Transcript Current Issues in Economics

Current Issues in Economics
Secular Stagnation
or
Growth Explosion?
1
Secular Stagnation or Growth Explosion
Growth – historical perspective
• The pace of growth since 1750 till 1970 is the sequence of
two industrial revolutions.
• First between 1750 and 1830 created steam engines,
cotton spinning, and railroads.
• The second was the most important, with its three central
inventions of electricity, the internal combustion engine,
and running water with indoor plumbing, in the relatively
short interval of 1870 to 1900.
• Both the first two revolutions required about 100 years for
their full effects to percolate through the economy.
• After 1970 productivity growth slowed markedly, most
plausibly because the main ideas of the second revolution
had been implemented by then.
2
Secular Stagnation or Growth Explosion?
Great Moderation
• From the early 1980s on, most advanced economies
experienced what has been dubbed the “Great
Moderation,” a steady decrease in the variability of
output and its major components— such as
consumption and investment.
• There were, and are still, disagreements about what
caused this moderation.
– Central banks would like to take the credit for it, and it is
indeed likely that some of the decline was due to better
monetary policy, which resulted in lower and less variable
inflation.
– Others have argued that luck, unusually small shocks
hitting the economy, explained much of the decrease.
3
Secular Stagnation or Growth Explosion?
Before storm
• The mid-2000s was a period of strong economic
performance throughout the world. Economic growth was
strong; inflation low; international trade and financial flows
expanded; and the emerging and developing world
experienced widespread progress and a notable absence of
crises.
• This favorable trends was underpinned, however, by three
trends that appeared increasingly unsustainable as time
went by:
– real estate values were rising at a high rate
– a number of countries were simultaneously running high and
rising current account deficits
– leverage had built up to extraordinary levels in many sectors
across the globe among consumers and financial institutions
4
Secular Stagnation or Growth Explosion?
History moves again: global economic shift
• Advanced economies accounted for two-thirds
of world GDP (in purchasing-power-parity
terms) in 1992 but their contribution fell to
less than half of global GDP by 2012 (IMF)
• Cities emerging as power centers—about 60
percent of global GDP today is generated by
600 urban centers (McKinsey, 2011).
5
Secular Stagnation or Growth Explosion?
Vicious circle of pre ‘08 global economic system:
• China trade surplus invested in US debt led to low
interest rates (low cost of financing)
• US low cost public debt financing and low cost
private credit real estate financing and false
wealth effect
• European demand for US structured debt
financial products financed by export of
investment goods to China and peripheral Euro
countries
6
Secular Stagnation or Growth Explosion?
Demographic pressures
• The world population is projected to increase to more
than 8 billion by 2030 and to age at an unprecedented
rate.
• For the first time in history, by 2020 children younger
than 5 will be outnumbered by people 65 and older.
• In all regions except sub-Saharan Africa the elderly
population will increase more than the working-age
population, driving up age-related costs.
• Some emerging markets, including China, may get old
before they get rich owing to a declining population.
7
Secular Stagnation or Growth Explosion
EU- the labor market perspectives:
• the unemployment rate would be reduced slightly from
7.2% in 2007 to 5.7% in 2020
• the employment participation rate would increase the
employment rate (of people aged 15 to 64) in the EU would
increase from 65.5% in 2007 to almost 70% in 2060. the
employment rate of women is assumed to rise from 58.4%
in 2007 to 65.1% in 2060, and for older workers (55-64),
from 44.9% in 2007 to 59.8% in 2060.
• the labor input, measured by total hours of work, would
increase by 5.4% until 2020; a reversal would start in 2020
and hours worked are expected to fall by 12.9% between
2020 and 2060.
8
Secular Stagnation or Growth Explosion
EU – labor shortage
• Increasing labor force participation rates in most countries
and rising net immigration levels in some can only
moderate the fall in employment caused by the ageing of
the population and the negative population growth of the
period 2020 to 2060.
• A reduction in labor input in 18 Member States over the
period 2007 and 2060, with drops of 20% and more in
Bulgaria, the Czech Republic, Germany, Estonia, Latvia,
Lithuania, Hungary, Poland, Romania, Slovenia and Slovakia.
• A few Member States would see an increase in hours
worked (Belgium, Ireland, Spain, France, Cyprus,
Luxemburg, Sweden and the UK).
9
Secular Stagnation or Growth Explosion
Labor shortage vs unemployment dilemma
• Youth unemployment is one of Europe’s most
glaring problems. Opponents of austerity point to
the swelling ranks of unemployed young (15-25
years of age) people in Europe’s periphery as
proof that fiscal tightening can no longer be
tolerated.
• Youth unemployment rates have reached 51% in
Greece and Spain, 36% in Italy and Portugal, and
30% in Ireland
10
Secular Stagnation or Growth Explosion
• Youth unemployment in the Eurozone crisis countries has
been exacerbated by the crisis, but it is not a by-product of
the crisis.
• The problem has deep roots in a policy that attempted to
overcome rigidities in the labor market and the production
structure by creating a deeply divided labor market, with
‘ins’ and ‘outs’. The ‘outs’, mostly young people, provided
the necessary flexibility to adjust in the years before the
crisis, where domestic expansion coexisted with increasing
competition from the Asian and Central European
producers.
• Today’s unemployment creates expectations of low
prospective employment, which in turn causes an
endogenous drop in demand, reducing activity and raising
unemployment even further.
11
Secular Stagnation or Growth Explosion
Demography turning into political problem
Reduction and delay of pensions while resulting in
budgetary savings, the inadequate pension levels may
lead to:
• increase in inequality: young vs old
• future demands for ad-hoc government interventions
to address declines in public pensions relative to wage
developments and the risk of poverty of pensioners,
• democratic destabilization – elderly vote
12
Secular Stagnation or Growth Explosion?
Demographic pressure - the positive side:
• increased life expectancy means people can work
longer.
• serving older people - new areas of demand
• elderly better in building social capital:
– Less crime
– More free time for volunteer activities
Mixed blessing: many developing economies, especially in
sub-Saharan Africa and south Asia, will have to generate
job opportunities for new labor market entrants amid
rapidly increasing populations.
13
Secular Stagnation or Growth Explosion?
Changing demographic patterns can affect
individual countries’ saving and investment and
alter future global financial and labor flows.
• Older societies more savings less demand
particularly for high-tech products
• Migration from poorer countries to fill the
labor gap
14
Secular Stagnation or Growth Explosion
Problem of growth not of distribution
• Given the extent of labor-saving technological
progress, there is increasingly weaker "natural" reason
for relationship between the overall productivity of the
economy and the size of the labor force.
• Societies raising retirement ages meant to reduce the
cost of social security outlays.
• However, it risks aggravating the generational issue.
The older generation stays in their positions for longer,
blocking the ascendancy of the next generation.
15
Secular Stagnation or Growth Explosion
EU – a sharp decline in potential growth rate?
• The annual average potential GDP growth rate in
the EU is projected to fall from 2.4% in the period
2007-2020, to 1.7% in the period 2021-2040 and
to a meagre 1.3% in the period 2041-2060.
• While all EU Member States would experience a
future slowdown in their potential growth rates,
owing to the adverse impact of demographic
trends, growth rates would differ substantially
from country to country.
16
Secular Stagnation or Growth Explosion?
Impact of growing complexity
• Institutions: Banks are only part of a complex network
of financial institutions and markets, and risks are far
from gone.
• Financial products: When the U.S. housing boom
turned to bust, a complex and opaque structure of
financial products led to confusion which institution
was holding which claims and which institutions were
solvent.
• This in turn led to major liquidity runs, not so much on
banks, but on many nonbank financial institutions,
such as investment banks—many of which over the
years operated like banks but without the regulation
and protections banks received.
17
Secular Stagnation or Growth Explosion?
Impact of regulatory system
• Markets, having been progressively deregulated since the
1970s, were confronted by a particularly fragmented and
ineffective system of government prudential oversight.
• The reality of financial regulation is that new rules open
new avenues for regulatory arbitrage, as institutions find
loopholes in regulations. That in turn forces authorities to
institute new regulations in an ongoing cat-and-mouse
game (between a very smart mouse and a less nimble cat).
• Global regulatory arbitrage. Hoping to reduce their
required regulatory capital under the Basel II framework,
European banks eagerly acquired AAA-rated (but
systemically risky and opaque) structured products.
18
Secular Stagnation or Growth Explosion?
Impact of globalization:
• By 2014, the world had 96 mobile phone subscriptions and 40
Internet users for every hundred inhabitants from zero 20 yeas
earlier
• Flows of goods, services, and finance rose from 24 percent of global
output in 1980 to a peak of 52 percent in 2007
• In 1990, 60 percent of trade in goods was among the high income
economies, another 34 percent was between high income and
emerging market economies, and just 6 percent was among
emerging market economies. By 2012, these ratios were 31
percent, 45 percent, and 24 percent, respectively.
• In 1980, FDI was negligible. Today, it is a large flow averaging 3.2
percent of global output between 2005 and 2012
• Total cross-border financial flows peaked at 21 percent of global
output in 2007, before collapsing to 4 percent in 2008 and 3
percent in 2009.
19
Secular Stagnation or Growth Explosion?
Impact of energy revolution
• Not long ago, the prevailing concern was that there wasn’t enough
energy to power the world. Now, among players from oil producers
to electric utilities to multinational manufacturers, there’s a new
worry: that a proliferation of new energy technologies and supplies
is starting to undermine world powers.
• From a boom in fossil-fuel production to a flowering of renewable
energy to the rollout of an array of contraptions and business
models to cut energy waste, the new energy riches of the 21st
century are destabilizing the old economic order.
• The energy revolution is starting to remake the global energy
landscape:
– They’re shifting the center of gravity of global oil production
westward, to North America from the Middle East.
– They’re reorienting the adolescent renewable-energy industry
eastward, to China from the United States and Europe.
20
Secular Stagnation or Growth Explosion?
Impact of policy worldview: Washington consensus
•
•
•
•
•
•
•
•
•
•
Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies toward pro-growth, pro-poor
services like education, health care and infrastructure investment;
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates that are market determined and positive in real terms;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with elimination of quantitative
restrictions (licensing, etc.); any trade protection to be provided by low and
relatively uniform tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;
Deregulation: abolition of regulations that impede market entry or restrict
competition, except for those justified on safety, environmental and consumer
protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.
In practice: "Stabilize, privatize, and liberalize"
21
Secular Stagnation or Growth Explosion?
Forces behind secular stagnation
• There was virtually no growth before 1750, and thus there
is no guarantee that growth will continue indefinitely.
• U.S. economy faces six headwinds that will limit future
potential growth and hold it below the pace which
innovation would otherwise make possible:
– The “demographic dividend” of more hours worked per capita is
now in reverse motion.
– The plateau in educational attainment
– Holding down the growth is raising inequality.
– Outsourcing of all types, from call centers to radiologist jobs.
– Energy and the environment represent the fifth headwind.
– The twin household and government deficits.
Robert J. Gordon
22
Secular Stagnation or Growth Explosion?
Ongoing 3rd industrial revolution
• The computer and Internet revolution began around
1960.
• Many of the inventions that replaced tedious and
repetitive clerical labor by computers happened in the
1970s and 1980s.
• Invention since 2000 has centered on entertainment
and communication devices that are smaller, smarter,
and more capable, but do not fundamentally change
labor productivity or the standard of living in the way
that electric light, motor cars, or indoor plumbing
changed it.
23
Secular Stagnation or Growth Explosion
Two narratives:
• Macroeconomic
– Central actors: policy makers
– Question: how to use production factors and
distribute outcomes
• Schumpeterian
– Central actors: entrepreneurs
– Question: creating conditions to innovate
24
Current Issues in Economics
Homework
Powerpoint of 5 slides up to 3 people teams.
Your takeout from the lectures, based on the following:
• “I must say I find television very educational. The minute somebody turns
it on, I go to the library and read a good book”. Groucho Marx
• “I think there is a world market for maybe five computers.” T. Watson,
president of IBM, 1943
• “640 kilobytes floppy disc ought to be enough for anyone.” Bill Gates, 1981
• “Who would like to pay for a message sent to no one in particular?”
Advise to D. Sarnoff not to invest in radio
• “The Americans need phones but we do not, we have plenty of messenger
boys” Chief, British Post, 1878
• “It’ll be gone by June” Variety Magazine on Rock n’Roll, 1955
[email protected]
25