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  • LSE Panel: 'Rock Stars of Economics' on Lessons from the Financial Crisis

    Here is your contemporary economics lecture for the day, and it is a start-studded one. Last week, Ben Bernanke , Olivier Blanchard , Lawrence Summers , and Axel Weber got together at the London School of Economics to answer the question "what should economists and policymakers learn from the financial crisis?" Mervyn King took a break from his duties as Governor of the Bank of England to lead the discussion. Last week we shared the text of Bernanke's part of the talk . Now video of the full discussion is available (thank you to David Wessel for pointing this out), and it is worth a watch. On the one hand, it may be premature to say we are ready to learn lessons from the financial crisis, as first policymakers must be sure we are out of the woods. And yet each of these influential men seems quite grounded in their approach. If you have limited time, skip ahead to the 20-minute-mark for Blanchard's turn. He outlines five key lessons (if you don't have time to watch, Wessel has made an edited transcript available at the Economix blog ).

  • Economic History Lessons for 'Leaderless Global Economy'

    At Vox , Peter Termin and David Vines argue that policymakers need to spend a little time on economic history for guidance on how to best manage the global economic challenges they now face. The lessons to take from global economic growth over the last 200 years, they say, are that international cooperation is key, and that it is best to deal with unemployment first and deficits second. But the most important step seems to be to recognize that we are going through a period of transition. In our recent book (Temin and Vines 2013), we argue that the transition from British to American hegemony was not made quickly or easily. Britain was exhausted by the war, Germany was burdened by reparations. Even though the US intervention was critical to Allied success in World War I, the US abandoned its European interests after the war. War debts led to hyperinflations in the early 1920s and this was followed by an interim period of lending to Germany in the mid 1920s and some consequent recovery. But the reparations problem had not been solved. The departure of Germany from the gold standard in the currency crisis of 1931, followed by Britain’s exit, and then by tight policies in the US, ultimately led to the Great Depression in the 1930s. The absence of a hegemon to restore cooperation and prosperity was all too evident. Massive unemployment persisted, only ending with the beginning of World War II. We are now in a similar transition. The US squandered its leadership with two elective wars and massive tax cuts, and with low interest rates and a property boom. Countries normally raise taxes to fight wars, although seldom far enough to avoid inflation. The US went in the opposite direction, under the idea that ‘deficits don’t matter’, at the same time as tolerating a property boom, simply because inflation did not rise. Since the boom collapsed, Americans have been left wondering how to deal with their resulting fiscal debts. Europeans started this century not with new wars, but a new currency. As a result, Germany has squandered its leadership within Europe, because the architecture of the new currency union was flawed. The idea was that international capital flows would become internal capital flows and, because of this, would cease to be an object of worry. We now know that this was wrong. The money which northern European banks lent to southern peripheral countries in Europe led to a boom there, as well as rising costs. And the money was not well used; it supported speculative property booms and consumption, rather than investment in productive tradable good industries. All went well during the ‘Great Moderation’ – the reduction in the volatility of business cycle fluctuations starting in the mid-1980s – but the system broke down during the Global Crisis. The money which banks lent to countries in the European periphery ended up as fiscal debts (once the banks had been rescued), and some of these fiscal debts have since became the obligations of the ECB. It is not clear within the Eurozone which countries will end up being responsible for resolving these fiscal debts. Read The leaderless economy: Can economic history suggest lessons here .

  • Michael Porter on U.S. Competitiveness

    Michael Porter sat down with Charlie Rose last week to discuss the state of the U.S. economy. They hit many of the key issues, but the most interesting facet of the conversation centered on what Porter sees as the central challenge: making America more competitive within the changing global economy. It is an issue that Porter has been driving as an institutional goal for Harvard Business School , where Porter teaches. In this excerpt, Porter discusses the business school's U.S. Competitiveness Project : Watch the full interview here .

  • Ecolanguage Video Explainer: Aggregate Demand and Supply

    We aren't exactly clear as to who Lee Arnold is. The line on him is that he's a plumber who has a deep understanding of economics and a skill for explaining complex issues through narrated animation. After seeing his work referenced by Mark Thoma and others, we spent some time on his YouTube channel , where Arnold has deposited a strong collection of video explainers. His latest topic: aggregate demand and supply, for which he has just added two videos. Here they are: You can access the full series of videos here .

  • OECD Commends Member Nations for Structural Reforms as Response to Recession

    Every year the OECD lays out five key areas for structural reform necessary for each member country (and the BRIICS nations) to spur growth. In this year's Going for Growth report, many countries get high marks for making key reforms that the OECD expects to provide more stable long term growth. The authors chalk up the changes as a response to "market pressures in the context of the euro area crisis and by discussions and co-ordinated efforts in multilateral settings such as the G20." Market pressures appear to have played an important role in the intensification of reforms, as indicated by the significant correlation between reform responsiveness and changes in government bond yields over the 2011-12 period: ● Euro area countries under financial assistance programmes or direct market pressures (e.g. Greece, Ireland, Italy, Portugal and Spain), are among the OECD countries whose responsiveness was highest (Figure 1.2, Panel A), and also where it increased most compared with the previous period (Figure 1.2, Panel B). Accession to the Euro area in 2011 – in concomitance with a steep recession – may have acted as reform catalyst for Estonia, who also ranks among the most responsive countries. ● Furthermore, as reflected in the comparison between simple and adjusted responsiveness rates, the crisis led most countries under financial markets pressure to enact reforms in traditionally politically-sensitive areas, e.g. labour market regulation and social welfare systems. ● In contrast, less progress has been achieved in other euro area countries, in particular those with a current account surplus (e.g. Germany, Luxembourg and the Netherlands). Yet, reforms are also needed in these countries, in particular in areas that may help intra-euro area rebalancing, such as boosting competition in non-tradable sectors. ● Despite exposure to financial market scrutiny, Iceland and Slovenia have made no or very little reform progress in the areas identified in 2011. While market pressures have played a catalyst role, allowing for long-overdue reforms to be undertaken, some concerns may arise over the effects of reforms in a context of strong budgetary retrenchment and weak activity. Yet, it can be argued that some of the measures taken have already helped by boosting confidence and bringing some market relief. This may have been particularly the case of policy changes, such as pension reforms, that directly contributed to restore medium-term public debt sustainability, though reforms aimed at restoring competitiveness over time will also help to underpin confidence. Still, it is clear that the broader benefits from reforms may take more time than usual to materialize in the current environment, in part due to possible delaying effects from remaining dysfunctions in financial markets. It is important to avoid such delays eroding popular support and to ensure that legislated changes be effectively implemented in order to reap the long-term gains and preserve the positive initial confidence effects. Read the full report here .

  • Chicago Fed: the Slowing of Growth in Productivity

    In a new Chicago Fed Letter , Chicago Fed Economists Jake Fabina and Mark L. J. Wright try to make sense of the reduction of the rate of growth in productivity in the U.S. and other advanced economies. Take a look at the trend: From Fabina and Wright: Figure 1 plots Fernald’s measure of the level of multifactor productivity of the U.S. business sector (i.e., excluding general government and household production) quarterly from 1973 to 2012. The data are scaled so as to equal 100 in 1973:Q1. The figure identifies four distinct periods of productivity growth. The first is the ten years beginning in 1973, which corresponds to the wellknown productivity slowdown of the 1970s. This was succeeded by a period of modest growth of productivity that continued into the mid-1990s. In the third period, multifactor productivity growth increased again to 1.7% per year. The fourth and final period shows a dramatic decline in the rate of growth of multifactor productivity to about 0.5% per year. This period begins somewhere around 2004, in advance of the Great Recession. The Great Recession is associated with a large temporary drop in the level of multifactor productivity, reflecting the fact that both labor and capital were underutilized during the recession. In asking the big question, "Where has all the productivity growth gone?" Fabina and Wright lay out a series of other questions that are helpful in understanding all the key variables to productivity: It is possible that the current slowdown is a short-term aberration, and that as the advanced economies emerge from this period of economic crisis, fasterproductivity growth will also reemerge. If not, then it is tempting to revisit explanations that were proposed for the 1970s productivity slowdown. Is it perhaps simply a problem of measurement related to the increasing share of the economy devoted to services—in particular, business and financial services— for which it is difficult to measure output (and, hence, productivity)? Or is it perhaps due to a more widespread problem with the measurement of intangible investments (see, e.g., Aizcorbe, Moylan, and Robbins, 2009)? Alternatively, might it be due to the exhaustion of the gains from the information technology revolution? Or to declines in the quality of education and, hence, the quality of the labor force? Or even to declines in government investments in infrastructure? Depending on the answer, slow measured productivity growth may be consistent with continued rising living standards or a period of stagnation in the developed world. Read Where has all the productivity growth gone? here .

  • Rogoff: 'Innovation crisis or financial crisis?'

    In a post for the World Economic Forum , Kenneth Rogoff weighs in on the argument by Peter Thiel, Gary Kasparov, and others that the global economic slowdown is the result of an innovation crisis in advanced economies. Rogoff seems to see some validity in exploring the question of whether there is a need to encourage more rapid, life-changing technological advancement (even in the age of iPhones and cloud computing), but he writes that "the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis." There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. They think they are changing the world at a pace as rapid as we have ever seen. Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem. No, the main cause of the recent recession is surely a global credit boom and its subsequent meltdown. The profound resemblance of the current malaise to the aftermath of past deep systemic financial crises around the world is not merely qualitative. The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation. It is no accident that the current era looks so much like what followed dozens of deep financial crises in the past. Granted, the credit boom itself may be rooted in excessive optimism surrounding the economic-growth potential implied by globalization and new technologies. As Carmen Reinhart and I emphasize in our book This Time is Different, such fugues of optimism often accompany credit run-ups, and this is hardly the first time that globalization and technological innovation have played a central role. Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. Credit contractions almost invariably hit small businesses and start-ups the hardest. Since many of the best ideas and innovations come from small companies rather than large, established firms, the ongoing credit contraction will inevitably have long-term growth costs. At the same time, unemployed and underemployed workers’ skill sets are deteriorating. Many recent college graduates are losing as well, because they are less easily able to find jobs that best enhance their skills and thereby add to their long-term productivity and earnings. Read the full post here .

  • Andy Xie: 'Australian economy is probably a bubble on top of China's overinvestment bubble'

    Australia sat out the global economic crisis as much as any major economy could. Thanks to mining wealth and ripple effects from China, Australia has seen strong growth while trading partners in the West have struggled. But Chinese economist Andy Xie , Director at Rosetta Stone Advisors , warns that Australia may be due for a financial crisis of its own in the coming year. Writing at The Big Picture , Xie outlines the threat to an economy that may have become too closely tied to China's fortunes and easy credit: The Australian economy has boomed more than any other developed economy over the past decade. Its nominal GDP has doubled in a decade, and its currency value against the U.S. dollar has doubled too. As a result, its per capita income is much higher than in the United States or Europe. Its property is the most expensive among developed economies. The price of its main export, iron ore, appreciated ten times at its peak, which justified some of its prosperity. Foreign investment in its mining sector has played a more important role. It has caused the Australian dollar to appreciate strongly despite its current account deficit and higher inflation than elsewhere. The strong currency has attracted financial capital from retail investors in China and Japan. The snowball effect on the financial side has made the Australian economy strong despite the recent tumbling of the price of iron ore. As mentioned, the investment flow is sticky due to the long cycle of mining asset development. So much capital inflow has pumped up Australia’s monetary system, creating an environment of easy credit. This is the factor behind the real estate and consumption booms. If capital inflow is a bubble, Australia’s property market must be a bubble, too. When the capital inflow reverses, the bubble will pop. The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too. Among the mining investors I have met there is strong hope that China would soon introduce a stimulus like in 2008. This is why the price of iron ore has rebounded by 40 percent recently. Bottom fishers came in to speculate on China’s possible stimulus before or soon after the 18th Party Congress. They are likely to be disappointed. The last stimulus has made the overinvestment situation so severe that another round is just plain wrong. Also, it would trigger severe inflation and currency devaluation. I just don’t see it happening. Read A Hard Landing Down Under here .

  • Daniel Gros: Reconsidering Macroeconomic Policy

    Writing at Project Syndicate , Daniel Gros argues that we got into this economic morass because, in boom times, we thought "this time is different." But what if this recovery is truly different and past macroeconomic fixes are not sufficient? Gros, Director of the Brussels-based Center for European Policy Studies, writes: The observation that recoveries following a financial crisis are different suggests that standard macroeconomic policies might not work as one would usually expect. And a transatlantic comparison suggests that this may indeed be the case. One would expect that the shock from the financial crisis should be comparable for the United States and the eurozone, given that they are of similar size, exhibit a similar degree of internal diversity, and experienced a similar increase in house prices (on average) in the years preceding the bust. Moreover, the relative increase in debt (leverage) in the financial system was similar on both sides of the Atlantic. And, indeed, US economic performance has been very similar to that of the eurozone since the start of the crisis: GDP per capita today is still about 2% below the 2007 level on both sides of the Atlantic. The unemployment rate in the US and the eurozone has increased by about the same amount as well – three percentage points. Of course, one can point to particular countries in Europe that are mired in recession. But the US also has depressed areas. For Ireland and Spain, read Nevada and California (and, for Greece, read Puerto Rico). The proper comparison is thus between the average of two continental-sized economies, both of which are characterized by considerable internal diversity. Read This Recovery is DIfferent here .

  • Looking to Engineering Accidents to Prevent Financial Meltdowns

    In a compelling speech at the PopTech Iceland 2012 conference this summer, Tim Harford presented an interesting way to prepare for, and ultimately prevent, financial disasters. And the approach has a lot less to do with studying the history of economic crises than you might think. Instead, Harford points to engineering failures and environmental disasters:

  • Richard Duncan on The New Depression

    In The New Depression: The Breakdown of the Paper Money Economy , Richard Duncan paints a grim picture of what is to come for the global economy. In this interview with The Economist , he presents his analysis, and makes the case for debt as a trigger for a deeper global economic crisis.

  • Ask the IMF: Europe

    This is so not your father's International Monetary Fund. In an effort to better engage with the general public, the IMF has a new series of videos that are essentially Q&As with citizens across a variety of countries. This one is from Europe: View Ask the IMF videos from China, Italy, and Great Britain here .

  • IMF: Slowing Momentum in Key Economies Puts Global Recovery at Risk

    The IMF has downgraded its already moderate projections for growth in the global economy. The key word in the latest World Economic Outlook is "momentum." As in "growth momentum has slowed," in the U.S. and in some key emerging economies. The EU troubles remain at the center of concerns over global economic slowdown. From the report: Overall, global growth is projected to moderate to 3.5 percent in 2012 and 3.9 percent in 2013, some 0.1 and 0.2 percentage point, respectively, lower than forecast in the April 2012 WEO. In view of a stronger-than-expected first quarter outcome, weaker global growth in the second half of 2012 will primarily affect annual growth in 2013 through base effects. Growth in advanced economies is projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013, a downward revision of 0.2 percentage point for 2013 relative to the April 2012 WEO. The downward revision mostly reflects weaker activity in the euro area, especially in the periphery economies, where the dampening effects from uncertainty and tighter financial conditions will be strongest. Owing mainly to negative spillovers, including from uncertainty, growth in most other advanced economies will also be slightly weaker, although lower oil prices will likely dampen these adverse effects. Growth in emerging and developing economies will moderate to 5.6 percent in 2012 before picking up to 5.9 percent in 2013, a downward revision of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to the April 2012 WEO. In the near term, activity in many emerging market economies is expected to be supported by the policy easing that began in late 2011 or early 2012 and, in net fuel importers, by lower oil prices, depending on the extent of the pass-through to domestic retail prices (which is often incomplete). When it comes to the subject of preventing the global recovery from coming to a complete stop, the report puts some of the onus on U.S. policymakers. In the short term, the main risk relates to the possibility of excessive fiscal tightening in the United States, given recent political gridlock. In the extreme, if policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the U.S. structural fiscal deficit could decline by more than 4 percentage points of GDP in 2013. U.S. growth would then stall next year, with significant spillovers to the rest of the world. Moreover, delays in raising the federal debt ceiling could increase risks of financial market disruptions and a loss in consumer and business confidence. Read the full World Economic Outlook here .

  • Pew Global Attitudes Survey: Support for Free Market Economy Slipping, Emerging Economies More Optimisitic About Economic Future

    Attitudes of people around the world toward free market economies have shifted since the start of the global economic crisis, according to the latest survey from the Pew Research Center 's Global Attitudes Project . Take a look: What catches your eye? The 2012 numbers for Brazil and China catch our attention. Overall, the outlook of citizens in emerging economies come across as significantly more positive in the survey results. People across Europe and the U.S. see less economic opportunity for themselves than previous generations. And people living in Arab nations are the most dissatisfied with their economic plight, and see little hope for improvement. But people living in China, Brazil, India, and Turkey are almost giddy in comparison: The Chinese, in particular, are quite positive about their economic situation, with 92% saying they are better off than the previous generation, 83% are satisfied with current national economic conditions, 70% feel they are financially more prosperous than they were five years ago and 69% are happy with their own personal economic circumstances. But the Brazilians are even more upbeat when it comes to their personal finances (75%), and 72% say they are better off financially than five years ago. In contrast, the Turks and Indians, while positive, are generally less optimistic across a range of indicators than are their emerging market counterparts. Thinking about the future, while strong majorities of Brazilians (84%) and Chinese (83%) think the economy will improve over the next 12 months, only a plurality of Indians (45%) and Turks (44%) agree. Regarding their children’s future, only in China (57%) does a majority think the next generation will have an easy time exceeding the well-being of their parents. And the median for Brazil, China, India and Turkey is a more pessimistic 35%. Nevertheless, taken together the four emerging market countries are much more optimistic than Americans (only 14% think their kids will have an easy time climbing the economic ladder) or Europeans (a median of 9%). Brazilians (69%) and Indians (67%) are among the strongest believers that hard work leads to success. But the Turks (50%) and the Chinese (45%) are more skeptical. Brazilians (75%), Chinese (74%) and Indians (61%) are among those with the greatest faith in capitalism. Turks (55%) are slightly less committed to the free market. As might be expected, people in emerging markets who have higher incomes are generally more positive in their economic outlook, with some notable exceptions. Upper-income Brazilians and Indians are much more likely to say that their economy is doing well than are their low income compatriots. But there is no effective difference in assessment of the economy between low-income and high-income Chinese or Turks. And, given the recent relative success of their economies, it may not be surprising that Indians and Turks who are well off are particularly supportive of the current free market system. Read the full report here .

  • Looking for Winners in the New Global Economy

    Looking for winners in the new global economy? Dani Rodrik is too. And he doesn't seem to be finding many. Writing at Project Syndicate , Rodrik tells us to expect lower rates of global economic gorwth for years to come, and that means few--very few--countries will be able to counter high debt rates. As for emerging economies, Rodrik isn't bullish on China, but he does see India and Brazil as relative winners. Rodrik: Those that do relatively better will share three characteristics. First, they will not be weighed down by high levels of public debt. Second, they will not be overly reliant on the world economy, and their engine of economic growth will be internal rather than external. Finally, they will be robust democracies. Having low to moderate levels of public debt is important, because debt levels that reach 80-90% of GDP become a serious drag on economic growth. They immobilize fiscal policy, lead to serious distortions in the financial system, trigger political fights over taxation, and incite costly distributional conflicts. Governments preoccupied with reducing debt are unlikely to undertake the investments needed for long-term structural change. With few exceptions (such as Australia and New Zealand), the vast majority of the world’s advanced economies are or will soon be in this category. Many emerging-market economies, such as Brazil and Turkey, have managed to rein in the growth of public debt this time around. But they have not prevented a borrowing binge in their private sectors. Since private debts have a way of turning into public liabilities, a low government-debt burden might not, in fact, provide these countries with the cushion that they think they have. Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage. A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders). Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment. Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies. Read The New Global Economy's (Relative) Winners here .
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