The Missing Ingredients of Growth


January 15, 2018

The Missing Ingredients of Growth

by Michael Spence and Karen Karniol-Tambour

Several positive macroeconomic trends suggest that the global economy could finally be in a position to achieve sustained and inclusive growth. But whether that happens will depend on whether governments can muster a more forceful response to changing economic and technological conditions.

Image result for Michael Spence

Nobel Laureate in Economics, Professor Michael Spence, Stern Business School, New York  University

MILAN/NEW YORK – Most of the global economy is now subject to positive economic trends: unemployment is falling, output gaps are closing, growth is picking up, and, for reasons that are not yet clear, inflation remains below the major central banks’ targets. On the other hand, productivity growth remains weak, income inequality is increasing, and less educated workers are struggling to find attractive employment opportunities.

After eight years of aggressive stimulus, developed economies are emerging from an extended deleveraging phase that naturally suppressed growth from the demand side. As the level and composition of debt has been shifted, deleveraging pressures have been reduced, allowing for a synchronized global expansion.

Still, in time, the primary determinant of GDP growth – and the inclusivity of growth patterns – will be gains in productivity. Yet, as things stand, there is ample reason to doubt that productivity will pick up on its own. There are several important items missing from the policy mix that cast a shadow over the realization of both full-scale productivity growth and a shift to more inclusive growth patterns.

First, growth potential can’t be realized without sufficient human capital. This lesson is apparent in the experience of developing countries, but it applies to developed economies, too. Unfortunately, across most economies, skills and capabilities do not seem to be keeping pace with rapid structural shifts in labor markets. Governments have proved either unwilling or unable to act aggressively in terms of education and skills retraining or in redistributing income. And in countries like the United States, the distribution of income and wealth is so skewed that lower-income households cannot afford to invest in measures to adapt to rapidly changing employment conditions.

Second, most job markets have a large information gap that will need to be closed. Workers know that change is coming, but they do not know how skills requirements are evolving, and thus cannot base their choices on concrete data. Governments, educational institutions, and businesses have not come anywhere close to providing adequate guidance on this front.

Third, firms and individuals tend to go where opportunities are expanding, the costs of doing business are low, prospects for recruiting workers are good, and the quality of life is high. Environmental factors and infrastructure are critical for creating such dynamic, competitive conditions. Infrastructure, for example, lowers the cost and improves the quality of connectivity. Most arguments in favor of infrastructure investment focus on the negative: collapsing bridges, congested highways, second-rate air travel, and so forth. But policymakers should look beyond the need to catch up on deferred maintenance. The aspiration should be to invest in infrastructure that will create entirely new opportunities for private-sector investment and innovation.

Fourth, publicly funded research in science, technology, and biomedicine is vital for driving innovation over the long term. By contributing to public knowledge, basic research opens up new areas for private-sector innovation. And wherever research is conducted, it produces spillover effects within the surrounding local economy.

Image result for Karen Karniol-TambourKaren Karniol-Tambour (right)

 

Almost none of these four considerations is a significant feature of the policy framework that currently prevails in most developed countries. In the US, for example, Congress has passed a tax-reform package that may produce an additional increment in private investment, but will do little to reduce inequality, restore and redeploy human capital, improve infrastructure, or expand scientific and technological knowledge. In other words, the package ignores the very ingredients needed to lay the groundwork for balanced and sustainable future growth patterns, characterized by high economic and social productivity trajectories supported by both the supply side and the demand side (including investment).

Ray Dalio describes a path featuring investment in human capital, infrastructure, and the scientific base of the economy as path A. The alternative is path B, characterized by a lack of investment in areas that will directly boost productivity, such as infrastructure and education. Though economies are currently favoring path B, it is path A that would produce higher, more inclusive, and more sustainable growth, while also ameliorating the lingering debt overhangs associated with large sovereign debt and non-debt liabilities in areas like pensions, social security, and publicly funded health care.

It may be wishful thinking, but our hope for the new year is that governments will make a more concerted effort to chart a new course from Dalio’s path B to path A.

Michael Spence, a Nobel Laureate in Economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Advisory Board Co-Chair of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.

Karen Karniol-Tambour is Head of Investment Research at Bridgewater Associates.

 

Trump’s Abominable Snow Job


January 12, 2018

Trump’s Abominable Snow Job

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“America first” means workers come last– The Abominable Snowman.

In the 2016 US Presidential Election, Donald Trump presented himself as a populist who would protect America’s “forgotten” workers from the disruptions of trade and immigration and the nefarious designs of unnamed elites. But, a year after assuming office, it has become abundantly clear that “America first” means workers come last.

Almost one year ago, beneath a gray sky and before a middling crowd, Donald Trump was sworn in as US President. In his inaugural address, he vowed that, “Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.” And to the “forgotten men and women of our country,” he vowed, “I will never, ever let you down.”

Trump had campaigned on a promise to tear up “unfair” trade agreements and crack down on immigration. And in his first weeks and months in office, he abandoned the Trans-Pacific Partnership (TPP). He announced America’s withdrawal from the Paris climate agreement. He banned entry to the United States for Muslims from seven countries. And he has cleared the way for the deportation of hundreds of thousands of Latin Americans who have been living in the US legally for a generation or more.

But, as Trump prepares to deliver his second “State of the Union” address, it is clear that many other major promises have fallen by the wayside. The wall he promised to erect on the border with Mexico is no closer to being built than it was a year ago. The 2010 Affordable Care Act (Obamacare) remains un-repealed. American infrastructure remains neglected and underfunded. And, rather than “drain the swamp” of entrenched insiders and vested interests that shape so much US policy, he’s stocked it with bigger alligators.

To be sure, Trump’s predecessors had similar failures. Barack Obama never did manage to shut down the US military prison at Guantánamo Bay. George W. Bush failed to enact comprehensive immigration reform. And Bill Clinton could not deliver on health care. But they at least upheld the spirit of their commitments.

As Project Syndicate commentators have documented, the same cannot be said for Trump. During his first year in office, US domestic and foreign policies have amounted to a full-scale betrayal of American workers and families, including those in Michigan, Pennsylvania, and Wisconsin to whom he owes his presidency. And, with his approval ratings pinned at historic lows, many others who voted for him in 2016 presumably feel the same way.

Soaking the 99%

The Trump policies that will most obviously affect American workers and families relate to health care and taxes. After joining with congressional Republicans last spring and summer in a failed attempt to repeal Obamacare, the Trump administration introduced regulations to bypass key provisions of the law, such as a new rule allowing companies and organizations to band together to purchase skimpier coverage. Trump says his executive orders are intended to shore up wobbly insurance markets, but many observers expect the measures to drive up premiums for millions of Americans and introduce new inequities in coverage over time.

 Image result for joseph stiglitzColumbia’s Nobel Laureate Joseph Stiglitz

The Tax Cuts and Jobs Act of 2017, signed in December, similarly backloads the pain. In the near term, American workers will see modest bumps in their paychecks. But within the next decade, Nobel laureate economist Joseph E. Stiglitz notes, the law “will increase taxes on a majority of Americans in the middle (the second, third, and fourth quintiles),” and add at least $1-1.5 trillion to the deficit by 2027, all so that tax cuts for corporations can remain permanent.

That timing, says Nouriel Roubini of New York University, is no coincidence. The tax plan was designed with the 2018 midterm congressional election firmly in mind. Until then, Roubini explains, Trump and the Republicans “can brag about cutting taxes on most households.” And after that, “they can expect to see the economic-stimulus effects of tax cuts peak in 2019, just before the next presidential election – and long before the bill comes due.”

But both Stiglitz and Roubini are skeptical that the GOP’s ruse will work. After all, Stiglitz writes, “voters are not so easily manipulated,” and there is much in the Trump tax package that workers, in particular, should regard skeptically.

For example, despite Trump’s promise to “bring back” jobs to the US, Roubini shows that provisions in the tax law “will give US multinationals an even greater incentive to invest, hire, and produce abroad.” And, contrary to Trump’s campaign promise that “no one will lose [health-insurance] coverage,” the tax law repeals Obamacare’s individual mandate, which “will cause 13 million people to lose health insurance, and insurance premiums to rise by 10%, over the next decade.”

Moreover, as Stiglitz points out, contrary to Trump’s explicit promise to “eliminate the carried-interest deduction and other special interest loopholes that have been so good for Wall Street investors,” the dodges remain intact, and will continue to be exploited by “job-destroying private-equity firms.” The tax law also does little for workers whose jobs have been eliminated or displaced. As the University of California, Berkeley, economist Laura Tyson and Lenny Mendonca of New America observe, the law “prioritizes investment in physical and financial capital over what the US really needs: more investment in human capital and lifelong learning to help workers and communities cope with the disruptive effects of automation and artificial intelligence.”

 

Image result for laura tysonLaura Tyson@ University of California

 

But that is not all. Tyson and Mendonca remind us that the law will also heap costs on Americans living in Democratic-leaning states such as New York and California, by imposing an “across-the-board limit on mortgage deductions,” and “by capping the federal deduction for state and local income and property taxes.” The combined effect of these provisions, Tyson and Mendonca conclude, will be to increase “the marginal tax rate on millions of workers in the country’s most productive locales and industries.” Rather than encouraging innovation, Trump’s tax law will stifle it.

Economic Impossibilities for Our Grandchildren

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Jeffrey Frankel
Beyond the tax plan’s immediate, concrete effects, it could also have adverse long-term implications for US economic growth and prosperity. Harvard University’s Jeffrey Frankel points out that, whereas previous Republican tax cuts, such as in the early 1980s, came after economic downturns, the new law lands on an economy that is already near full employment. That means it could hasten the rate at which the US Federal Reserve will raise interest rates, which, Stiglitz notes, will lead to slower “investment, and thus growth,” regardless of whether “the consumption of the very rich increases.”
 

Frankel also laments that the law will reduce government revenue at a time when baby boomers are “retiring at a rate of about 10,000 people per day, meaning that Medicare and Social Security outlays – for health insurance and pensions, respectively – will increase rapidly.” Such cost increases, Roubini says, play directly into the “starve the beast” strategy long beloved of congressional Republicans, whereby party leaders will “use the higher deficits from tax cuts to argue for cuts” in social programs for “elderly, middle-class, and low-income Americans.” But, while Speaker of the House of Representatives Paul Ryan has already expressed his eagerness to pursue entitlement reform in 2018, Senate Majority Leader Mitch McConnell is much more reluctant.

In fact, the argument for entitlement reform – that US government debt is unsustainable and must be reined in – contradicts a central claim behind the Trump/Republican tax plan: that it will generate enough growth to cover most of its costs. As Stephen S. Roach of Yale University explains, this is the classic supply-side argument to which America now owes its swelling debt. After the Reagan-era tax cuts, Roach observes, “federal budget deficits ballooned to 3.8% of GDP during the 1980s, taking public debt from 25% of GDP in 1980 to 41% by 1990”; moreover, the US current account has “remained in deficit ever since (with the exception of a temporary reprieve in the first two quarters of 1991 due to external funding of the Gulf War).”

Higher deficits, former Greek Finance Minister Yanis Varoufakis reminds us, imply “higher long-term tax bills” for American workers down the road. Of course, taxpayers might be willing to accept that if the law’s corporate-tax provisions translate into higher wages across the board. But will they?

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Harvard’s Martin Feldstein

 

Harvard University’s Martin Feldstein, who believes the “economic benefits resulting from the corporate tax changes will outweigh the adverse effects of the increased debt,” is cautiously optimistic. Before the law passed, he predicted that reducing the corporate-tax rate from 35% to 20% (the final bill reduces it to 21%) would make the US far more competitive. And that, in turn, “will attract capital to the US corporate sector,” translating into higher “productivity and real wages,” possibly to the tune of “$4,000 per household in today’s dollars” by 2027.

But as Roach points out, US companies already “pay a surprisingly low effective corporate tax rate – just 22% – when judged against post-World War II experience.” The US is already third in the World Economic Forum’s yearly ranking of international competitiveness. And, at 9% of gross domestic income, “the current GDP share of after-tax [corporate] profits is well above the post-1980 average of 7.6%.”

Moreover, Tyson and Mendonca point to a “large body of economic research” showing that, “at most, 20-25% of the benefits of corporate tax cuts will accrue to labor; the rest will go to shareholders, about one-third of whom are foreign.” That suggests the long-run trend of wage gains trailing behind productivity growth could continue. While corporate profits have been rising, Roach observes, “the share of national income going to labor has been declining.” There is no reason to expect the Republicans’ tax legislation to change that.

The Great Growth Debate

Still, in the lead-up to the bill’s passage, Harvard’s Robert J. Barro pointed to three provisions in the tax plan that he believes will induce substantial business investment, and thus growth in output and employment. In addition to lowering the corporate-tax rate, the law also allows companies to write off the full cost of new equipment immediately, rather than over time; and it shortens from 39 to 25 years the period for writing off non-residential business structures. According to Barro’s calculation, the new tax regime will “raise long-run capital-labor ratios by 25% for non-residential corporate structures and 17% for corporate equipment,” implying “a large long-run increase in real per capita GDP – by around 7%.”

 

Image result for Harvard's Larry SummersHarvard’s Lawrence H. Summers

 

But Barro’s Harvard colleagues, Jason Furman and Lawrence H. Summers, who both served as senior economic advisers to Obama, criticized Barro’s analysis for making “the least favorable assumptions about current law and the most favorable assumptions about future policy” under the Trump/Republican plan. Using Barro’s own model, Furman and Summers calculate that the tax law will “yield an increase in the level of long-run GDP of about 1%.” That prediction is in line with assessments from most other economists and official budget scorers, including, they note, the “Republican-appointed Joint Committee on Taxation.”

In his own contribution to the tax debate, Stanford University’s Michael J. Boskin – who co-signed an open letter in November with Barro and seven other economists promoting the tax package’s growth potential – suggests that Furman and Summers have underestimated key effects of the bill. The impact of equipment investment on GDP growth, he contends, is “much larger than in the conventional models used in most studies, including those relied on by government revenue scorers,” owing to the “learning-by-doing effects” associated with new technologies.

Then again, tax policies are not the only factor weighing on investment decisions. Roach, for his part, suspects that weak business investment in recent years may be “due less to onerous taxes and regulatory strangulation, and more to an unprecedented shortfall of aggregate demand,” the latter being a more salient driver of capital expenditures. The extent to which the tax package will stimulate demand remains to be seen, and much will depend on whether Republicans follow through on spending cuts this year. If they do, Barry Eichengreen of the University of California, Berkeley expects the ax to fall on programs that benefit “hand-to-mouth consumers, who will reduce their own spending dollar for dollar, denting aggregate demand.”

“America First,” Workers Last

Furnishing workers with more bargaining power could help to boost wages, and thus demand. And yet, as Roubini observes, Trump’s “deregulatory policies are blatantly biased against workers and unions.” The Trump administration has proposed deep cuts to the Occupational Safety and Health Administration, which polices workplace safety. And it has sided with corporations over workers in pending court cases, including one before the Supreme Court that could decide whether employees may be forced to sign arbitration agreements barring them from joining class-action lawsuits against their employers.

Likewise, Christopher Smart of the Carnegie Endowment for International Peace argues that Trump’s decision to abandon the TPP will actually make it harder for American workers to compete with cheaper labor abroad. Under the TPP, Smart explains, “Countries as diverse as Peru, Vietnam, and Mexico would have signed on to labor laws enshrining workers’ rights to form independent unions and engage in collective bargaining,” thus raising the cost of their labor vis-à-vis American workers. Of course, if a new Japanese-led effort to resuscitate the TPP succeeds, the 11 remaining Pacific-rim countries could still agree to higher uniform labor standards. But with the US remaining outside the proposed trade bloc, it will have less leverage to address other countries’ violations.

 

Image result for Bill Emmott,Bill Emmott

Elsewhere on the trade front, Bill Emmott, a former editor-in-chief of The Economist, notes that, “Trump has often huffed and puffed about other countries’ unfair trade practices, just as he did during the 2016 election campaign; but he has done little to turn words into deeds.” After promising to label China a currency manipulator, for example, Trump has (wisely) abstained from following through. Still, Emmott expects Trump to ramp up his protectionist policies this year, now that tax cuts are behind him.

In December, the White House gave a preview of what that agenda might look like with the release of its National Security Strategy, which places an unprecedented emphasis on economics. In Feldstein’s view, the Trump NSS includes some “valuable initiatives” for “dealing with foreign trade” – including stepped-up efforts to crackdown on intellectual-property theft. The problem, for Feldstein, is that the NSS singles out “unfair policies pursued by China and other countries, without distinguishing between those that hurt American interests and those that, though ‘unfair,’ actually help Americans.”

The fear now is that Trump will take a broad approach and either eliminate Chinese policies that are good for American consumers – such as exporting excess goods at fire-sale prices – or precipitate a full-scale trade war. If the latter happens, Kaushik Basu of Cornell University warns, no country “will suffer more than the US itself.”

Trump’s first-year record on immigration is a similarly mixed bag. After multiple tries, he managed to implement a Muslim-focused travel ban that passes judicial muster (it now also bars travelers from North Korea and Venezuela). And yet it is not clear what, if anything, his immigration policies have done for American workers, even those who believe that immigrants take American jobs and contribute less to the economy than they consume in public services. After all, notes Roubini, “the ‘Muslim ban’ doesn’t affect the supply of labor in the US”; nor does “the administration’s plan favor skilled over unskilled workers.” In fact, as Harvard’s Kenneth Rogoff warns, measures that “sharply reduce immigration” would “have significant adverse effects on growth,” and thus on jobs and wages.

Nationalism for Dunces

In his inaugural address, Trump also promised to “reinforce old alliances and form new ones,” and to “seek friendship and goodwill with the nations of the world,” while always putting “America first.” Foreign policy does not have as obvious an effect on US workers and households as tax cuts do. But if an incompetent or dangerous administration were to undermine the US dollar’s standing as the world’s main reserve currency, that loss of status would most likely prove to be more consequential than any domestic legislation.

Image result for Benjamin J. Cohen Benjamin J. Cohen, University of California@ Santa Barbara

The dollar’s exalted status in global financial markets, explains Benjamin J. Cohen of the University of California, Santa Barbara, is what allows America to “go on spending whatever it needs to sustain its many security commitments around the world, and to finance its trade and budget deficits.” If other countries suddenly soured on the dollar, the US could experience capital flight; at a minimum, the government would have to pay more to service its existing debt, implying a larger burden on taxpayers.

As it happens, the dollar performed poorly during Trump’s first year, losing almost 10% of its value when one might have expected it to appreciate with the strengthening of the US economy, a widening interest-rate differential with other advanced economies, and the promise of corporate-tax cuts. Last August, Cohen observed that, after Trump’s tweet threatening North Korean dictator Kim Jong-un with “fire and fury” – and even before his refusal to recertify the Iran nuclear deal – investors were “looking for alternative safe havens in other markets, from Switzerland to Japan.”

Similarly, Eichengreen cautioned in October that if the Trump administration continues to discredit America in the eyes of its allies, it could provoke a dollar crisis. Eichengreen imagines a scenario in which South Korea and Japan – both of which are “thought to hold about 80% of their international reserves in dollars” – are forced to find a new financial refuge. A failure on Trump’s part to manage the North Korean nuclear crisis, for example, could create an opening for China to step in. “And where China leads geopolitically,” Eichengreen writes, “its currency, the renminbi, is likely to follow.”

 

Image result for Christopher R. HillAmbassador Christopher R. Hill

 

If that sounds far-fetched, bear in mind that North Korea has now bypassed the US altogether to hold talks with South Korea, with China’s blessing. Meanwhile, notes Christopher R. Hill, the chief US negotiator with North Korea during George W. Bush’s presidency, Trump has made it increasingly clear “that he has no idea what to do next” when it comes to Kim’s regime. Indeed, a year ago this month, Trump responded to Kim’s threat to test a new ballistic missile by tweeting, “It won’t happen!” Since then, North Korea has conducted eight missile tests – demonstrating, among other things, that the regime now has the capability to strike the US mainland – and what appears to have been its first test of a hydrogen bomb.

As 2017 came to an end, the Trump administration had further discredited itself with its approach to the Middle East. Trump’s unilateral decision in early December to recognize Jerusalem as Israel’s capital, notes Columbia University’s Jeffrey D. Sachs, was immediately and “overwhelmingly rejected” by most United Nations member states, including many US allies. According to the Palestinian journalist Daoud Kuttab, the decision also defies the wishes of most Americans, and seemed to be aimed at satisfying Trump’s “small base of US Christian Zionist evangelicals,” as well as leading Republican donors such as the casino magnate Sheldon Adelson.

As anyone familiar with the Middle East could have predicted, Trump’s Jerusalem policy has already proved self-defeating. According to Shlomo Ben-Ami, a former Israeli foreign minister, “anti-American powers” such as Hezbollah, Iran, Russia, and Turkey have wasted no time in taking “Trump’s divisive decision as an opportunity to enhance their own regional influence, at the expense of the US and its allies.”

 

Image result for Richard N. HaassCouncil on Foreign Relations’ Richard N. Haass

 

At the same time, Trump has invited still more international derision by insisting that his decision on Jerusalem – for which he received nothing in return from Israel – still leaves the door open for a two-state solution to the Israel-Palestine conflict. In fact, warns former German Foreign Minister Joschka Fischer, “America’s recognition of Jerusalem as Israel’s capital could mean the end of the two-state solution once and for all.” At a minimum, argues Richard N. Haass, the president of the Council on Foreign Relations, Trump has squandered the opportunity created by an ongoing rapprochement between Israel and Sunni Arab powers that share its interest in countering Iran.

Before Trump’s decision, Saudi Arabia might have been willing to back or even help lead an effort to end the Israel-Palestine conflict, which itself would have solidified the region’s anti-Iranian opposition. But now, Haass notes, the Saudis will be “reluctant to be associated with a plan that many will deem a sellout.” Ultimately, they “are likely to prove much less of a diplomatic partner than the White House had counted on.” In other words, Trump’s recklessness could leave the US sidelined and humiliated yet again.

As with Trump’s domestic record, it is hard to see how alienating allies, escalating nuclear tensions with North Korea, fomenting anti-American sentiment around the world, and threatening the international standing of the dollar will do anything to “benefit American workers and American families.” Far more likely, laments Ian Buruma of the New York Review of Books, is that the Trump presidency will “turn out very badly” for his supporters, to say nothing of the majority of Americans who never supported his agenda.

The World Economy in 2018


December 26, 2017

The World Economy in 2018

ttps://www.project-syndicate.org/commentary/world-economy-2018-predictions-by-michael-boskin-2017-12
 

In the tenth year since the start of the global financial crisis, the US economy reached a new high-water mark, and the global economy exceeded expectations. But whether these positive trends continue in 2018 will depend on a variety of factors, from fiscal and monetary policymaking to domestic politics and regional stability.

Image result for michael j. boskin stanford

Michael J. Boskin, a senior fellow at the Hoover Institution and the T. M. Friedman Professor of Economics at Stanford University,Palo Alto, California

STANFORD – All major macroeconomic indicators – growth, unemployment, and inflation – suggest that 2017 will be the American economy’s best year in a decade. And the global economy is enjoying broad, synchronized growth beyond what anyone expected. The question now is whether this strong performance will continue in 2018.

The answer, of course, will depend on monetary, fiscal, trade, and related policies in the United States and around the world. And yet it is hard to predict what policy proposals will emerge in 2018. There are relatively new heads of state in the US, France, and the United Kingdom; German leaders still have not formed a governing coalition since the general election in September; and the US Federal Reserve has a new chair awaiting confirmation. Moreover, major changes in important developing economies such as Argentina, Saudi Arabia, and Brazil have made the future outlook even murkier.

Still, we should hope for the best. First and foremost, we should hope that synchronized global growth at a rate of just under 4% will continue in 2018, as the International Monetary Fund projected in October. Growth not only raises incomes, but also makes vexing problems such as bad bank loans and budget deficits more manageable. As former US President John F. Kennedy famously said in an October 1963 speech in which he promoted his proposed corporate and personal tax reductions, “a rising tide lifts all boats.”

For my part, I predict that the global recovery will continue, but at a slightly slower growth rate of around 3.5%. The two most obvious risks to keep an eye on will be Europe, where a cyclical upturn could stall, and the oil-rich Middle East, where tensions could flare up once again.

Image result for jerome jay powell

Second, let us hope that the Fed, guided by the steady hand of its new chair, Jerome “Jay” Powell (pic above), will continue or even accelerate its monetary-policy normalization, both by raising its benchmark federal funds rate, and by shrinking its engorged balance sheet. And we should hope that economic conditions allow the other major central banks, especially the European Central Bank, to follow suit.

On this front, I predict that the major central banks will continue to normalize monetary policies more gradually than is necessary. The biggest risk here is that markets may try to test the Fed under its new leadership, for example, if inflation rises faster than anticipated.

Third, let us hope that the Republican tax package will, if enacted, deliver on its promise of increased investment, output, productivity, and wages over the coming decade. Here, I predict that the legislation will pass, and that investment in the US over the next few years will be relatively higher than if no action had been taken.

To be sure, whether investment will rise from its currently subdued level will depend on many other factors than the corporate-tax rate. But the tax package can still be expected to boost output, productivity, and wages. The question is not if, but when.2

If the full effects of the legislation are not felt before the 2018 or 2020 elections, that lag could prove politically consequential. The biggest danger is that its benefits will be delayed, and that its key provisions will be reversed whenever the Democrats are back in power.

Fourth, let us hope that governments everywhere begin to address the looming crisis in public-pension and health-care costs, which have been rising for decades. As social programs become costlier, they crowd out government expenditures on necessities such as defense, while generating ever more pressure to impose higher growth-suppressing taxes.

Europe, in particular, must not let its cyclical rebound lull it into complacency. Many European Union member states still need to reduce their government debt, and the eurozone needs to resolve its “zombie bank” crisis. Beyond that, structural labor-market reforms of the kind French President Emmanuel Macron is pursuing would be most welcome.

Unfortunately, I’m afraid that progress on structural reforms will be sporadic, at best. The danger is that slow growth will not lead to sufficient wage gains and job creation to defuse the ticking time bomb of high youth unemployment in many countries. Another risk is that reform attempts could provoke a political backlash that would be harmful to long-term investment.

Fifth, let us hope that the eurozone can avoid a currency crisis. This will depend largely on whether German Chancellor Angela Merkel can form a coalition government and restore political stability to Europe’s largest economy.

Sixth, we should hope that the EU and the UK can agree on a reasonable Brexit deal that will preserve fairly strong trade relations. The main risk here is that localized declines in trade could spill over and cause broader harm

And, beyond Europe, let us hope that negotiations between the US, Canada, and Mexico over the North American Free Trade Agreement (NAFTA) will result in an arrangement that still facilitates continental trade. For trade generally, the biggest risk is that the Trump administration could start a lose-lose trade dispute, owing to its understandable eagerness to help American manufacturing workers

Seventh, let us hope that new policies targeting information and communication technology (ICT) strike the right balance among all stakeholders’ competing and legitimate concerns. On one hand, there is reason to worry about certain Internet companies’ concentration of market power, particularly in online content and distribution, and about the effects of new technologies on personal privacy, law enforcement, and national security. On the other hand, new technological advances could deliver immense economic gains.

It is easy to envision a scenario of too much regulation, or of too little. It is also easy to envision a large-scale public backlash against the major technology companies, particularly if poor self-policing or a refusal to cooperate with law enforcement leads to some horrible event.

Here, I predict that achieving an appropriate policy balance will take years. If some future event strikes an emotional chord, the public’s mood could swing dramatically. Ultimately, however, I suspect that competition and innovation will survive the forthcoming regulations.

Finally, and most important, let us hope that terrorism is thwarted everywhere, conflicts subside, democracy and capitalism regain some momentum, and greater civility and honest dialogue return to the public domain. Should that happen in 2018, it will be a very good year indeed

Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.

Complacency Will Be Tested in 2018


December 15, 2015

Complacency Will Be Tested in 2018

by Stephen S. Roach@ http://www.project-syndicate.org

Despite seemingly robust indicators, the world economy may not be nearly as resilient to shocks and systemic challenges as the consensus view seems to believe. In particular, the absence of a classic vigorous rebound from the Great Recession means that the global economy never recouped the growth lost in the worst downturn of modern times.

Image result for Complacency will be tested in 2018

“World GDP growth is viewed as increasingly strong, synchronous, and inflation-free. Exuberant financial markets could hardly ask for more.I suspect that today’s consensus of complacency will be seriously tested in 2018”.–Stephen S. Roach

NEW HAVEN – After years of post-crisis despair, the broad consensus of forecasters is now quite upbeat about prospects for the global economy in 2018. World GDP growth is viewed as increasingly strong, synchronous, and inflation-free. Exuberant financial markets could hardly ask for more.

While I have great respect for the forecasting community and the collective wisdom of financial markets, I suspect that today’s consensus of complacency will be seriously tested in 2018. The test might come from a shock – especially in view of the rising risk of a hot war (with North Korea) or a trade war (between the US and China) or a collapsing asset bubble (think Bitcoin). But I have a hunch it will turn out to be something far more systemic.

The world is set up for the unwinding of three mega-trends: unconventional monetary policy, the real economy’s dependence on assets, and a potentially destabilizing global saving arbitrage. At risk are the very fundamentals that underpin current optimism. One or more of these pillars of complacency will, I suspect, crumble in 2018.

Unfortunately, the die has long been cast for this moment of reckoning. Afflicted by a profound sense of amnesia, central banks have repeated the same mistake they made in the pre-crisis froth of 2003-2007 – over staying excessively accommodative monetary policies. Misguided by inflation targeting in an inflationless world, monetary authorities have deferred policy normalization for far too long.

That now appears to be changing, but only grudgingly. If anything, central bankers are signaling that the coming normalization may even be more glacial than that of the mid-2000s. After all, with inflation still undershooting, goes the argument, what’s the rush?

Alas, there is an important twist today that wasn’t in play back then –central banks’ swollen balance sheets. From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies (the United States, the eurozone, and Japan) expanded by $8.3 trillion, according to the Bank for International Settlements. With nominal GDP in these same economies increasing by just $2.1 trillion over the same period, the remaining $6.2 trillion of excess liquidity has distorted asset prices around the world.

Therein lies the crux of the problem. Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.

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Will the Republican Tax Plan work?

That is particularly true in the United States. According to Nobel laureate economist Robert J. Shiller, the cyclically adjusted price-earnings (CAPE) ratio of 31.3 is currently about 15% higher than it was in mid-2007, on the brink of the subprime crisis. In fact, the CAPE ratio has been higher than it is today only twice in its 135-plus year history – in 1929 and in 2000. Those are not comforting precedents.

As was evident in both 2000 and 2008, it doesn’t take much for overvalued asset markets to fall sharply. That’s where the third mega-trend could come into play – a wrenching adjustment in the global saving mix. In this case, it’s all about China and the US – the polar extremes of the world’s saving distribution.

China is now in a mode of saving absorption; its domestic saving rate has declined from a peak of 52% in 2010 to 46% in 2016, and appears headed to 42%, or lower, over the next five years. Chinese surplus saving is increasingly being directed inward to support emerging middle-class consumers – making less available to fund needy deficit savers elsewhere in the world.

By contrast, the US, the world’s neediest deficit country, with a domestic saving rate of just 17%, is opting for a fiscal stimulus. That will push total national saving even lower – notwithstanding the vacuous self-funding assurances of supply-siders. As shock absorbers, overvalued financial markets are likely to be squeezed by the arbitrage between the world’s largest surplus and deficit savers. And asset-dependent real economies won’t be too far behind.

In this context, it’s important to stress that the world economy may not be nearly as resilient as the consensus seems to believe – raising questions about whether it can withstand the challenges coming in 2018. IMF forecasts are typically a good proxy for the global consensus. The latest IMF projection looks encouraging on the surface – anticipating 3.7% global GDP growth over the 2017-18 period, an acceleration of 0.4 percentage points from the anemic 3.3% pace of the past two years.

However, it is a stretch to call this a vigorous global growth outcome. Not only is it little different from the post-1965 trend of 3.8% growth, but the expected gains over 2017-2018 follow an exceptionally weak recovery in the aftermath of the Great Recession. This takes on added significance for a global economy that slowed to just 1.4% average growth in 2008-2009 – an unprecedented shortfall from its longer-term trend.

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Trumpian Economics

The absence of a classic vigorous rebound means the global economy never recouped the growth lost in the worst downturn of modern times. Historically, such V-shaped recoveries have served the useful purpose of absorbing excess slack and providing a cushion to withstand the inevitable shocks that always seem to buffet the global economy. The absence of such a cushion highlights lingering vulnerability, rather than signaling newfound resilience – not exactly the rosy scenario embraced by today’s smug consensus.

A quote often attributed to the Nobel laureate physicist Niels Bohr says it best: “Prediction is very difficult, especially if it’s about the future.” The outlook for 2018 is far from certain. But with tectonic shifts looming in the global macroeconomic landscape, this is no time for complacency.

*Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

 

Why 1997 Asian Crisis Lessons Lost


December 7, 2017

Why 1997 Asian Crisis Lessons Lost

by Jomo Kwame Sundaran

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Various different, and sometimes contradictory lessons have been drawn from the 1997-1998 East Asian crises. Rapid or V-shaped recoveries and renewed growth in most developing countries in the new century also served to postpone the urgency of far-reaching reforms. The crises’ complex ideological, political and policy implications have also made it difficult to draw lessons from the crises.

Conventional wisdom

The conventional wisdom was to blame the crisis on bad economic policies pursued by the governments concerned. Of course, the vested interests favouring the international financial status quo or further liberalization also impede implementing needed reforms. Such interests continue to be supported by the media.

Citing currency crisis theory, the initial response to the crises was to blame poor macroeconomic, especially fiscal policies, although most East Asian economies had been maintaining budgetary surpluses for some years. Nevertheless, the IMF and others, including the international business media, urged spending cuts and other pro-cyclical policies (e.g., raising interest rates) which worsened the downturns.

Such policies were adopted in much of the region from late 1997, precipitating sharper economic collapses. By the second quarter of 1998, however, it was increasingly recognized that these policies had worsened, rather than reversed the economic deterioration, transforming currency and financial crises into crises of the real economy.

By early 1998, however, as macroeconomic orthodoxy lost credibility, the blame shifted to political economy, condemning ‘cronyism’ as the cause. US Federal Reserve Bank chair Alan Greenspan, US Treasury Deputy Secretary Lawrence Summers and IMF Managing Director Michel Camdessus formed a chorus criticizing Asian corporate governance in quick sequence over a month from late January.

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Paul Krugman, Joseph Stiglitz and Jeffery Sachs supported Keynesian counter-cyclical policies.

The dubious conventional explanations of the Asian crises were not shared by more independently minded mainstream economists with less ideological prejudices. The World Bank’s chief economist Joseph Stiglitz and other prominent Western economists such as Paul Krugman and Jeffrey Sachs supported Keynesian counter-cyclical policies.

Regional contagion and response

The transformation of the region’s financial systems from the late 1980s had made their economies much more vulnerable and fragile. Rapid economic growth and financial liberalization attracted massive, but easily reversible, footloose capital inflows.

New regulations encouraged short-term lending, typically ‘rolled over’ in good times. Much of these came from Japanese and continental European banks as UK and US banks continued to recover from the 1980s’ sovereign debt crises. But these gradual inflows suddenly became massive outflows when the crisis began.

Significant inflows were also attracted by stock market and other asset price bubbles. The herd behaviour characteristic of capital markets exacerbated pro-cyclical market behaviour, heightening panic during downturns. Fickle market behaviour also exacerbated contagion, worsening regional neighbourhood effects.

Japan’s offer of US$100 billion to manage the crisis in the third quarter of 1997 was quickly stymied by the US and the IMF. Instead, a more modest amount was made available under the Miyazawa Plan to finance more modest facilities, institutions and instruments.

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Much later, in Chiang Mai, Thailand, the region’s Finance Ministers approved a series of bilateral credit lines or swap facilities, conditional on IMF approval. Many years later, the finance ministers of Japan, China and South Korea ensured that these arrangements were regionalized, and no longer simply the aggregation of bilateral commitments, while increasing the size of the credit facility.

New International Financial Architecture

A year after the crisis began in July 1997, US President Bill Clinton called for a new international financial architecture. The apparent spread of the Asian crisis to Brazil and Russia underscored that contagion could be more than regional.

The collapse of Long-Term Capital Management (LTCM) following the Russian crisis led the US Federal Reserve to intervene in the market to coordinate a private sector bailout. This legitimized government interventions to ensure functioning financial systems and sufficient liquidity to finance economic recovery.

After the US Fed lowered interest rates, capital flowed to East Asia once again. The Malaysian government’s establishment of bailout institutions and mechanisms in mid-1998 and its capital controls on outflows from September 1998 also warned that other countries might go their own way.

Ironically, the economic recoveries in the region from late 1998 weakened the resolve to reform the international financial system. Talk of a new international financial architecture began to fade as recovery was presented as proof of international financial system resilience.

Maybe Trump knows his base better than we do


December 3, 2017

Maybe Trump knows his base better than we do

by Dr. Fareed Zakaria

https://www.washingtonpost.com/opinions/maybe-trump-knows-his-base-better-than-we-do/2017/11/30/b4ca2164-d60e-11e7-b62d-d9345ced896d_story.html?utm_term=.227592e3afbc

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The most important revolution in economics in the past generation has been the rise of the behavioral scientists, trained in psychology, who are finding that people systematically make decisions that are against their own “interests.” This might be the tip of the iceberg in understanding human motivation. The real story might be that people see their own interests in much more emotional and tribal ways than scholars understand. What if, in the eyes of a large group of Americans, these other issues are the ones for which they will stand up, protest, support politicians and even pay an economic price? What if, for many people, in America and around the world, these are their true interests?—Dr. Fareed Zakaria

 

 

Watching the Republican tax plan race through Congress, one is reminded of a big apparent difference between President Trump’s program and other populist movements in the Western world. In the United States, Trump is leading something that is best described as plutocratic populism, a mixture of traditional populist causes with extreme libertarian ones.

Congress’s own think tanks — the Joint Committee on Taxation and the Congressional Budget Office — calculate that in 10 years, people making between $50,000 and $75,000 (around the median income in the United States) would effectively pay a whopping $4 billion more in taxes, while people making $1 million or more would pay $5.8 billion less under the Senate bill. And that doesn’t take into account the massive cuts in services, health care and other benefits that would likely result. Martin Wolf, the sober and fact-based chief economics commentator for the Financial Times, concludes, “This is a determined effort to shift resources from the bottom, middle and even upper middle of the U.S. income distribution toward the very top, combined with big increases in economic insecurity for the great majority.”

The puzzle, Wolf says, is why this is a politically successful strategy. The Republican Party is pursuing an economic agenda for the 0.1 percent, but it needs to win the votes of the majority. This is the issue that University of California at Berkeley political scientist Paul Pierson discusses in a recently published essay. Writing in the British Journal of Sociology, Pierson notes that Trump’s program does have strong populist aspects, especially on trade and immigration. But, he points out, “On the big economic issues of taxes, spending and regulation — ones that have animated conservative elites for a generation — he has pursued, or supported, an agenda that is extremely friendly to large corporations, wealthy families, and well-positioned rent-seekers. His budgetary policies (and those pursued by his Republican allies in Congress) will, if enacted, be devastating to the same rural and moderate-income communities that helped him win office.”

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Republican Party is cleverly and successfully hoodwinking its supporters, promising them populism and enacting plutocratic capitalism?  –Thomas Frank’s book “What’s the Matter with Kansas?

Pierson argues that Trump entered the White House with a set of inchoate ideas and no real organization. Thus, his administration was ripe for takeover by the most ardent, organized and well-funded elements of the Republican Party — its libertarian wing. Nurtured and built up over the years, this group of conservatives decided to ally with the Trump administration to enact its long-standing agenda. Pierson quotes Grover Norquist, the fiercely anti-statist GOP operative, explaining in 2012 his views on the selection of a Republican presidential nominee. “We are not auditioning for fearless leader. We don’t need a president to tell us in what direction to go. We know what direction to go. . . . We just need a president to sign this stuff.”

Image result for “The plutocrats are riding on a hungry tiger,” writes Wolf.

Is it that the Republican Party is cleverly and successfully hoodwinking its supporters, promising them populism and enacting plutocratic capitalism instead? This view has been a staple of liberal analysis for years, most prominently in Thomas Frank’s book “What’s the Matter with Kansas?” Frank argued that Republicans have been able to work this magic trick by dangling social issues in front of working-class voters, who fall for the bait and lose sight of the fact that they are voting against their own interests. Both Wolf and Pierson believe that this trickery will prove dangerous for Republicans. “The plutocrats are riding on a hungry tiger,” writes Wolf.

But what if people are not being fooled at all? What if people are actually motivated far more deeply by issues surrounding religion, race and culture than they are by economics? There is increasing evidence that Trump’s base supports him because they feel a deep emotional, cultural and class affinity for him. And while the tax bill is analyzed by economists, Trump picks fights with black athletes, retweets misleading anti-Muslim videos and promises not to yield on immigration. Perhaps he knows his base better than we do. In fact, Trump’s populism might not be as unique as it’s made out to be. Polling from Europe suggests that the core issues motivating people to support Brexit or the far-right parties in France and Germany, and even the populist parties of Eastern Europe, are cultural and social.

The most important revolution in economics in the past generation has been the rise of the behavioral scientists, trained in psychology, who are finding that people systematically make decisions that are against their own “interests.” This might be the tip of the iceberg in understanding human motivation. The real story might be that people see their own interests in much more emotional and tribal ways than scholars understand. What if, in the eyes of a large group of Americans, these other issues are the ones for which they will stand up, protest, support politicians and even pay an economic price? What if, for many people, in America and around the world, these are their true interests?