Browse by Tags

In his latest book, The Price of Civilization: Reawakening American Virtue and Prosperity , Jeffrey Sachs calls on Americans to recognize that we are connected to other countries' problems in direct ways, and that our behavior as consumers and citizens have a significant impact on global development. And he offers up his prescription for working toward a cure to the global economic crisis. He discussed the state of the global economy, and specifically the euro-zone debt crisis, in an interview with Parminder Bahra of the Wall Street Journal:

As much as the US economy is struggling, exports have been strong ever since the recession ended. According to Jay C. Shambaugh , of the McDonough School of Business at Georgetown, exports have risen 23% since the end of the recession. This is easily explained by the weakness of the dollar, right? The costs for US goods abroad have decreased along with the strength of the US economy. Not so fast, says Shambaugh. Writing at Econbrowser , he points out that the patterns of where exports have risen do not match the dollar's relative decline: The takeaway for Shambaugh seems to be that, while exports can not serve as the fix for the US economy's problems, their relative strength is a sign that the foundation might not be as cracked as some suggest: The ability of U.S. firms to increase production and sell to markets where demand is growing is just more evidence that the U.S. economy is not fundamentally flawed or broken. Firms can find workers and increase output where they have customers. Yet while exports to growing foreign markets have been soaring, at home, residential construction has collapsed, structures investment by firms has collapsed, and state and local government spending has declined. All of these are a serious brake on demand. Compounding all this is the fact that real Federal Government consumption expenditures and gross investment in the third quarter was 2% below that of a year ago. This acts as a further brake on growth in output and employment. Some businesses may complain about fear of regulation (though in surveys their number one complaint is lack of customers) and some commentators may worry about structural unemployment and a lack of appropriate skills amongst the U.S. work force. There is plenty of reason to always make sure that supply side policies are sensible and worker training and education is adequate. But these do not seem to be the problems of today. Based on exports, the evidence shows that where there is demand for their products, American firms are more than ready to produce and to sell. Read What can exports tell us about the economy? here .

Alistair Darling was the Chancellor of the Exchequer when the Global Economic Crisis hit, and he was tasked with rescuing Britain's banking system. Now he argues that further banking reforms are necessary to prevent another crisis. He spoke about that need, and the state of the global economy today, when he sat down for Tea with the Economist :

So here's the central question of the last three years: do the economic models of the pre-crisis hold up? The Carnegie Council outlines the primary points of contention in this Global Ethics Corner : Get more from the Global Ethics Corner here .

For all the talk of the US economy rebounding, many small business owners continue to feel left behind by any recovery. Scott Shane , Professor of Entrepreneurial Studies at Case Western Reserve University, sees little in the present economic situation or in the near future that suggests small business owners have much to be happy about. Writing at Small Business Trends , Shane gives four reasons small business owners feel left behind. First, the housing market woes have a greater impact on smaller businesses: Moreover, small business financing depends a lot on housing prices. Big public companies obtain the capital that they need by issuing bonds and stock and selling them to investors, but small businesses rely heavily on personally guaranteed and personally borrowed money from banks. Analysis I conducted with my colleague Mark Schweitzer of the Federal Reserve Bank of Cleveland shows that the fall in housing prices has eliminated almost $25 billion in potential credit for small business owners. Second, big businesses can better take advantage of the more robust economic growth occurring in other countries. Small Business Administration data shows that small businesses only account for 31 percent of exports but generate more than half of non-agricultural private sector GDP. The lesser reliance of large businesses on economic conditions within the country has worked to their advantage in recent months. Third, increase in government regulation, as seen in the financial and health care reform bills have imposed a disproportionately large burden on small businesses. In a recent paper, Nicole and Mark Crain of Lafayette University wrote that “small businesses face an annual regulatory cost … which is 36 percent higher than the regulatory cost facing large firms.” Fourth, most government policies to combat the weak economic conditions have helped lar ge companies more than small ones. For instance, the stimulus program, which worked in part through government contracting, favored large businesses that knew how to work the public contracting system. Read Is Small Business Prosperity Just Around the Corner? here .

The Doing Business 2010 report from the World Bank commends leaders in countries around the world for instituting reforms that make doing business easier. The report gives high marks especially to countries in Eastern Europe and Central Asia where the report says that 84% of economies instituted at least one Doing Business reform. Overall, 75% of economies had at least 1 key reform in 2009/10: The 2010 report has an optimistic tone, as the authors seem to feel that policy makers around the globe have heeded some important lessons from the last few years and are trying to make it easier for start-ups and small businesses: Against the backdrop of the global financial and economic crisis, policy makers around the world took steps in the past year to make it easier for local firms to start up and operate. This is important. Throughout 2009/10 firms around the world felt the repercussions of what began as a financial crisis in mostly high income economies and then spread as an economic crisis to many more. While some economies have been hit harder than others, how easy or difficult it is to start and run a business, and how efficient courts and insolvency proceedings are, can influence how firms cope with crises and how quickly they can seize new opportunities. Between June 2009 and May 2010 governments in 117 economies implemented 216 business regulation reforms making it easier to start and operate a business, strengthening transparency and property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures. More than half those policy changes eased start-up, trade and the payment of taxes (figure 1.1). Read the full report here .

With Republicans taking control of the House of Representatives, but the Democrats still the majority party in the Senate, we will be watching moves on financial regulation over the early months of the next Congressional session. Mark Thoma , economist at the University of Oregon, made some top-line predictions in his column this morning on CBS's Money Watch. In short, Thoma expects that some recent reforms--Dodd-Frank, Basel III--will survive, but will not be changed much. If the Republicans get any repeal efforts through Congress, the White House will use veto power. If the Democrats push efforts to add regulatory measures to existing legislation, Thoma expects Republican leadership to successfully block them. The most important change in regulation is the resolution authority regulators now have over large financial institutions that get into trouble. When the crisis hit, regulators did not have the authority they needed to take over a failing financial institution. That authority exists for traditional banks, and is used frequently, but it had never been extended to financial institutions that are part of what is known as the shadow banking system. That left regulators with only two choices, neither of them good ones. They could let large institutions fail and risk a meltdown of the entire system, or they could bail out the banks and, in the process, reward those who caused the problems in the first place. If a traditional bank had been involved, they would have had other options that allowed them to minimize the costs of a meltdown while imposing losses on equity holders and removing management, but no such option existed for shadow banks. Will resolution authority survive? I don’t expect that resolution authority will be impacted much if at all by the change in the political atmosphere. Both sides of the political fence are in general agreement that this is a good idea. The second important regulatory change in the Dodd-Frank legislation is the Volcker rule. This rule limits the ability to make speculative investments with government insured money. The regulatory restrictions the legislation imposes are weaker than many people would prefer, and banks are already pushing against the boundaries . Will the Volcker rule be changed? Any attempt to further weaken this provision would likely be vetoed, but nothing will be done to strengthen the bill should banks discover ways to bypass the legislation’s intent. A third feature to highlight in the Dodd-Frank legislation is the attempt to make derivative markets more transparent by forcing the trades through organized markets. Again, I don’t expect big changes here, but Republicans have, in general been more sympathetic to arguments that some derivatives must be traded outside of over-the-counter markets. They will likely push for exceptions, and the more exceptions that are granted, the more likely it is that banks can find creative ways to bypass the legislation. So this could, over time, weaken this provision of the bill. Read What Impact Will the Election Have on Financial Reform? here .

Last month, the Basel Committee put forward new bank capital rules to central banks. The aim: to make banks resilient enough to avoid collapse, and to set forth guidelines for banking regulations. Felix Salmon shared some of the details in this post for Reuters. And in the following interview from Knowledge@Wharton , Wharton finance professor Richard J. Herring outlines what he thinks the Basel Committee was trying to accomplish, where he thinks they came up short, and how he expects the financial services industry to react: