The OECD’s retiring chief economist worries the stimulus designed to stop the GFC turning into a depression has worsened inequality. She also points to weak wage growth post the GFC, caused in part by sexism. Max Rashbrooke reports.
Catherine Mann is stepping down after a stint as OECD chief economist that was described as “outstanding” by no less a luminary than Financial Times columnist Martin Wolf. So how does she see the world economy sitting as she completes her tenure?
Speaking to Newsroom ahead of her address to December’s Government Economics Network conference in Wellington, Mann argued that some vulnerabilities have reduced since the global financial crisis. House prices and corporate debt – two of the things that should have received more attention in the run-up to 2008 – though too high, are not “flashing red, country by country”. What concerns her is the “accelerator effect” of cross-border capital flows potentially spreading financial contagion.
When she looked at the indicators, “the question is, ‘Are they flashing red for the cross-border stuff?’ and that, I think, is where we are – in my mind that’s still the question. … The banks are fine, but the banks are the last war. What about the shadow banks, what about other things?”
On the upside, Mann said: “This time around there’s not as much leverage.” What was formerly on the balance sheet of corporates is now on the balance sheet of central banks. And companies are sitting on “a tonne of cash”. In short: “Do I think there’s going to be another financial crisis? No … Do I think there’s going to be some rocky times in some markets? I think the probability is quite high.”
Mann wouldn’t make a similar call on the future of trade and the question of whether big multilateral deals like the TPP have run out of steam. But she does believe that their role in creating inequality – seen by some as one driver of the protectionist anger roiling the developed world – has been oversold.
‘Governments are responsible’
Or, rather, trade deals do create inequality, but since they bring benefits overall, the blame must lie with national governments for failing to ensure those benefits are widely spread.
“It was a failure of domestic policy to rectify the consequence of trade deals. Focusing on the trade agreements is not a distraction … but it absolves domestic policy-makers of their responsibility. It really bothers me that domestic policy-makers are thinking they’re off the hook,” she said.
Reverting to one-on-one (bilateral) trade deals is not a good idea, Mann added. You typically get a patchwork fabric of deals “and not a good fabric – a fragmented approach”, which companies will take advantage or play countries off against each other, to “arbitrage … down to the lowest common denominator”. The balance of power in such deals is always with the bigger country, too, which makes them difficult for smaller ones, unless the bigger country happens to be especially altruistic. And, she says with a wry smile, “I can’t think of such a country in reality.”
Mann does, though, accept that some parts of the current trade framework, notably the investor-state provisions that allow companies to sue countries through confidential arbitration courts, are not fit for purpose. In any legal process, she said, “the transparency of the proceedings and the independence of the adjudicators are both key ingredients … If we then think about those principles, and we transport that to investor-state dispute, some of those elements of transparency and the independence of the adjudication seem to be missing.”
‘Post GFC stimulus just pumped up asset prices’
One of the OECD’s biggest policy pushes recently has been on “inclusive growth”, an open attempt to suggest ways to reduce economic inequality after the financial crisis. The problem is that not all of the three key elements of that plan – increasing employment, boosting wages and spreading wealth – are firing. While employment is up, most countries are “still desperately short of real wage growth”, and recent central bank attempts to stimulate the economy – through policies like quantitative easing – have inflated the price of assets already disproportionately held by the wealthy.
“So you have one [element] that is working well, one working against – that’s asset prices – and one in the middle [wage growth] which is off the field and hasn’t powered yet.” The “collective fiscal austerity” in the first few years after the financial crisis didn’t help, Mann adds, as it cut things that would have boosted employment and incomes, like government benefits, investment in skills and education, and public infrastructure. “Those are the things that got slashed in the first half of the decade.”
The reasons for weak wage growth
The explanations for the lack of wage growth are complex, she says, citing a range of possible causes: the fact that 95 percent of firms in any given sector have had no productivity growth in the last 20 years; the global shift to classically lower paid service work where productivity improvements can be hard to come by (a phenomenon sometimes known as Baumol’s disease); the fact that employment increases have been stronger for women, who are paid less; and the fact that well-paid older workers are retiring and being replaced by lower-paid young workers.
“There are pieces of all of that,” Mann said.
What about the ever-growing weakness of unions and the decline in ordinary workers’ bargaining strength? Mann said even in countries where unions or other “social partners” are strong, such as Germany, Japan and Sweden, workers “are not bargaining for wage increases, they are bargaining for employment security.”
Mergers compressing wages
She also thinks corporate mergers may be having an effect. In the past, workers at company A could boost their income by taking a higher-paid job at company B: having a wide range of companies around created greater competition, and more wage-increase options, for staff. “But if company A and company B merge, well now you don’t have the ability to do that anymore.” While this question remains “a very active area of research”, Mann said, the evidence to date “indicates that it’s a major factor. It appears that wage compression has been an outcome of mergers.”
Along with wage earners, women in economics are having a tough time of it, Mann said. There is, admittedly, greater awareness of the problems of sexism in the profession, such as the lack of women employed in senior roles or published and cited in major journals.
“Awareness doesn’t necessarily create change, but it does bring things up … We’re a data-driven profession, and the data is pretty bad, so that’s raising awareness.”
But, she adds, “There’s still a lot of individual sexism because individuals are who they are. Implicit bias is really hard to change, really hard to change … and it’s really hard to change when the profession moves slowly.”