Tuesday, June 9, 2015

On June 2nd, the OECD released its twice-yearly Economic Outlook. Following the contraction of the Canadian and US economies in the first quarter of 2015, what was the weakest period of global growth since the Great Recession, the OECD downgraded its forecast for global growth to 3.1% in 2015, from 3.7% projected last November. Canada’s 2015 growth was projected at 1.5%, a downward revision of March’s forecast of 2.2% and last November’s projection of 2.5%. 

Six years into the "recovery," 40 million people in the OECD remain unemployed, 7.5 million more than the pre-crisis peak. The unemployment rate remains above 11% in the Eurozone. Summing up the global economy, the OECD writes, “in effect, many economies have become stuck in a low-growth and low-investment equilibrium, with persistent unemployment, stagnant wages, and non-robust consumption.”

Faced with this bleak outlook, the OECD Ministerial Council devoted its meetings during the first week of June to addressing the conundrum of weak private investment. This cycle saw a deeper drop in business investment than previous downturns, but there’s only been a 5% increase in investment 28 quarters after the pre-crisis peak – the worst recovery in investment in recent memory.  The consequence has been slower potential output growth, weak productivity growth, labour scarring, stagnant incomes, and rising inequality.
From the OECD's vantage point, investment should have been boosted by lower corporate tax rates, and indeed, over half of OECD countries have reduced corporate tax rates since 2007. But as it concedes, corporations that can shift taxable income to low-tax jurisdictions already have effective average and marginal tax rates below domestic levels.  In this context, changes in domestic tax rates have little impact on multinational corporations’ effective rates (p. 232 of the Outlook).

The Economic Outlook concludes that the slow recovery in private investment is mostly explained by weak demand, domestically and globally. The OECD points out that a 1% increase in domestic demand would lead to additional investment growth of 1% over a 5 year horizon -- with a bonus 0.5% investment growth if expansion is coordinated among states.

What the Outlook didn't draw attention to is that the OECD’s own labour-market reform proposals, implemented over the past 20 years, have helped soften demand by weakening workers' organizations and their bargaining power. The recommendations of the 1994 OECD jobs study, now largely implemented, called for lower budget deficits and debt levels, more flexible work arrangements, weaker employment security provisions, restricted unemployment insurance benefits, and greater wage and working-time flexibility. Moreover, OECD governments (including Canada) cut public investment as part of their fiscal consolidation efforts following the crisis (urged on by the OECD), despite the fact that government investment has a relatively strong fiscal multiplier of 2.1.

Meanwhile, the IMF published research the same week advising governments with fiscal capacity against dogmatically insisting on reducing debt levels. For his part, Financial Times columnist and author Martin Wolf told OECD conference-goers that future generations would find it "unbelievably stupid" that today's governments failed to take advantage of exceptionally low interest rates to invest in jobs and the transition to a low-carbon economy.