects. Capital has nowhere to go, a form of stagnation. Worse yet, technology has created a situation where productivity has increased quickly, the product consequently gets cheaper more rapidly, and capital then moves to less efficient arenas. ZIRP and NIRF policies have also pushed capital into areas where allocations would have been highly suspect in a normal world, but now low growth is perceived to be the “new normal”. Structural issues, unfortunately, take time to solve.