TIME Economy

The World’s Mania for Economic Data Is Pretty Silly

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Want to double your GDP? That's easy. Just calculate it differently

In early April, Nigeria achieved an amazing feat. Overnight, its economy swelled by 89%. Just like that. The West African giant has been posting pretty impressive growth rates recently. But it wasn’t fresh investment, surging consumer spending or high oil prices that generated the GDP windfall. Nigeria can thank its statisticians.

Nigeria’s bookkeepers made a few changes to how they calculate GDP, updating the base year for determining prices and improving data collection. And voila! GDP almost doubles with a few clicks on a spreadsheet. This isn’t an economic magic trick or some kind of corrupt shell game. Economists have more confidence in the new figure than the old. Nigeria had not been refreshing the way it measures GDP as it should have been.

Confused yet? Global financial markets thrive upon data. Every new figure or percentage gets analyzed, reanalyzed, debated, discussed, dissected and analyzed some more. The reality, though, is that many important economic statistics aren’t as hard and fast as we tend to treat them to the point where we have to wonder how much use they are to understanding the world economy.

Take a look, for instance, at China. Much praise (or concern, depending on where you sit) has been lavished on China’s rapid ascent. But the Chinese data we use is riddled with question marks. Its GDP figures, for instance, just don’t add up. A recent report from Bank of America Merrill Lynch commented that the sum of the GDPs of China’s provinces doesn’t match national GDP, though the investment bank also noted that the discrepancy has narrowed recently, “perhaps due to less data rigging.”

China’s current trade data is also screwed up because companies were caught last year fabricating exports as a way to evade the country’s capital controls. Perhaps we should take the advice of China’s Premier, the No. 2 policymaker in the nation, who, earlier in his career, said Chinese GDP figures are “man-made” and “for reference only.”

Nevertheless, these statistics are taken as official. Then they are put through another round of numerical aerobics. Headlines turned heads in April when new figures from a World Bank report estimated that China’s economy was much larger than originally thought. The data suggested that China would overtake the U.S. as the world’s No. 1 economy as early as this year, much more quickly than anticipated. This prompted all sorts of talk about the decline of the West and a new world order led by China.

But again, we find ourselves in a statistical conundrum. To compare GDPs from country to country, the figures are usually converted from their national currencies into U.S. dollars using exchange rates. But some analysts believe that this method is flawed. Exchange rates, the thinking goes, fail to properly measure GDP since they fluctuate and can’t fully account for different prices in varied countries. So the International Comparison Program, coordinated by the World Bank, offered an alternative using “purchasing-power parity” (PPP), which adjusts for the prices of goods and services across economies.

The result: China’s GDP practically doubles, from $7.3 trillion in 2011 using exchange rates, to $13.5 trillion based on PPP. How’s that for different? (China’s economy is far from the only one inflated in this way. India’s tripled by the ICP’s calculations, to nearly $5.8 trillion.)

Which number is right? Derek Scissors of the American Enterprise Institute blasted the ICP, saying the PPP method “makes no sense.” PPP comparisons were devised to better understand personal incomes and consumption, and using them to compare economic size “stretches the idea of PPP beyond the breaking point.” Instead, Scissors recommends comparing economies not on GDP at all, but on a measure of national wealth.

Obviously, the experts don’t agree on which statistics to believe. That would be of purely academic interest if data weren’t taken so seriously. Economists and investors make all sorts of choices based on statistics that can change radically depending on who is doing the calculating.

It isn’t just GDP data that suffers in this way. U.S. financial markets gyrate wildly based on jobs data released by business-services firm ADP, since it is widely seen as an indicator for the official report from the U.S. government released at a later date. Yet ADP has proved a poor forecaster, even after an overhaul of its methodology, inspiring one economist to call the report “a joke.”

Policymakers are also stuck trying to make decisions based on conflicting data. William Galston, once an adviser to President Bill Clinton, recently argued for action to ensure workers are properly rewarded for their increased efficiency. Based on the stats he was using, workers were producing more, but wages haven’t been rising to properly compensate them for that extra contribution and that was widening inequality and creating a major economic headache.

“For the sake of economic growth, social mobility and political stability, we must think more boldly about reforging the connection between compensation and productivity,” he wrote. That led the Cato Institute to condemn Galston for employing “statistical fog” to promote “the worst economic policy idea of the past 40 years.” Cato argued that data upon which Galston based his argument was faulty, and by using supposedly superior methods, the imagined gap between wages and productivity vanishes.

What can we do? Economic statistics are what they are imperfect numbers based on imperfect data and twisted further by contending methods of analysis. Just keep that in mind next time you dip into a database.

TIME europe

The European Economy Needs Another ‘Whatever It Takes’ Moment

Belgium EU Daily Life
A homeless man rubs his eyes as another man passes by outside the E.U. Council building in Brussels on Monday, Nov. 18, 2013 Virginia Mayo—ASSOCIATED PRESS

European Central Bank president Mario Draghi's 2012 promise to do "whatever it takes" to save the euro was a turning point in the E.U.'s financial crisis. The same resolve is needed now

In July 2012, Mario Draghi, president of the European Central Bank, stood before investors at a London conference and made a proclamation that changed the fate of Europe. Fear in financial markets about the unsustainable debt mounting on euro-zone governments was threatening to tear apart the beloved monetary union. But Draghi would have none of that. His central bank “is ready to do whatever it takes to preserve the euro,” he stated bluntly.

That moment is widely regarded today as the turning point in Europe’s financial crisis. Since then, the turmoil that could have crushed the dream of European integration has receded. The yields on the sovereign bonds of Spain and Italy, which had risen to levels at which they would likely have required expensive bailouts, returned to normalcy, and the risk to the survival of the euro dramatically decreased.

Draghi’s strong statement worked because it showed a degree of resolve that had until then been lacking in efforts to quell the debt crisis. But ironically, the resolve that ended one stage of that crisis has only perpetuated the next stage: fixing the damage inflicted on the average European family.

The fact is that Europe has grown complacent in confronting its problems. The region’s political leaders are going about their business as if the crisis is over. It isn’t. Sure, the euro zone has climbed out of recession and, after six years of trauma, appears to be on the mend. The countries that required European Union-backed rescues are beginning to exit from them. But it’s hard to call what is happening a recovery.

The latest forecast from the International Monetary Fund estimates GDP in the euro zone will expand a mere 1.2% in 2014, compared with 2.8% for the U.S. Some of the most important European economies aren’t even moving at that lackluster pace. The IMF expects France to grow a mere 1%, and Italy only 0.6%. Meanwhile, with prices barely rising, concerns have arisen that the euro zone could plunge into debilitating deflation, which would make the debt burden of Europe’s weakest economies even heavier.

Europe has also made almost no progress in solving its gut-wrenching unemployment problem. The latest euro-zone jobless rate is a woeful 11.8% — a year earlier, it was 12%. For some countries, unemployment remains almost incomprehensible. Spain’s rate is 25.3% and Greece’s 26.7%. Youth unemployment, meanwhile, stands at 23.7% in the euro zone. On top of that, nearly 10 million people in the European Union lucky enough to hold at least part-time jobs are underemployed.

If this isn’t a crisis, what is? In the U.S., such depressing statistics would probably spark political and social upheaval. Yet Europe’s politicians don’t seem particularly alarmed. No one is scrambling to urgent leadership conferences as they had during the old stage of the debt crisis. Two years ago, there had been a push for a strategy to boost growth and ease the pain for the euro zone’s weakest economies. That has remained mere talk. Italy’s Finance Minister recently complained that the E.U. paid no more than “lip service” to creating growth and jobs.

The reforms that could aid the millions of jobless and restore better growth are moving at a crawl. In Italy, newly installed Prime Minister Matteo Renzi (the country’s fourth leader since 2011) is attempting to restart an effort to liberalize the over-regulated economy after two years of minimal progress, but it is far from certain the country’s politicians, beholden to special interests, will act with the urgency required.

Even those measures that have been implemented often fall short. The Organisation for Economic Co-operation and Development recently praised Spain’s labor-market reforms, which allow firms to hire and fire workers more easily, for helping to create jobs. But the report then went on to say that more was needed, especially to assist young workers. (Youth unemployment in Spain is a staggering 53.9%.)

Nor has there been a big rush to press ahead with the integration within Europe that could give the region’s economy a boost. The German government is reviving a push for more centralized governance in the euro zone, including a budget commission that would have the power to veto national spending plans – the type of measure many economists see as critical to stabilizing the monetary union. But efforts to use integration as a tool to boost growth and jobs remain sidelined. A recent report from the European Parliament showed that by reducing remaining barriers to cross-border business in sectors like e-commerce, the E.U. could add a badly needed $1.1 trillion onto its GDP.

There are other ways, too, in which the varied nations of the union can help each other, if they so chose. A promising initiative from Berlin to offer young people across Europe language and job training to work in Germany has been a wild success – so much so that the program got overwhelmed.

We need to see more such efforts. But the problem in Europe today is the same that has plagued the region’s efforts to fight its economic crisis from the very beginning. Despite lofty talk of “more Europe,” each country’s national politics get in the way. That continues to undercut the intra-Europe cooperation that would produce long-term benefits but requires short-term sacrifice. Germany angrily rebuffs criticism that its export-led growth model – which produces a larger current account surplus than China’s – hurts its euro-zone partners, when changing that model, by, for instance, liberalizing its own tightly wound domestic service sector, would ultimately benefit everyone.

Back when Draghi made his now famous pledge, many bankers (especially in Germany) worried that when pressure from markets receded, Europe would slip back into its usual do-nothing mode and lackadaisically allow the region’s problems to persist. The trials of millions of European families don’t seem to be sufficient to stir the continent’s leaders to action. Europe needs another “whatever it takes” promise – this time to do “whatever it takes” to create growth and jobs. Though apparently, nobody has the guts to make it.

TIME Economy

China Could Overtake the U.S. as the World’s No. 1 Economy This Year

A worker walks past a steel factory in Beijing
A worker walks past a steel factory in Beijing on April 1, 2013 Kim Kyung Hoon—Reuters

New data from the World Bank suggests China could surpass the U.S. as the world’s biggest economy as early as this year, a day that was always meant to arrive after China began its quest for wealth in the 1980s, but it will just veil the reality of its economic weaknesses

China’s economy is catching up to the U.S.’s much more quickly than anticipated. That’s according to a new report from the International Comparison Program of the World Bank.

The study recalibrates GDP statistics based on updated estimates of “purchasing-power parity” — a measure of what money can actually buy in different economies. In the process, the economy of China comes out far larger than we had previously thought. Its GDP surges to $13.5 trillion in 2011 (the latest year available), compared with the $7.3 trillion calculated using exchange rates. That catapults China’s economy much closer to that of the U.S. — at $15.5 trillion. Forecasting ahead, these figures show that China could overtake America as the world’s largest economy as early as this year.

This day, of course, was always going to arrive. The ascent of China to the world’s No. 1 slot has been inevitable ever since the country embarked on its great quest for wealth in the 1980s. With a population heading toward 1.4 billion, the question has been when, not if, China will topple the U.S. from its lofty perch. Still, we can’t ignore the historic significance of that switch. The U.S. has been the globe’s unrivaled economic powerhouse for more than a century. The fact that China will replace the U.S. at the top is yet another signal of how economic and political clout is rapidly shifting to the East from the West.

That quickly gets everyone’s passions boiling over. To many Chinese, becoming No. 1 is vindication for what they feel has been two centuries of humiliation at the hands of an aggressive West and proof that its authoritarian, state-capitalist economic model is superior to the democratic, free-enterprise systems of the U.S. and Europe. In the U.S., losing the top spot is seen as a symbol of America’s decline on the world stage.

Yet we shouldn’t get ourselves too worked up. These new figures don’t mean as much as many people think. Leaving aside the obvious statistical questions the report raises about the value of GDP figures generally, where the U.S. and China rank misses the more important point: bigger isn’t necessarily better.

Even if China does become No. 1, that would just be a mask covering up the reality of the economy’s weaknesses. Some of the factors that have been driving GDP upward are also signs of China’s deteriorating economic health — investment in excess capacity, the construction of wasteful real estate projects and the buildup of crazy levels of debt. China is losing its cost competitiveness but still lags badly in the managerial expertise, technology and financial professionalism necessary to develop a truly advanced economy.

Beijing’s leadership is embarking on an ambitious program of reform to make the state-led economy more market-oriented and give private business greater sway. But the challenges of implementing these reforms are huge and could cause a dramatic economic slowdown, or even worse. Many economists and analysts (myself included) have openly wondered if China is heading toward a full-blown financial crisis.

On the flip side, if the U.S. slips from its No. 1 position, it doesn’t spell doom. The U.S. still has a substantial lead in innovation, and its dominant position in many industries and sectors is not about to vanish. New York City will remain the world’s premier financial center, and the dollar will reign supreme on the world stage for some time to come. Still, wherever the U.S. ranks, its economy too is badly in need of reform. Better infrastructure, a smarter tax code, an improved education system and more determined efforts to close the income gap would also strengthen the economy’s foundation for growth.

So we shouldn’t get too stuck on who is No. 1 and who isn’t. Ultimately it’s what you do with your economy, and not its size, that matters.

TIME

Here’s How You Help the Poor Without Soaking the Rich

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Afghan children Malik, 8, and Popal, 11, wait at a roadside with wild tulips for sale to potential customers driving through the Shamali plains, north of Kabul. SHAH MARAI—AFP/Getty Images

We have to clear our minds of a fallacy about poverty alleviation: Helping the poor does not mean welfare. This isn’t to say that we don’t need welfare. Ignoring the unfortunate who can’t put enough food on the table or afford proper education or healthcare is not just cruel, it’s bad economics. The impoverished make either good consumers or productive workers.

But government aid can only reduce the suffering of the poor; it usually can’t make them escape poverty permanently. We know that from watching what has happened in the developing world over the past half century. Those countries that have tried to use wide-scale state programs to alleviate poverty—such as India—have not achieved results as quickly as nations that did not, such as Singapore and South Korea. (See my recent piece on this subject.) Generally, the high-performance economies of East Asia didn’t fight poverty by playing Robin Hood—soaking the rich and handing out cash to the poor. There is no reason why we’d have to do that today.

Instead we have to give the downtrodden better jobs, more opportunities, more tools to improve their incomes and fairer treatment in economic policy.
That means we must improve the climate for investment. I’m pretty sure you didn’t expect me to write that when you started reading. There is a widespread assumption that what’s good for companies is bad for the little guy. But if Asia’s example teaches us anything, it’s that there are two ways to end poverty: (1) create jobs and (2) create more jobs. The only way to do that is to convince businessmen to invest more.

That’s why it is imperative to make investing easier. We should press ahead with free-trade agreements like the Trans-Pacific Partnership to bring down barriers between countries and encourage exports and cross-border investment. Though CEOs complain far too much about regulation—the sub-prime mortgage disaster, the recent General Motors recall, or Beijing’s putrid air all show that we need to keep a close eye on business—we should also streamline regulatory procedures, standardize it across countries and thus make it less onerous to follow.

We also need to improve infrastructure like transportation systems to bring down the costs of doing business. I think it is a national embarrassment for the U.S. to allow the Highway Trust Fund to run out of money at a time when the country needs both jobs and better roads. The environment for investment shouldn’t just improve for Walmart and Apple, but also entrepreneurs and small companies. In many parts of the world—in certain European countries, for example, and China—there’s too much red tape involved in starting a company, and not enough finance available.

We also need to invest in the workforce. U.S. Senator Marco Rubio, in an attack on a proposed minimum-wage hike, said that “I want people to make a lot more than $9—$9 is not enough.” He’s right, but that just won’t magically happen on its own. To get people’s paychecks up, workers have to possess better skills. We are simply not doing enough to improve schools, teachers and job training programs. We should also be doing more to make higher education more affordable.

While overall U.S. spending on education is among the highest in the world, it still lags in important ways. Take a look at this data comparing education spending across countries. U.S. public expenditure on education has remained more or less stable, at 5.1% of GDP in 2010, but that’s lower than a lot of other developed countries, from Sweden to New Zealand. What is also interesting is how the cost of education is pushed onto the private sector in the U.S. much more than in most other countries.

Spending is also heading in the wrong direction. The U.S. Census Bureau calculated that in fiscal 2011, expenditure per student dropped for the first time since statistics have been kept.

Clearly, the U.S. spends so much money on education already that we should be getting more bang for our buck. Reform is crucial to put all those billions to better use. But slicing spending isn’t the answer, either. The latest budget from U.S. Congressman Paul Ryan streamlines some U.S. education programs he considers wasteful and recommends measures that would add to the financial burden of going to college for some families. Meanwhile, he’s leaving the military budget generally unscathed. Do Ryan and his colleagues believe the Pentagon isn’t wasteful? Apparently not enough to put the military on a diet.

The fact is we have the money to do more for education. U.S. federal spending is about $3.5 trillion—roughly the size of the entire economy of Germany. The problem is how we choose to spend it.

We also must restore performance-based pay. The idea that people should benefit from their hard work is a cardinal belief of capitalism, but there is ample evidence that it hasn’t held true for quite a while. Productivity growth has far outpaced wage increases in the U.S. going back to the 1970s.

This appears to be a global phenomenon. The International Labor Organization (ILO) looked at 36 countries and figured that average labor productivity has increased more than twice as much as average wages since 1999. Some have disputed this argument, but we can’t deny that wages are going nowhere. According to the Bureau of Labor Statistics, real weekly earnings in the U.S. in March were a mere $1.82 higher than a year earlier. Generally, workers are losing ground to capital globally. The ILO has shown that wages’ share in GDP has decreased in recent decades, meaning that the regular worker isn’t benefiting as he should from economic growth.

There are many factors behind this trend, including the formation of an international labor market. But globalization itself isn’t the problem—it’s how the benefits are being allocated. Corporate management doesn’t seem to care so much about shareholder value when paying themselves. Professor Steven Kaplan noted that in 2010 the average CEO of a major U.S. company earned more than $10 million, or about 200 times more than the typical household.

Companies also have the money to raise wages: They just choose not to give it to their employees. Rating agency Moody’s recently reported that U.S. non-financial companies are sitting on $1.64 trillion in cash. Companies also spent $476 billion buying back their stock in 2013, 19% more than the year before.

The question is: How get management and shareholders to disgorge more corporate profits to their employees? There isn’t an easy answer. William Galston, former advisor to President Bill Clinton, once suggested tax rates should be linked to a company’s worker compensation strategy (though that strikes me as a bit too intrusive). The ILO recommends we support stronger collective bargaining to allow workers to fight for their fair share of corporate profits.

But the crux of the problem is the idea of shareholder value. How do we convince shareholders and management that higher wages are positive for the long-term prospects of their corporations? Maybe we should consider altering the way we tax capital gains. Rather than breaking them down into two main categories—short and long term—it might help to decrease the rate the longer the asset is held. That would encourage longer-term shareholding, and perhaps make owners more interested in the long-term outlook for the companies in which they hold shares. I also think we should rebalance tax rates between capital and labor. I understand the principle that low capital-gains taxes reward people for wise investments. But what about rewarding people who work hard at their jobs every day? The Organization for Economic Co-operation and Development noted in a report this month that the tax burden on wage earners has increased in most of its member states in recent years.

These are just suggestions, and I’m interested in hearing more of them. The basic point is that we have to take steps to improve both the outlook for corporations and the many ordinary employees who work for them. The game should be win-win, not zero-sum.

TIME China

Don’t Be Fooled by China’s Robust Growth

A labourer works at a construction site in Hangzhou, Zhejiang province, April 14, 2014. China's economy grew at its slowest pace in 18 months in the first quarter of 2014, official data showed on Wednesday. William Hong—Reuters

The economy may be holding up, but so are the risks China presents to the world economy

As usual, China manages to surprise. Many economists have been expecting China’s economy to suffer its roughest patch in more than 20 years. But on Wednesday, the government announced GDP grew a healthy 7.4% in the first quarter. That’s slower than the previous quarter, but still better than consensus forecasts. Though some of the underlying details won’t inspire optimism — the all-important housing sector is stumbling, resulting in slower investment — generally the data lifted spirits around an Asia increasingly dependent on China for its growth.

Yet don’t breathe too easily. As has been the case for several years, robust GDP growth figures mask what is really rotting the Chinese economy and threatening global economic stability: Extreme levels of debt. The rapid rise of debt (relative to GDP) in China has been similar to that experienced in other countries (including the U.S. and Japan) before their financial crises, and today the economy is in the process of a major workout of the problem. Growth has slowed because credit expansion has, too. The government also seems to be getting a handle on the out-of-control “shadow banking” sector. But the signs of strain are obvious, including the country’s first-ever corporate bond default in March. That’s probably just the beginning. China has become a debt junkie, requiring more credit to generate its growth, and that’s a problem that can’t be resolved overnight.

It will also take some pretty serious reform. Fixing the debt problem and returning to more sustainable growth will entail a fundamental transformation of the way in which the economy works. The state maintains tremendous control over finance and many key industries. But that has to change. Bureaucrats have to permit banks to allocate money more wisely, withdraw the subsidies and protection from bloated and uncompetitive state-owned enterprises, and allow excess capacity to get weeded out. Beijing’s top policymakers have pledged reforms that would give the market more power and the private sector more influence. But the measures have so far remained the subject of nice speeches, not actual policy. And as this big transition is taking place, China’s leaders will encounter many risks – probably more bankruptcies, bank losses and hard choices about which firms to rescue and which ones to let go.

That’s why Societe Generale, in a note on Wednesday, said China was in the midst of “a good slowdown” — a much needed pause to sort out the problems amassed over the decades of rapid growth. It’s a daunting challenge, one that ultimately surprising growth figures can’t hide.

TIME Economy

We’re Much Too Obsessed With Central Bankers

Bank Of Japan Governor Haruhiko Kuroda News Conference
This man can't save the economy by himself, and neither can any other central banker. Haruhiko Kuroda, governor of the Bank of Japan, during a news conference in Tokyo on April 8, 2014 Bloomberg—Bloomberg via Getty Images

Japan's struggles make clear that global financial markets are overly focused on what central banks are doing and not enough on what really ails the world economy

Turn on CNBC any given morning and you’ll endure fund-manager after banker after stock-market-analyst attempt to decipher what the U.S. Federal Reserve might or might not do, and when it might or might not do it.

The statements of Fed Chairwoman Janet Yellen are dissected syllable by syllable for clues of direction or intention over and over and over again. Across the Atlantic, Mario Draghi, president of the European Central Bank, garners similar attention. What will — or should — Draghi do to combat the euro zone’s continuing economic woes?

The financial world is obsessed with our central bankers. And though they possess great power over economies and markets — Draghi is credited with almost single handedly quelling the euro-zone debt crisis — the focus on what they say and do has gone too far.

That’s made obvious by the efforts of Haruhiko Kuroda, governor of the Bank of Japan. A year ago, when he first took that lofty post, Kuroda instituted a radical plan to jump-start the perennially sluggish Japanese economy with a massive infusion of cash — like the Fed’s quantitative-easing (QE) programs, but even more aggressive. The plan is part of a great experiment called Abenomics, named after Japanese Prime Minister Shinzo Abe, who inspired it. Abe believes that the central bank’s largesse, combined with government spending and economic reforms, will finally shake Japan out of its two-decade funk.

Yet what Abenomics has become is a study in the limits of central-bank power. A year into Kuroda’s stimulus program, Japan is only marginally better off than it was before. Kuroda has overcome the damaging deflation that plagued the economy, at least for now. But after an initial lift, Abenomics has done little to boost Japan’s growth.

GDP expanded only an annualized 0.7% in the quarter that ended in December. A cheaper yen, engineered downward by Kuroda’s actions, may be helping Japan’s exports a bit, but not enough to close a widening trade deficit. Wages have gone nowhere. Meanwhile, in an attempt to chip away at the government’s giant budget deficit, Abe hiked the consumption tax to 8% this month, which will further drain demand out of an economy that already badly lacks demand.

So inevitably, attention has shifted back to Kuroda. Some economists are expecting the Bank of Japan to step in and increase its stimulus even further to regain momentum. Yet Kuroda can’t fix Japan on his own. The problem is that he’s not getting enough help from Abe and his policy team.

Japan’s economy requires a serious makeover to enhance its ability to grow. Yet the part of Abenomics aimed at major reform, called the third arrow, has progressed much more slowly than Kuroda’s printing presses. Only now is Abe beginning to talk about tackling the economy’s most difficult problems.

In late March, the government began unveiling details of economic zones in which policymakers plan to experiment with looser regulation on labor, health care, foreign investment and other overly controlled sectors — all reforms economists believe are long overdue. But it isn’t clear at this point how far the deregulation will go. Nor is it clear how fiercely Abe is willing to take on those special interests (old-line politicians, civil servants, farmers) that prefer the status quo. Economists believe Japan would see a big boost from joining the Trans-Pacific Partnership, a free-trade agreement orchestrated by the White House, but talks have stalled in part because of Abe’s refusal to open the country’s protected rice industry.

Such reforms would achieve what Kuroda can’t — making Japan Inc. more competitive. In the end, Japan can be saved only by fundamental change to the way the economy works. The same can be said about the rest of the industrialized world. Draghi can help fight deflation or support the banking sector, but he can’t reform the euro zone to produce more growth and better jobs. That’s up to Europe’s political leaders, but their efforts at further integration have slowed. Nor can Yellen improve American infrastructure and education, reform the tax code or take other steps that would aid U.S. competitiveness.

We’ve come to rely so much on our central bankers because politicians and corporate leaders are failing to fix what really is holding us back. Whatever their meeting minutes might tell us, central bankers can never say enough to finally get the global economy on the road to health.

TIME global economy

There’s a Class War Going On and the Poor Are Getting Their Butts Kicked

Orange Farm Residents Protest Over Service Delivery
A South African man hurls a burning tire in Johannesburg during protests over squalid living conditions in 2010. Conditions for the poor are worsening around the world Gallo Images—Getty Images

Although they say they're concerned about inequality, economic policymakers continue to pummel low-income families and the jobless, and that’s bad for all of us

A year ago I asked if Karl Marx was, in certain respects, right about capitalism, and argued that class struggle was making a comeback.

The German philosopher believed the capitalist system was inherently unjust. Capitalism, Marx predicted, would inevitably concentrate wealth in the hands of a few while impoverishing everyone else. There is ample evidence that Marx’s theorizing is becoming reality.

According to a recent report from the International Monetary Fund, income inequality has risen in nearly all advanced economies over the past two decades. In the U.S., the share of income captured by the richest 10% of the population jumped dramatically from around 30% in 1980 to 48% by 2012, while the portion grasped by the population’s richest 1% more than doubled, from 8% to 19%. Other data shows that since 2009, the 1% captured 95% of all income gains; the bottom 90% of people got poorer.

The good news is that more politicians and policymakers are waking up to the problem. “Inequality has deepened. Upward mobility has stalled,” U.S. President Barack Obama said in this year’s State of the Union Address. “Our job is to reverse these trends.”

There is an emerging consensus, furthermore, that such extremes of inequality are bad for overall economic health. “We now have firm evidence … that a severely skewed income distribution harms the pace and sustainability of growth over the longer term,” IMF Managing Director Christine Lagarde warned in a February speech.

But here’s the bad news. The talk hasn’t translated into action. Economic policy for the most part is still biased against the poor — in some ways, it is becoming increasingly antipoor.

The war against the poor may be most pronounced in the U.S. Washington sliced $8.7 billion from the food-stamp program in February, even though nearly 47 million people, or about 1 out of every 7 Americans, currently rely on it. A new bill to extend emergency unemployment benefits is almost definitely dead on arrival in the Republican-controlled House of Representatives.

The standard conservative argument against such welfare programs is that they make people dependent on “nanny states” and discourage initiative. But statistics say otherwise. According to the Center on Budget and Policy Priorities, more than 60% of families with children who receive food stamps have a member who works. The problem is that too many people with jobs don’t earn enough to buy sufficient food and other necessities — they’re the “working poor.” But don’t expect any sympathy from Congress. The Republicans are dead set against a hike in the minimum wage that would allow these folks to buy their own food.

Meanwhile, in Europe, politicians and bankers are breathing sighs of relief that the region’s debt crisis has been quelled. But the reality is that, for tens of millions of Europeans, it hasn’t. Unemployment in the euro zone in February was a gut-wrenching 11.9% — almost unchanged from 12% a year earlier. In Greece, the latest rate is a staggering 27.5%. No wonder angry Spaniards protested in the streets of Madrid in March, more than five years after the economic crisis began. Yet the European Union remains wedded to a policy of austerity rather than growth. What happened to the emergency leadership conferences that were so common when the governments themselves were in trouble? Apparently, Europe’s impoverished aren’t worth such efforts.

In Japan, new policies by Prime Minister Shinzo Abe aimed at restarting a stalled economy are instead squeezing the Japanese people. In an attempt to shake Japan from damaging deflation, Abe is using the central bank to flood the economy with cash to raise prices. Meanwhile, to contend with giant budget deficits and rising government debt, he is also increasing the consumption tax. Yet even though corporate profits have soared — thanks to a weakened yen, also engineered by central-bank policy — those profits haven’t trickled down to the average worker. A combination of higher prices and taxes, and flat wages, means that Japanese families are getting poorer.

Even in China, policymakers talk about closing the country’s gaping rich-poor gap, but many of the necessary reforms have yet to materialize. Interest rates in the banking sector are still controlled in a fashion that punishes savers to subsidize industry, so the return on bank deposits is so meager it barely keeps up with inflation. That hurts China’s low-income families the most. Policy also continues to discriminate against the country’s 262 million migrant workers, who are deprived of proper social services.

Before anyone attacks me as a liberal opposed to free enterprise — the usual slander slapped on those who think the destitute deserve better — please be clear that I see pro-poor policies not as charity, but simply good business and smart economics. Improving the financial health of the average family can build a stronger foundation for economic growth. The soccer mom in Wichita, Kans., who stops by her local bakery to buy a birthday cake for her 5-year-old son, or purchases a new Ford from her local dealer, is every bit as important to the overall economy as any Manhattan tycoon.

What I find baffling is how business leaders and economists fret over retail-sales figures and consumer-confidence surveys, but then advocate practices and policies that crimp people’s incomes and ability to spend. Companies won’t pay a living wage and then wonder where their customers have gone. This isn’t just a matter of improving current economic growth, but our future economic potential as well. U.S. Congressman Paul Ryan recently lambasted America’s school-lunch program, which provides meals to poor kids, as offering “a full stomach — and an empty soul.” Yet is it fair to expect a student with an empty stomach to perform as well on exams as those with full bellies? Ryan isn’t encouraging hard work. He wants to tilt the playing field in favor of the wealthy.

The same is true around the world. Why Abe thinks a poorer population can restart Japanese growth is hard to fathom. China won’t be able to reshape its broken economic model and produce more sustainable growth without pro-poor reforms. With astronomical youth unemployment, Europe is looking at a segment of its population possibly facing economic peril for years, perhaps decades, to come. Is it any surprise euro-zone GDP is expected to grow a mere 1% this year?

The fact is that there is a class war going on, and the little guy is losing. Perhaps that won’t result in revolution, as Marx assumed. But until our politicians and CEOs understand that the average family on Main Street is as critical to the global economy as the bankers on Wall Street, our economic outlook will be just as grim.

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