Malaysia: The Economy is in bad shape. Thank you, UMNO

September 18, 2018

by Phar Kim Beng@www.malaysiakini.com

Former Prime Minister Najib Razak should be awarded the 2018 Nobel Prize in Economics for his management of the Malaysian Economy. He pioneered the 1MDB method of robbing the Malaysian Treasury.

COMMENT | The Malaysian economy is in bad shape. Very bad.

Revisiting the 2014 magnum opus of the Prime Minister’s new Economic Advisor Dr. Muhammed Abdul Khalid, The Colour of Inequality: Ethnicity, Class, Income and Wealth in Malaysia, we see that Malaysia’s income gap has not changed much from 1957 levels, when the country first gained independence.

Between 1990 and 2018, Malaysians on the whole gained little, except the very rich. Muhammed describes a small breakthrough in 2012, but there is no telling if this was due to fiscal spending to ward off the effects of the 2007-2008 global financial crisis.

Muhammed’s reliance on the Statistics Department’s Household Income Survey, while illuminating, is not entirely convincing, especially when paired with numbers or assertions culled from Pemandu, the now-defunct government-funded performance delivery unit.

 

In other words, the actual picture of the Malaysian economy could be worse than what Muhammed actually describes.

Income from the manufacturing sector, for example, has been on the decline, which may be due to the over-reliance on cheap foreign labour – with an estimated 5.5 million migrant workers in the country – which further depresses the cycle of Malaysian wages.

Indeed, Muhammed correctly notes that “90 percent of each ethnic group does not have any liquid savings, and would not be able to survive more than few months in case they lose their source of income or employment”.

Ticking time bomb

This is not a very pleasant picture, even if it is colour blind. Why? The danger lies in the ticking time bomb that cuts across all races and groups. When the income chasm widens, people tend to blame one another for their problems, which in turn accentuates social, political, religious and racial tensions.

While democracy can ameliorate the tensions, it cannot overcome them completely. What democracy cannot structurally and systematically solve, groups of all religious and ideological fancies might rise to plug the policy gaps. When they do so, inter- and intra-ideological or religious pressures will only become more acute.

When political parties refuse to have elections, or postpone them indefinitely, they become blindsided by what the people want, which in turn hastens their own demise, as witnessed with Umno and BN.

Knowingly or unknowingly, as the book was completed well before the May 9 polls in which a kleptocracy was defeated, the above was one of the key takeaways of Muhammed’s simple but sophisticated book.

A bad economy will skew a political party’s fate, even if it well-larded with cash, corruption and connections. Reading the book now, after the 14th general election, it almost seems like a eulogy to UMNO-BN.

Barely a trickle

But The Colour of Inequality is also a sad indictment of how politicians and corporate leaders have steered the mighty Malaysian ship aground.

As Muhammed (photo, below) notes, most companies simply refuse to pay their workers well. When they don’t, and with less than nine percent of workers unionised, the bargaining power of the workers is overwhelmingly diminished, leaving them to the mercy of their corporate masters.

 

If the book is anything go by, the whole of Malaysia is sputtering to a halt – despite a GDP that “grew from RM5.1 billion in 1957 to RM1 trillion in 2012”. With the national debt now standing at RM1.09 trillion, Malaysia is caught in the vice-like middle-income trap.

The infamous trickle-down economics, for the lack of a better term, is not just non-existent here; wealth seems to be flowing upwards. Given when it was written, The Colour of Inequality references the Occupy Wall Street, where the 99 percent were trying, seemingly in vain, to challenge the grip of the exalted one percent.

In any case, widespread disempowerment is a phenomenon that should not be happening if the state and the market, as is the case in Malaysia, have vouched to work in tandem to help the poor – as reflected in the National Economic Policy and its derivatives.

But although Malaysia as a whole was becoming richer, the income differentials of Malaysians is growing wider. The lethal brew of myriad income determinants and gangly systems of income distribution have conspired to render the middle and working classes disempowered.

As Muhammed puts it: “(As of 2012), the top 20 percent held more than 52.1 percent of all wealth, while the bottom 40 percent held less than eight percent. The distribution of liquid assets was very extreme – the top 20 percent had 95 percent of all financial wealth, while the bottom 80 percent had only five percent.”This shouldn’t be happening

This process of emasculation should not be happening. Especially not after 61 years of independence.

In 1958, there were only 3,000 Malay taxpayers out of the overall of 33,000 taxpayers. A decade later, of the 1,488 students in Universiti Malaya – the only university in the country at the time – who graduated with a BSc, only 69 were Malays. Only four of the 408 who graduated with an engineering degree were Malays.

“During the same period,” Muhammed adds, “only 12 Malays graduated from the medical faculty, representing less than 10 percent of the total medical faculty graduates.”

But while the number of Malay graduates, technocrats and universities between 1970-2018 have risen dramatically, the chasm between rich and poor continues to stay the same, if not widened.

Statistics from the Employees Provident Fund (EPF) show that 92 percent of the people are earning less than RM 6,000 a month; four out of 10 Malaysians have no pensions at all; close to 40 percent earn less than RM3,000 per month; 25 percent of Malaysians have no properties to their names; and the money that pilgrims save for the hajj is spent entirely on the hajj, leaving their children with nothing to draw on.

Muhammed adds that it is “estimated that there were only 150,000 inter (-racial) marriages in Malaysia, a small figure in a population of 28 million”. Wealth, or, the lack of it, tends to have the same clustering effects in one group and one race.

An epilogue

One thing that Muhammed does not address at length is the extent to which the state can compel GLCs and GLICs to remunerate their workers well, or at least put a cap on the salary differentials between those at the top and the workers at the bottom.

Additionally, in the aftermath of the financial crisis and Occupy Wall Street, the honeycomb, gig, platform and sharing economy has emerged. If more people put their minds together, more bottom-up solutions – as manifested by Uber, Grab, Air BnB and other forms of electronic commerce – can and will emerge.

But are Malaysians ready for this, beyond the template of the digital free trade zone offered by Alibaba? Or will the proverbial cheese of Malaysians once again be consumed wholesale by a flood of new migrants from China, India and the rest of the world?

Come what may, Malaysians have to work together and understand the structural and systemic reforms that are needed beyond the mere creation of a few digital unicorns.

They need to empower themselves through education, especially online education, even if this involves disciplining themselves to start taking self-enrichment courses – including learning management systems such as edX or Class Central.

If anyone is in need of more inspiration, Muhammed’s book is the best place to start.

The Colour of Inequality, if not redressed, will lead to the panic of inequality, in which only the paranoid will survive. Especially because it is only another 20 years or so before Malaysia starts greying, a process that took European societies a century to experience.

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PHAR KIM BENG was a multiple award-winning Head Teaching Fellow on China and Cultural Revolution in Harvard University.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

Shake Off Feudalism: This is 21st Century Malaysia

June 7, 2018

by S. Thayaparan@www.malaysiakini.com

COMMENT | “The people expect them to be the embodiment of all things good and holy. But the question is: Are they?”

– A Kadir Jasin, “Constitution: The King and the Pauper”

I never thought I would say this, but former Information Minister Zainuddin Maidin questioning UMNO information chief Annuar Musa if the latter was still living in the Hang Tuah era, was pretty interesting blowback for Annuar’s urging of the state security apparatus to investigate Bersatu Supreme Council member A Kadir Jasin for his article allegedly “questioning” the royal institution.

Furthermore Maidin’s caution of not threatening the rakyat with “reckless feudalism” is also a reminder that perhaps, we are living in a new dawn of Malaysians politics, something which I am skeptical of. This idea that political hegemons “threaten” the rakyat with “feudalism”, reckless or otherwise, has always been the preferred weapon of the “bangsa and agama” (race and religion) crowd.

Here is an example of this narrative whereby the rakyat have been threatened with “feudalism”.

When Anwar Ibrahim goes on his royal tour, apparently to convince the royalty that all is kosher with “Malay rights” and “Islam”, this is part of the narrative that Malay rights and Islam are under attack.

Anwar Ibrahim–  A Reformist or a Fawning Royalist? Maybe a Political Chameleon. He should be grateful to Malaysians for his Pardon.

When Anwar Ibrahim and any Malay politician for that matter have to reassure the Malay community that for hithe appointment of Tommy Thomas will not adversely affect Malay rights and Islam, this feeds into the narrative that those ideas/institutions are under attack. The counter-narrative is, have they ever been under attack?

What did Kadir actually say in his pieces about the royalty? In his blog post, “Constitution: The King and the Pauper”, he:

1. Questioned the journalistic integrity of the New Straits Times;
2. Questioned if the Royalty was really insecure as some have claimed;
3. Wondered why Anwar Ibrahim had to go on his royal tour; and
4. Reminded the ordinary rakyat of how much is allegedly spent on the Agong and the difference of expectation between a pauper and a king.

To wit – “But unlike the pauper who evokes God’s name to earn sympathy of the passers-by, the Agong evokes God’s name in his oath of office.”

That’s powerful stuff coming from Kadir, and the reality is that this is what the average rakyat is wondering.

When kids carry out a car wash to contribute to the Hope Fund or whatever it’s called, people think it demonstrates how Malaysian we are.

When the salaries of politicians are cut and the trimmings used to contribute to the Hope Fund, people think it demonstrates how politicians are playing their part in saving this country.

However, when the expenses of the royalty are brought into question, people wonder, why is it so much when we are told that we are on an austerity drive.

We have a Finance Minister who apparently has sleepless nights because of his fear of the financial time bombs that he would discover in the red files.

The rakyat also notices how the royalty, during the lead-up to the elections and post-elections, by word or deed have made extremely political overtures.

Of course, when you bring up the expenses of the royalty, you better cite sources which are credible, which is where Kadir’s piece suffers.

However, what should be done is that the Finance Ministry should immediately issue a response and tell the rakyat exactly how much is spent on the royal institutions.

After all, this is supposed to be a ministry which values truth above all else. Truth, we are told, is needed for this country to move forward.

So when Kadir makes a statement about royal expenses, his claim does not have to be challenged by the royalty but should either be verified and challenged by the Finance Ministry. End of controversy. However, Kadir’s piece is more than just about royal expenses.

Kadir’s conclusion is this – “In conclusion, our CONSTITUTIONAL monarch (emphasis in original) has nothing to fear if they understand their special position and stick to their duties as spelt out by the constitution – and the rakyat wonder, does the royal institution understand their special position and stick to their duties as spelt out in the constitution?”

When UMNO was in charge, there was never an issue when UMNO set policy. Even when former Prime Minister Najib Abdul Razak introduced the National Security Council Act – by the way Harapan folks, is this act going to be ditched? – the “issues” with the objections of the royalty were simply brushed aside.

Nobody in UMNO seemed to care that the royal institutions were sidelined because the sitting UMNO Prime Minister wanted more power than the Agong. Even Prime Minister Dr. Mahathir Mohamad said as much on the campaign trail.

Did anyone from UMNO or PAS object when the constitutional provisions that guaranteed certain rights to the royalty were supplanted by this most odious of “acts” from UMNO? Were the rakyat threatened by reckless feudalism from the UMNO state?

Did the royalty make noise that the powers they were guaranteed under the constitution – the very same powers, that Kadir argues, makes them immune from insecurity – were under attack from the Najib regime?

Did the Malays need to be reassured that the Malay institution was not under attack?

This idea that the royal institution has not changed through constitutional means is a myth, much like the mythical/mystical era – depending on the source – of the Hang Tuah era.

The current Harapan grand poohbah in his time went against the “reckless feudalism” and instituted changes that were embraced by some of the very same UMNO potentates who are now scrambling for power in the political party – UMNO – which has staked the “bangsa and agama” ground as its sole province.

Look even in the Sinar Metro article, all Kadir did was raise three points – in my opinion – which are vital to the economic and social stability of this country. Reproduced here in the original Malay:

1. “Mereka dibayar gaji oleh rakyat jelata dan segala keperluan rasmi mereka ditanggung oleh kerajaan. Dalam keadaan di mana hidup rakyat susah dan kewangan negara sempit, kerajaan tidak boleh sekali-kali membazirkan wang untuk sesiapa pun. Biarlah saya kata macam ini: Istana-istana yang ada itu sudah mewah.
2. Dalam usaha kerajaan baharu mempertahankan hak rakyat jelata dan melindungi institusi negara daripada sebarang bentuk pencabulan maka adalah penting diambil tahu pembabitan raja atau istana dalam kegiatan-kegiatan tidak rasmi seperti perniagaan dan social.
3. Kalau perlu kita kaji semula perlembagaan dan kontrak sosial bagi mengambil kira suasana dan realiti yang ada pada hari ini bagi mengharmonikan perjanjian antara raja dan rakyat jelata.”

My interpretation of Kadir’s words is as follows (you may of course disagree): In times of austerity, because the rakyat are in a crunch, the government of the day should scrutinise its expenses and the royal institutions should also play their part. That the royal institutions should not be involved in unofficial business and social enterprises, because it weakens the integrity of these institutions and encourages practices which are detrimental to a functional state. And as Malaysians we should understand that reforms of institutions – all institutions – are needed to save this country.

If anything, what Kadir is advocating is “responsible feudalism”, which I suppose is what a constitutional monarchy is all about.of

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S THAYAPARAN is Commander (Rtd) of the Royal Malaysian Navy

 

The Californization of America

June 4, 2018

SOQUEL, Calif. — Across the country, Democrats are winning primaries by promoting policies like universal health insurance and guaranteed income — ideas once laughed off as things that work only on the “Left Coast.”

At the same time, national politicians from both sides are finally putting front and center issues that California has been grappling with for years: immigration, clean energy, police reform, suburban sprawl. And the state is home to a crop of politicians to watch, from Kevin McCarthy on the right to Gavin Newsom and Kamala Harris on the left, part of a wave that is likely to dominate American politics for the next generation.

California, which holds its primaries on Tuesday, has long set the national agenda on the economy, culture and technology. So maybe it was just a matter of time before it got back to driving the political agenda, as it did when Ronald Reagan launched his political career in the 1960s. But other things are happening as well. The state is a hub for immigrants, a testing site for solutions to environmental crises and a front line in America’s competition with China. On all sorts of big issues that matter now and will in the future, California is already in the game.

In a way, California even gave us Donald Trump. So much of his “training” to be president came while he was an entertainment celebrity, on a show that, for a stretch of its existence, was produced in Los Angeles. And of course the means of his ascent — the smartphone, social media — came out of Silicon Valley. That’s a lot to have on a state’s conscience.

Governor Jerry Brown of California

California is a deep-blue state — only 26 percent of its residents approve of Mr. Trump, and Democrats dominate the Legislature, statewide offices and most large city governments. But the state’s leaders are also aware that setting the political agenda for the country means making a stark break with naked partisanship. Getting that right will determine whether California, in its newly dominant role, perpetuates the political divide or moves America past it.

For decades, California, even as it grew in size and wealth, was seen as an outlier, unintimidating, superficial and flaky. We were no threat. We were surfer dudes and California girls who got high and turned on, tuned in and dropped out. We spawned Apple and Google, but we also spawned hippies and Hollywood. For a time, our governor was nicknamed Moonbeam.

As recently as the 2000s, with California at the center of the subprime-mortgage crisis, it was fair to wonder whether we had a future; a popular parlor game was to imagine how the state might be divided up into more manageable statelets.That was the old California.

The new California, back from years of financial trouble, has the fifth-largest economy in the world, ahead of Britain and France. Since 2010, California has accounted for an incredible one-fifth of America’s economic growth. Silicon Valley is the default center of the world, home to three of the 10 largest companies in the world by market capitalization.

California’s raw economic power is old news. What’s different, just in the past few years, is the combination of its money, population and politics. In the Trump era, the state is reinventing itself as the moral and cultural center of a new America.

Jerry Brown — Governor Moonbeam — is back, and during his second stint in office has been a pragmatic, results-focused technocrat who will leave behind a multibillion-dollar budget surplus when his term ends in January. But he has also been a smart and dogged opponent of the Trump agenda, from his high-profile visits to climate-change negotiations in Europe to substantive talks in Beijing with President Xi Jinping.

California is hardly monolithic. The region around Bakersfield provides the power base for Mr. McCarthy, the House majority leader and an indefatigable defender of President Trump, who calls him “my Kevin.” Other sizable pockets of Trump supporters live along the inland spine of the state, especially in the north near the Oregon border.

Still, there’s no doubt California runs blue — so blue, people say, that its anti-Trump stance is inevitable. But that’s not right; in fact, California defies Mr. Trump — and is turning even more Democratic — not for partisan reasons but because his rhetoric and actions are at odds with contemporary American values on issue after issue, as people here see it, and because he seems intent on ignoring the nation’s present and future in favor of pushing back the clock.

California doesn’t just oppose Mr. Trump; it offers a better alternative to the America he promises. While Mr. Trump makes hollow promises to states ravaged by the decline of the coal industry, California has been a leader in creating new jobs through renewable energy.

While Mr. Trump plays the racism card, California pulls in immigrants from all over the world. For California, immigration is not an issue to be exploited to inflame hate and assuage the economic insecurities of those who feel displaced by the 21st-century economy, it’s what keeps the state economy churning.

For us, immigration is not a “Latino” issue. The state’s white population arrived so recently that all of us retain a sense of our immigrant status. My great-great-grandfather Gerhard Kettmann left Germany in 1849 and made his way to California during the Gold Rush. That’s why everyone is able to unite, even in our diversity.

And the draw of California is more powerful than ever. People come not only from countries around the globe to work in Silicon Valley — more than seven in 10 of those employed in tech jobs in San Jose were born outside the United States, according to census data analyzed by The Seattle Times — they come from all over the country.

It seems as if every other idealistic young person who worked in the Obama White House or on the Hillary Clinton presidential campaign later moved to California. All these new arrivals create major problems, from housing shortages to insane Los Angeles-style traffic in Silicon Valley. They also create a critical mass of innovation.

Lt. Gov. Gavin Newsom

 

Many Californians see the next decade as a pivot point, when decisions about the environment and the economy will shape America’s future for generations to come. “It’s ‘Mad Max’ or ‘Star Trek,’” said Gavin Newsom, the lieutenant governor and leading candidate to succeed Governor Brown. It’s no mystery which movie he thinks Mr. Trump is directing.

Nationally, Mr. Newsom is known mostly as a cultural pioneer, having allowed same-sex marriage as the mayor of San Francisco in 2004 — among the first big-city mayors to do so. But he sees himself in more pragmatic terms, more like a latter-day Robert Kennedy, a believer in the idea that government can do more for the people if it’s smarter about trying new ideas and updating old assumptions.

Mr. Newsom doesn’t mind making bold claims, and he and his main Democratic challenger, the former Los Angeles mayor Antonio Villaraigosa, are both vowing to build 500,000 homes in California every year for seven years. He also wants to provide single-payer health care to everyone in the state and commit the state to 100 percent renewable energy for its electricity needs. Sure, these are campaign promises — but in California, they suddenly seem like practical, feasible ideas.

California for years was divided between its main population centers. Northern California, birthplace of Berkeley’s Free Speech Movement in 1964 and the Summer of Love in San Francisco later that decade, was often at odds with large sections of Southern California, particularly Orange County, a bastion of suburban Republicans.

That divide is eroding. Orange County even went for Hillary Clinton in 2016. California remains diverse culturally, but politically, it is increasingly unified. That can be a potent engine for social and economic progress; it can also be an excuse for insularity and political grandstanding.

The key, many of the state’s politicians say, is to promote the former without falling into the trap of the latter — no easy task at a time when many Californians see their state as the base of the anti-Trump resistance.

Vivek Viswanathan running for state treasurer of California

Take Vivek Viswanathan. Raised on Long Island by parents who immigrated from India, he did policy work for the Hillary Clinton presidential campaign and Governor Brown and is now running for state treasurer.

It would be easy for him to run far to the left, mixing anti-Trump rhetoric with unrealistic policy promises. Instead, he wants America to see a different California — a state that mixes pragmatism and progressivism.

“I’m one of those people that think the threats that we face from Washington are very real, and not just to the resources we need, but the values that make us who we are,” he said. “California is really a model for what the country can be if we make the right choices.”

The first test of a unified California’s newfound political heft could come this fall. Democrats need to pick up 24 seats in the House of Representatives to win control of it, and they have their eye on seven California districts carried by Mrs. Clinton in 2016 that have Republican incumbents, including four that are wholly or in part in Orange County.

Further north, in the Central Valley, a deputy district attorney for Fresno County named Andrew Janz is running a surprisingly competitive race against Devin Nunes, the chairman of the House Intelligence Committee. Mr. Nunes has used his position to defend the president, while providing little congressional oversight — something that doesn’t sit well with even moderate California Republicans.

“The momentum is definitely on our side,” Mr. Janz told me. “My opponent is more concerned about blaming Democrats than getting the job done. The people here honestly want Nunes to focus less on creating these fake controversies and more on doing the work that’s required to move us along into the 21st century here in the Central Valley.”

Again and again, this is the message coming from the state’s rising politicians — anger with the president and his allies not out of an ideological commitment, but because the president seems more interested in personal gain than national progress.

The more visionary among California’s leaders, including Mr. Newsom, recognize that their state has the highest poverty rate in the country, by some measures, and that addressing the problem — through affordable housing, job programs and early education — has to be a priority. To the extent these are national problems, too, other states may soon be looking to Sacramento, not Washington, for leadership.

It’s also a given that one or more Californians could figure prominently in the 2020 presidential race, including Ms. Harris, a first-term senator who has gained a reputation for her withering examinations of the president’s cabinet nominees. Mr. Newsom, particularly if he wins the governor’s race this year by a convincing margin, could also make the jump to the national stage, following Ronald Reagan and Jerry Brown.

Billionaire Tom Steyer is the “Impeachment Guy” who has spent millions of dollars on television ads in which he speaks to the camera directly and makes a case for the urgent need to impeach President Trump.

To see how different the stereotype of California is from the reality, consider another of the state’s rising political figures, the billionaire Tom Steyer.

To most people in Washington or New York, Mr. Steyer is the “Impeachment Guy” who has spent millions of dollars on television ads in which he speaks to the camera directly and makes a case for the urgent need to impeach President Trump. Impeachment is a widely popular idea among Democrats, but political realists say it’s unlikely to happen absent a Democratic surge in the midterm elections — in other words, that’s California for you.

But at home, Mr. Steyer is anything but a dreamer. His organization NextGen America focuses on developing solutions to climate change and economic inequality, issues that resonate here, especially among the young. The goal is to show the way not through talk, not through TV ads, but through action.

“I think California has this great advantage, which is we have a functioning democracy,” Mr. Steyer said in a recent interview. “With all our problems — and we have a lot of them, the biggest one being economic inequality — we have a spirit in business and in politics that says, sure, there are big problems, but we can address them. That spirit is a great advantage and it’s not true in Washington, D.C., right now.”

Steyer’s bet — and that of millions of others in my state — is that soon, California will pick up the slack.

Steve Kettmann, a columnist for The Santa Cruz Sentinel, is a co-director of the Wellstone Center in the Redwoods.

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A version of this article appears in print on June 3, 2018, on Page SR1 of the New York edition with the headline: The Californization Of American Politics. Order Reprints | Today’s Paper

GE-14: The Battle to Lead Malaysia Gets Personal

April 28, 2018

By Rosalind Mathieson and Shamim Adam

Malaysia’s Prime Minister Najib Razak may be best known internationally for a multibillion-dollar scandal at state investment fund 1MDB, a money trail that led to the Hollywood blockbuster, The Wolf of Wall Street, a $250 million yacht and a $3.8 million diamond given to actress Miranda Kerr.

At home, it’s his intensely personal election battle with a 92-year-old patron-turned-enemy that’s gripping the nation.

 Najib weathered the initial storm over 1MDB, and was cleared of wrongdoing. Now he has to defeat the man who helped bring him to power in 2009, Mahathir Mohamad, who came out of semi-retirement after they fell out over issues including 1MDB.

At stake for Najib is his coalition’s six-decade grip on power. He lost the popular vote in 2013 but won a narrow majority of seats in parliament. In his first international interview in more than three years, Najib said he’s “reasonably confident” he’ll do better on May 9.

Listen to Najib Razak’s Interview

https://www.bloomberg.com/news/articles/2018-04-26/the-battle-to-lead-malaysia-gets-personal

 

 

The Era of Fiscal Austerity Is Over. Here’s What Big Deficits Mean for the US​ Economy.

February 11, 2018

By Neil Irwin

The last seven weeks amount to a sea change in United States economic policy. The era of fiscal austerity is over, and the era of big deficits is back. The trillion dollar question is how it will affect the economy.

In the short run, expect some of the strongest economic growth the country has experienced in years, and some subtle but real benefits from a higher supply of Treasury bonds in a world that is thirsty for them.

In the medium run, there is now more risk of surging inflation and higher interest rates — fears that were behind a steep stock market sell-off in the last two weeks.

In the long run, the United States risks two grave problems. It may find itself with less flexibility to combat the next recession or unexpected crisis. And higher interest payments could prove a burden on the federal Treasury and on economic growth. This is particularly true given that the ballooning debt comes at a time when the economy is already strong and the costs of paying retirement benefits for baby boomers are starting to mount.It’s hard to overstate how abrupt the shift has been.

When the Congressional Budget Office last forecast the nation’s fiscal future in June, it projected a $689 billion budget deficit in the fiscal year that begins this coming fall. Analysts now think it will turn out to be about $1.2 trillion.

One major reason is the tax law that passed on Dec. 20, which is estimated to reduce federal revenue by about $1.5 trillion over the next decade, or $1 trillion when pro-growth economic effects modeled by the congressional Joint Committee on Taxation are factored in. A budget deal passed in the early hours of Friday morning includes $300 billion in new spending over the next two years for all sorts of government programs and $90 billion in disaster relief, without corresponding cuts elsewhere in the budget.

It is a stark reversal from 2010 to 2016, when congressional Republicans insisted upon spending cuts and the Obama administration insisted on raising taxes (or, more precisely, allowing some of the Bush administration’s tax cuts to expire). Those steps, combined with an improving economy, cut the budget deficit from around 9 percent of G.D.P. in 2010 to 3 percent in 2016.

The Near Term: Strong Growth in 2018

In almost any economic model you choose, the new era of fiscal profligacy will create a near-term economic boost. For example, Evercore ISI, the research arm of the investment bank Evercore, estimates that the combination of tax cuts and spending increases will contribute an extra 0.7 to 0.8 percentage points to the growth rate in 2018, compared with the policy path the nation was on previously.

Economists generally think that these policies will have a lower “multiplier” than these policies would have if they took place during a recession, when there is more spare capacity in the economy. But that doesn’t mean the multiplier becomes zero.

“Some people assume that because this was a bad process and the tax bill is really regressive that it won’t have a short-term growth impact, but I think that’s wrong,” said Adam Posen, president of the Peterson Institute for International Economics. “We shouldn’t confuse whatever distaste one has for the composition of the package for totally overwhelming the multiplier effects.”

Put a different way, it would be very hard for the government to pump an extra half-trillion dollars into the economy in a single year without getting some extra economic activity out of it.

Another potential near-term positive for the global financial system could be the effect of billions of dollars in bonds issued by the Treasury. For years the world has experienced what some analysts call a “safe asset shortage,” too few government bonds and other investments viewed as reliable relative to demand.

This has arguably been a factor in depressed interest rates and sluggish growth across much of the advanced world. More Treasury bonds floating around might reduce those pressures.

The Medium Term: Depends on Economic Slack, and the Fed

Over the next two or three years, things get more murky. What happens will depend on how the economy responds to the additional fiscal stimulus, and how the Fed responds to that.

The big question is whether the economy has the room to keep growing without higher inflation emerging. The unemployment rate is already low at 4.1 percent, so there aren’t exactly hordes of jobless people available to be put back to work. That means there is a chance that all this extra money flooding into the economy doesn’t go toward more economic output but just bids up wages and ultimately consumer prices.

If that happens, the Federal Reserve would almost certainly raise interest rates more than it now plans, essentially engineering an economic slowdown to try to keep inflation from accelerating. In that scenario, the apparent benefits of tax cuts and spending increases would be short-lived.

But there’s no certainty that will happen. It may be that the United States has more growth potential than standard models suggest. Perhaps corporate income tax cuts and looser regulation on business will unleash more capital investment and higher productivity, as conservatives argue. Maybe some of the millions of prime-age adults who have dropped out of the labor force in recent years will come back in, creating more economic potential.

“The really big question mark we have is how much slack there really is in the economy,” said Donald Marron, a scholar at the Urban Institute who was once acting director of the Congressional Budget Office. “If you look at conventional measures, unemployment looks really low, but on the other hand if you look back to what we used to think of the potential of the economy a few years ago, we may have some room to grow.”

The Long Run: Higher Debt-Service Costs and Less Room to Maneuver

The public debt was already on track to rise relative to the size of the economy before the new tax and spending deals; now it will probably rise faster. The Congressional Budget Office (CBO) projected last June that the nation’s debt-to-G.D.P. ratio would rise to 91 percent in 2027, from 77 percent in 2017.

The C.B.O. hasn’t updated those numbers to reflect the new tax and spending legislation, but the Committee for a Responsible Federal Budget estimates that it will turn out to be between 99 and 109 percent, depending on whether provisions of the tax law are allowed to expire as they are scheduled to.

But those numbers are just an abstraction. The question is what effects higher debt loads might have for Americans in 2027 and beyond.

Higher debt service costs are one big one. Taxpayers in 2027 were forecast to pay $818 billion a year in interest costs even before the tax cuts and spending increases, or 2.4 percent of G.D.P. That will presumably be higher, because taxpayers will be paying interest costs on more debt, and probably at higher interest rates.

And there is probably some point at which the amount of debt the government takes on crowds out private investment; to the degree that the supply of funds to borrow is finite, every dollar the government borrows is not available to be lent to a homeowner taking out a mortgage or a business looking to expand. That said, in practice, the supply of loanable funds is not finite — households may save more with higher interest rates, for example, and foreign capital might flow in.

The bigger costs of a high national debt may come in how much flexibility policymakers have to respond to a future recession or crisis. If the United States finds itself in a major war or a deep recession, its starting point in terms of debt load will be much higher than it was at the onset of the Iraq War or the 2008 financial crisis.

“It’s about risk management,” Mr. Posen said. “We may need that fiscal capacity for something else.”

Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.” @Neil_IrwinFacebook

A version of this article appears in print on February 10, 2018, on Page A1 of the New York edition with the headline: Austerity Era Comes to End. Order Reprints | Today’s Paper |

GDP Should Be Corrected

January 23, 2018

by Urs Rohner@www.project-syndicate.org

The hazards of relying solely on gross domestic product as a measure of overall economic activity have become obvious over time, especially as corporate profits have outpaced GDP growth in key economies. But none of the flaws in GDP are fatal, and policymakers should focus on fixing them, rather than seeking an entirely new framework.

 

ZURICH – Respected economists have long pointed out that gross domestic product is an inadequate measure of economic development and social well-being, and thus should not be policymakers’ sole fixation. Yet we have not gotten any closer to finding a feasible alternative to GDP.

One well-known shortcoming of GDP is that it disregards the value of housework, including care for children and elderly family members. More important, assigning a monetary value to such activities would not address a deeper flaw in GDP: its inability to reflect adequately the lived experience of individual members of society. Correcting for housework would inflate GDP, while making no real difference to living standards. And the women who make up a predominant share of people performing housework would continue to be treated as volunteers, rather than as genuine economic contributors.4

Another well-known flaw of GDP is that it does not account for value destruction, such as when countries mismanage their human capital by withholding education from certain demographic groups, or by depleting natural resources for immediate economic benefit. All told, GDP tends to measure assets imprecisely, and liabilities not at all.

Still, while no international consensus on an alternative to GDP has emerged, there has been encouraging progress toward a more considered way of thinking about economic activity. In 1972, Yale University economists William Nordhaus and James Tobin proposed a new framework, the “measure of economic welfare” (MEW), to account for sundry unpaid activities. And, more recently, China established a “green development” index, which considers economic performance alongside various environmental factors.

Moreover, public- and private-sector decision-makers now have far more tools for making sophisticated choices than they did in the past. On the investor side, demand for environmental, social, and governance data is rising steeply. And in the public sector, organizations such as the World Bank have adopted metrics other than GDP to assess quality of life, including life expectancy at birth and access to education.

At the same time, the debate around gross national income has been gaining steam. Though it shares fundamental elements with GDP, GNI is more relevant to our globalized age, because it adjusts for income generated by foreign-owned corporations and foreign residents. Accordingly, in a country where foreign corporations own a significant share of manufacturing and other assets, GDP will be inflated, whereas GNI shows only income the country actually retains (see chart).

Ireland is a prominent example of how GNI has been used to correct for distortions in GDP. In 2015, Ireland’s reported GDP increased by an eye-popping 26.3%. As an October 2016 OECD working paper noted, the episode raised serious questions about the “ability of the conceptual accounting framework used to define GDP to adequately reflect economic reality.”

The OECD paper went on to conclude that GDP is not a reliable indicator of a country’s material well-being. In Ireland’s case, its single year of astonishing GDP growth was due to multinational corporations “relocating” certain economic gains – namely, the returns on intellectual property – in their overall accounting. To address the growing disparity between actual economic development and reported GDP, the Irish Central Statistics Office introduced a modified version of GNI known as GNI*) for 2016.

The gap between GDP and GNI will likely close soon in other jurisdictions, too. In a recent working paper, Urooj Khan of Columbia Business School, Suresh Nallareddy of Duke University, and Ethan Rouen of Harvard Business School highlight a misalignment in “the growth in corporate profits and the overall US economy” between 1975 and 2013. They find that, during that period, average corporate-profit growth outpaced GDP growth whenever the domestic corporate-income-tax rate exceeded that of other OECD countries.

In late December, this disconnect was addressed with the passage of the 2017 Tax Cuts and Jobs Act. By lowering the corporate-tax rate to a globally competitive level and granting better terms for repatriating profits, the tax package is expected to shift corporate earnings back to the United States. As a result, the divergence between GDP and GNI will likely close in both the US and Ireland, where many major US corporations have been holding cash.

Looking ahead, I would suggest that policymakers focus on three points. First, as demonstrated above, the relevant stakeholders are already addressing several of the flaws in GDP, which is encouraging. Second, public- and private-sector decision-makers now have a multitude of instruments available for better assessing the social and environmental ramifications of their actions.

And, third, in business one must not let the perfect become the enemy of the good. We have not solved all of the problems associated with GDP, but we have come a long way in reducing many of its distortions. Instead of seeking a new, disruptive framework to replace current data and analytical techniques, we should focus on making thoughtful, incremental changes to the existing system.

 

• Urs Rohner is Chairman of the Board of Credit Suisse.