Transcript Current Issues in Economics

Current Issues in Economics
4th Industrial Revolution
or
Secular stagnation
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Current Issues in Economics
Overview
• Knowledge and social capital as production
factors
• Internet Economics
• Labor markets in the time of robots, aging
societies, and new era of inequality
• 4th Industrial Revolution or Secular
Stagnation
• Policy response: austerity vs. stimulus
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Sequence of technological progress
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How and were labor can survive
Six ways that humans have historically created value, through:
• our legs and other large muscles move things to where we
need them to be
• our fingers, can rearrange them into useful patterns
• our mouths, our words, whether spoken or written –
enable us to inform and entertain one another
• our brains, regulate routine activities, keeping the leg- and
finger-work on track
• our smiles, help us to connect with others
• our minds – our curiosity and creativity – identify and
resolve important and interesting challenges.
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Fourth industrial revolution
“Previous industrial revolutions liberated
humankind from animal power, made mass
production possible and brought digital capabilities
to billions of people. This Fourth Industrial
Revolution is, however, fundamentally different. It is
characterized by a range of new technologies that
are fusing the physical, digital and biological worlds,
impacting all disciplines, economies and industries,
and even challenging ideas about what it means to
be human.” – World Economic Forum
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Time of great promise and great peril
“The resulting shifts and disruptions mean that
we live in a time of great promise and great
peril. The world has the potential to connect
billions more people to digital networks,
dramatically improve the efficiency of
organizations and even manage assets in ways
that can help regenerate the natural
environment, potentially undoing the damage of
previous industrial revolutions.” – World
Economic Forum
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Is technologicaal progress always good?
Sceptic’s view
1 - 3rd industrial revolution
• Many of the inventions that replaced physically
demanding and repetitive labor happened before
the 1980s.
4th industrial revolution
• 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.
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Secular stagnation?
• Not a new concept: in 30-thies turned wrong b/c of IIWW
• Condition of negligible or no economic long-term growth in a
market-based economy
• When per capita income at relatively high levels, the percentage of
savings is likely to start exceeding the percentage of longer-term
investments that are necessary to sustain future economic growth.
• With the reduced percentage savings rate converging with the
reduced investment rate, economic growth comes to a standstill – it
stagnates.
• Consumers anticipating secular stagnation, might transfer their
savings to more attractive-looking foreign countries
• This would lead to a devaluation of their domestic currency, which
would potentially boost their exports, assuming that the country
did have goods or services that could be exported.
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Growth – historical perspective
• There was virtually no growth before 1750, and thus
there is no guarantee that growth will continue
indefinitely
• There was no growth before XVIII c.
• The pace of growth since 1750 till 1970 is the sequence
of two industrial revolutions.
• 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.
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Economic growth-long view
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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.
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Forces behind secular stagnation
• 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
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Demographic trend
• 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.
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End of demographic divident
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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).
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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
• many developing economies, especially in subSaharan Africa and south Asia, will have to
generate job opportunities for new labor market
entrants amid rapidly increasing populations.
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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
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End of education premium?
• Don’t confuse with individual career perspective
• Youth unemployment 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’. (Europe, Japan, Korea)
• The ‘outs’, mostly young people, provided the necessary
flexibility and 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.
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New frontiers of divsion
• 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
• Mobile cognitive elite vs. static rest
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Inequality of Aging
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Who’s gaining who’s losing?
• 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).
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Problem of growth or 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.
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Structural consequences of inequality
Changing demographic/technology 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
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Roots of global imbalances
• 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
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New global division of labor
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
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US turn world debtor
International Central Banking Trade, Debt, Currency Exchange Imbalances
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Can China bankrupt US?
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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.
• 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 renewable-energy industry
eastward, to China from the United States and Europe.
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Excess of capital
•
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Public and private debt explosion
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How much debt is menageable?
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Policy dillema
Return to the old good days?
or
New normal?
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