National Column: Stock market rumbles signal unsound economy

by Thomas Walkom

The stock markets are unsettled. But so far there has been no crash. Life goes on.

Still, market gyrations serve as a reminder. Even though the world economy is in better shape than it was a few years ago, it remains structurally unsound.

First, income inequality persists. It affects not only the developing world but so-called advanced economies, such as Canada and the U.S.

As economist Andrew Jackson has pointed out in the Globe and Mail, census data shows that the gap between Canada’s top 10 per cent and the middle class continues to widen.

This is not just a moral problem. It is a practical one. Economies prosper when the broad middle classes make enough money to buy the goods and services produced. They sputter when those conditions are not met.

Second, wage growth is still low. It’s better than it has been since the recession of 2008 – in large part because, with unemployment dropping, workers have slightly more bargaining power.

But the structural forces that conspire to keep wages down – such as the decline of unions and the growth of precarious work – remain.

As well, whenever workers make significant wage gains, central banks threaten to reverse them.

Indeed, that’s what was behind last week’s stock market turmoil. Traders weren’t spooked by fears of a declining economy. Rather they were reacting to news that the economy was doing unusually well.

Specifically, they were reacting to a report that hourly wages in the U.S. had increased by 2.9 per cent over the year.

In bread and butter terms, 2.9 per cent isn’t very much – particularly to those who have gone a decade without a real raise.

But traders worried that even this paltry amount might be enough to persuade the U.S. Federal Reserve to raise interest rates.

Which brings us to the third point: the strange role played by central banks.

In the years leading up to the recession of 2008, central banks – including the Bank of Canada – focused overwhelmingly on inflation.

When prices threatened to rise too quickly, central banks would signal that they wanted a hike in interest rates. This hike would then lead firms to restrict their business activity and lay off workers.

With unemployment up, wages would be depressed, leading workers to buy fewer goods and services. And that in turn would curb price increases.

It was roundabout and brutal. But it worked.

Faced with the recession of 2008, however, most central banks tried something quite different. In an effort to keep the financial system solvent and encourage economic growth, they did everything in their power to drive interest rates down dramatically.

It was a bold and useful strategy. But it had unintended consequences.

One was a real estate bubble as buyers took advantage of cheap mortgage rates to bid up the price of homes.

Another was a stock market bubble as investors took advantage of cheap money to bid up the price of shares.

The task central banks have given themselves now is how to push interest rates back up to normal levels
without pricking these bubbles.

As last week’s stock-market events showed, this won’t be easy.

Some governments have understood some of these problems. Stephen Harper’s Conservatives ran big
fiscal deficits in order to get the economy rolling – even while pretending not to.

Justin Trudeau’s Liberals talk endlessly about bolstering the middle class and have made some steps in that direction.

As part of her pre-election veer to the left, Ontario Premier Kathleen Wynne has finally begun to address some of the problems posed by precarious work. For example, her Liberal government would make it easier to certify unions in four hard-to-organize areas.

But it is all very hesitant. Meanwhile, the markets rumble.

Thomas Walkom appears Monday, Wednesday and Friday.
Copyright 2018-Torstar Syndication Services

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