Browse by Tags

The slow pace of the recovery in the U.S. has felt a lot less slow in some households. According to a new Pew report, those households in the top 7% saw their mean net worth rise 28% from 2009 to 2011. Net worth for the remaining 93% dropped 4%. And the key seems to have been the rise of the value of financial assets as opposed to property values: From Pew's Richard Fry and Paul Taylor : The different performance of financial asset and housing markets from 2009 to 2011 explains virtually all of the variances in the trajectories of wealth holdings among affluent and less affluent households during this period. Among households with net worth of $500,000 or more, 65% of their wealth comes from financial holdings, such as stocks, bonds and 401(k) accounts, and 17% comes from their home. Among households with net worth of less than $500,000, just 33% of their wealth comes from financial assets and 50% comes from their home. The Census Bureau data also indicate that among less affluent households, fewer directly owned stocks and mutual fund shares in 2011 (13%) than in 2009 (16%), meaning a smaller share enjoyed the fruits of the stock market rally. Likewise, fewer had individual retirement accounts (IRAs) or Keogh accounts (22% in 2011 versus 24% in 2009) and the same share had 401(k) or Thrift Savings Plan accounts (39% in both years). Among affluent households, there was also a decline in the share directly owning stock and mutual fund shares during this period (59% in 2011 versus 62% in 2009), but a slight increase in the share with IRAs or Keogh accounts (70% versus 68%) and a larger increase in the share with 401(k) or Thrift Savings Plan accounts (65% versus 61%). Overall, net worth per household in the U.S. in 2011 made up nearly all the ground it had lost since 2005—$338,950 versus $340,252 in 2005, the latest pre-recession data published by the Census Bureau. (Total household wealth doubtless rose for a period after 2005 before falling precipitously during the Great Recession of 2007-2009 and rebounding since then. However, no household wealth data are available from the Census Bureau for the years between 2005 and 2009, so it is not possible to pinpoint when, or at what level, the peak in wealth per household occurred.) Looking at the period from 2005 to 2009, Census Bureau data show that mean net worth declined by 12% for households as a whole but remained unchanged for households with a net worth of $500,000 and over. Households in that top wealth category had a mean of $1,590,075 in wealth in 2005, $1,585,441 in 2009 and $1,920,956 in 2011. Read the report here .

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 .

How would you like to save a trillion dollars a year? One thing, you have to spend a bunch of money on a bunch of projects you have been putting off. That's the opportunity and challenge global policy leaders are facing when it comes to infrastructure, according to a report from the McKinsey Global Institute . In order to just keep up with global economic growth, government spending has to reach new highs at a time when politics is pushing many key economies toward cuts. From the report: The McKinsey Global Institute (MGI) estimates $57 trillion in infrastructure investment will be required between now and 2030—simply to keep up with projected global GDP growth. This figure includes the infrastructure investment required for transport (road, rail, ports, and airports), power, water, and telecommunications. It is, admittedly, a rough estimate, but its scale is significant—nearly 60 percent more than the $36 trillion spent globally on infrastructure over the past 18 years. The $57 trillion required investment is more than the estimated value of today’s worldwide infrastructure.1 Even then, this amount would not be sufficient to address major backlogs and deficiencies in infrastructure maintenance and renewal or meet the broader development goals of emerging economies. Moreover, the task of funding the world’s infrastructure needs is more difficult because of constraints on public-sector budgets and commercial debt in the wake of the financial crisis, higher and more volatile resource costs, and the additional costs of making infrastructure resilient to climate change and less harmful to the environment. The size of the infrastructure “gap” and the undoubted challenges there are in finding the financing necessary to close it dominate political and public discussion on this topic. Yet this focus diverts attention from what we believe is just as compelling and urgent an issue—how the world can get more, better-quality infrastructure for less. This report focuses on rethinking how governments, together with the private sector, select, design, deliver, and manage infrastructure projects, and make more out of the infrastructure already in place. We argue that there is an emerging opportunity to raise the productivity of infrastructure investment by a substantial margin. Based on McKinsey & Company’s work with governments and private-sector infrastructure players around the world, an extensive literature review, and drawing on insights from more than 400 case examples, we project that if infrastructure owners around the world were to adopt proven best practice, theycould increase the productivity of infrastructure investment to achieve savings of 40 percent. Put another way, scaling up best practice could save an average of $1 trillion a year in infrastructure costs over the next 18 years. While a 40 percent saving is an extrapolation that uses several simplifying assumptions, we believe a productivity boost of this magnitude is achievable in many countries if they are willing to invest in a systematic approach to infrastructure that drives improvement across agencies and private-sector owners and contractors. The measures that we discuss are not about inventing a completely new approach to infrastructure— what we propose is simply rolling out proven best practice on a global scale. Here is a breakdown of the key sectors where the report argues infrastructure is needed: Read the full report here .

In 1962, Arthur Okun wrote that "changes in the level of economic activity are associated with shifts in the composition of employment and output by industry." But the nature of the economic recovery in the U.S. (as slow as it may seem) has made reconsidering Okun's Law popular (if not necessary). In a post for VoxEU , Laurence Ball , Daniel Leigh , and Prakash Loungani examine whether jobs and output can now be decoupled: Figure 1 shows peak-to-trough declines in output for a group of OECD countries during the Great Recession against the change in unemployment over the same period. The correlation is essentially zero. In the language of economics textbooks, Figure 1 suggests a breakdown of Okun’s Law, the short-run negative relationship between output and unemployment reported by Arthur Okun in 1962. Figure 1. The Great Recession: Peak-to-trough output and unemployment changes (simple scatter plot) We believe the casual impression that "Okun’s broken" is misleading (Ball, Leigh and Loungani 2013). Two adjustments are needed to restore Okun’s Law (as shown in Figure 2): The first adjustment is to account for differences in the duration of the recessions; For the set of recessions shown in these charts, the period from peak to trough ranges from two quarters to seven quarters. As we show in our paper, Okun’s Law implies a relationship between the changes in unemployment and output only if we control for this factor. The second adjustment accounts for the fact that, historically, the coefficient in Okun’s Law varies across countries. Figure 2. The Great Recession: Peak-to-trough output and unemployment changes (with adjustments for duration of recessions and country-specific Okun coefficients) Read the full post here .

Earlier this week, Brookings gathered business leaders and policy makers to discuss "fiscal challenges, U.S. manufacturing and government performance." Bruce Katz , VP of the Brookings Metropolitan Policy Program , addressed the good and the bad of American manufacturing. Katz pointed out the manufacturing sector lost the most jobs during the great recession. When you lose manufacturing jobs, other jobs, like design and engineering jobs, leave the country as well. But some manufacturing jobs have come back (see Katz's handout on jobs recovered, by sector, here ). And Katz sees some trends that suggest continuing recovery in American manufacturing is possible. The key to continued growth, Katz says, is collaboration: You can watch other excerpts from the Brookings panel discussion on American manufacturing here .

Fantastic storytelling from Adam Davidson in the New York Times about visiting the Bank of England and meeting with Monetary Policy Committee member Adam Posen. But Davidson's story is also about, well, storytelling and how it is applied to decision making at one of the most influential global financial institutions. It seems Posen has been fighting against the tide within the BofE and losing because his math hasn't squared with the narratives his fellow committee members have bought into: Economics often appears to be an exercise in number-crunching, but it actually resembles storytelling more than mathematics. Before the members of the Monetary Policy Committee gather for their monthly meeting, they sit through a presentation from the Bank of England’s economic staff. The staff members take the most recent economic data — G.D.P. growth, the unemployment rate and more subtle details gathered from interviews with businesspeople throughout the country — and try to fashion it into a narrative. Does a sudden spike in new factory orders represent a fundamental shift, or is it just a preholiday blip? Do anecdotal reports of rising food prices herald a period of inflation, or is it the result of a cold snap? Which story feels truer? A few days later, each of the nine members of the M.P.C. puts forth his or her own interpretation. Over two days, the members debate these competing narratives and discuss what the Bank of England should do. Then the committee votes, and the winning policies are implemented. Soon after Cameron was elected, Posen argued that the committee should endorse a more radical, expansionary approach of economic recovery. He believed that the data indicated the sputtering would end and the economy would grow only if the Bank of England began buying many billions of pounds’ more worth of bonds. This added stimulus would flood the banking system with new cash and indirectly push banks to lend to businesses and citizens. (Banks don’t make money by sitting on cash.) Some of Posen’s colleagues warned that this would lead to inflation. He countered that the economy was operating below its capacity, so there was no reason to fear inflation. Each month, the committee heard Posen’s advice. Each month, it voted 8 to 1 against him. The bank eschewed his more expansionary suggestions and stuck to a more conservative approach of keeping interest rates low and modest bond-buying. Soon Posen became a famously divisive figure in London’s financial community, alternatively the enlightened genius trying to save the country and the mad Yank who wanted to inflate the pound out of existence. “There was this period,” he remembers, “when I would lie awake at night and think: Am I just crazy? Maybe I’m nuts. It’s like the scene in ‘12 Angry Men.’ I almost wavered. But then I decided: No, no, no. I was convinced: They’re nuts and I’m right.” Read God Save the British Economy here .

The economic situation in Britain has mirrored a London winter day: gray and bleak. And it may be worse than a lot of us have realized. Chancellor of the Exchequer George Osborne addressed Parliament earlier this week and reported that the government is anticipating an extension of austerity measures beyond 2015. The Economist 's John Prideaux and Jeremy Cliffe discuss the impact of Osborne's address on the British economy and beyond: