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  • IMF's Blanchard: Focus of Global Recovery Should Now Be On Supply Side

    The global economy has a supply side problem. That is, the global marketplace needs more buyers. IMF director of research Olivier Blanchard notes that while he and his team are projecting 3.6 percent growth this year, and 3.9 percent growth next year, it all depends on a "broader" recovery. First, potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of some labor market institutions, to increasing competition and productivity in a number of non-tradable sectors, to rethinking the size of the government, to reexamining the role of public investment. Second, although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable byproduct of more balanced growth. In others, there is clearly scope for some structural reforms to improve the outcome. Finally, as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely rising inequality. Though inequality has always been perceived to be a central issue, until recently it was not seen as having major implications for macroeconomic developments. This belief is increasingly called into question. How inequality affects both the macroeconomy, and the design of macroeconomic policy, will likely be increasingly important items on our agenda for a long time to come. Read the full post here . And watch Blanchard discuss the global recovery below:
  • The Rise and Fall of Real Interest Rates

    Ahead of biennial meetings with the World Bank in Washington this week, the IMF 's research department has put out an interesting analysis of interest rates around the world. In the last thirty years, real interest rates have plummeted, from an average of 5.5% in the early 1980s to 0.33% post global economic crisis. From the report: The decline in real interest rates in the mid-2000s has often been attributed to two factors: • a glut of saving stemming from emerging markets economies, especially China; and • a shift in investors’ preferences toward fixed income assets—such as bonds—rather than equity, such as stocks. Both these factors put downward pressure on real interest rates globally while the expected return to invest in equities increased. The substantial increase in saving in emerging market economies, especially China, in the middle of the first decade of the 21st century was responsible for more than half of the decline in real rates (Chart 2). This was only partly offset by the reduction in saving in advanced economies. High-income growth in emerging market economies during this period seems to have been the most important factor driving the increase in savings. The IMF is now projecting a rise in real interest rates, but not to anywhere near the levels of the 1980s: Read the report here .
  • SF Fed Economic Letter: 'Career Changes Decline During Recessions'

    The great recession has spawned something of a jobless recovery--at least for the long term unemployed. As Carlos Carrillo-Tudela , Bart Hobijn , and Ludo Visschers note in a new Economic Letter for the San Francisco Fed , many of the jobs lost during the recession have gone away. So it would make sense if we saw a lot of people changing careers. But that isn't happening. Figure 1 shows the fraction of hires out of unemployment that change industries (panel A) and occupations, (panel B). The shaded areas depict recessions. Because industry and occupation definitions and classification systems have changed over time, data are not continuous for the period we study, as shown by the vertical dashed lines in 1983, 1992, and 2003. Two other dashed lines in 1985 and 1995 show periods when we cannot link CPS respondents across surveys. The more detailed our industry and occupation categories are, the more career changes we identify. This is why the line showing changes in industry and occupation groups at the major level lies below that showing the most detailed code level in both panels. Though the levels of industry and occupational mobility vary with the level of detail, the fluctuations in mobility over the business cycle are remarkably similar for both levels. These patterns for occupational switches also appear in data from the U.S. Census Bureau’s Survey of Income and Program Participation (see Carillo-Tudela and Visschers 2013). The common cyclical pattern between these series clearly shows that the fraction of unemployed people who change careers upon getting rehired declines during recessions. All the recessions in our sample follow this pattern, from those in the early 1980s to the Great Recession that started in 2007. Likewise, the figures show that career changes increase when the labor market is strong, as at the end of the 1980s and the 1990s. The fact that the rate of career change for unemployed workers declines during recessions seems counterintuitive, but there are several possible explanations for this phenomenon. These explanations can be divided into two broad categories. The first focuses on why those unemployed during recessions are less likely to pursue a change in career. For example, Carrillo-Tudela and Visschers (2013) consider aggregate unemployment fluctuations based on unemployed workers’ decisions to change occupations. They argue that in recessions, two factors reduce the incentives for unemployed people to change careers. One, though their job opportunities in their old careers might have dried up during the recession, it is also harder to find jobs in the alternate careers that they consider pursuing. And two, workers take into account that they may be less likely to start a particularly successful career path during a recession, which further reduces their incentives to change careers. Read the full letter here .
  • Personal Income and Spending Continue to Climb

    Personal income is steadily rising, according to the Commerce Department . Income and disposable personal income both rose by 0.3 percent in February, after rising 0.2% in January. Spending is just a step behind income (perhaps as it should be). Real consumer spending rose 0.2% after rising 0.1% in January. Take a look at the monthly change: From the Bureau of Economic Analysis release: Private wages and salaries increased $13.0 billion in February, compared with an increase of $17.2 billion in January. Goods producing industries' payrolls increased $5.2 billion in February and were unchanged in January; manufacturing payrolls decreased $0.3 billion in February, compared with a decrease of $2.8 billion in January. Services-producing industries' payrolls increased $7.8 billion, compared with an increase of $17.3 billion. Government wages and salaries increased $2.0 billion, compared with an increase of $1.2 billion. Read the BEA's full report here .
  • Charities Aid Foundation Ranks U.S. As Most Charitable Nation

    Ted Hart , the CEO of the the American branch of the Charities Aid Foundation , recently heralded the giving record of Americans in an article for the Stanford Social Innovation Review . "Americans give more to charity, both overall, and per capita, than any other nation," Hart writes. He goes on to note that Americans are also more engaged in charitable activity than people in any other country, based on CAF's measurements, which you can find at the end of the CAF's World Giving Index . One has to be careful not to equate charitable giving with caring for others, as the different social spending records of countries based on their tax structures surely has to be considered, but that should not take away the value of watching the trends within countries. And it appears the recovery in giving in the U.S. has outpaced GDP growth post-recession. You can read the full report here . Many of the key findings are in this infographic:
  • Shiller on Narratives and the Psychology of the Global Economy

    "We seem to be at the mercy of our narratives," writes Robert Shiller at Project Syndicate . On a speaking tour in Japan, Shiller was struck by how people there responded to the "positive change" in Prime Minister Shinzo Abe's economic reforms. A "comprehensive" and seemingly effective plan led to greater optimism, and then a narrowing of the gap between actual GDP and potential GDP. Shiller says our collective optimism was up in the early 2000s (to our detriment, as it turned out). We kept the real estate bubble going because we wanted to believe it could last forever. Then the financial crisis erupted, scaring the entire world. A story of opportunity and riches turned into one of corrupt mortgage lenders, overleveraged financial institutions, dimwitted experts, and captured regulators. The economy was careening like a rudderless ship, and the sharp operators who had duped us into getting on board – call them the 1% – were slipping away in the only lifeboats. By early 2009, the plunge in stock markets around the world reached its nadir, and fear of a deep depression, according to the University of Michigan Consumer Sentiment Survey, was at its highest level since the second oil crisis in the early 1980’s. Stories of the Great Depression of the 1930’s were recalled from our dimmest memories – or from our parents’ and grandparents’ memories – and retold. To understand why economic recovery (if not that of the stock market) has remained so weak since 2009, we need to identify which stories have been affecting popular psychology. One example is the rapid advance in smartphones and tablet computers. Apple’s iPhone was launched in 2007, and Google’s Android phones in 2008, just as the crisis was beginning, but most of their growth has been since then. Apple’s iPad was launched in 2010. Since then, these products have entered almost everyone’s consciousness; we see people using them everywhere – on the street and in hotel lobbies, restaurants, and airports. This ought to be a confidence-boosting story: amazing technologies are emerging, sales are booming, and entrepreneurship is alive and very well. But the confidence-boosting effect of the earlier real-estate boom was far more powerful, because it resonated directly with many more people. This time, in fact, the smartphone/tablet story is associated with a sense of foreboding, for the wealth that these devices generate seems to be concentrated among a tiny number of tech entrepreneurs who probably live in a faraway country. These stories awaken our fears of being overtaken by others on the economic ladder. And now that our phones talk to us (Apple launched Siri, the artificial voice that answers your spoken questions, on its iPhones in 2010), they fuel dread that they can replace us, just as earlier waves of automation rendered much human capital obsolete. Read The Global Economy's Tale Risks here .
  • Economic Letter: 'Private Credit and Public Debt in Financial Crises'

    In a new San Francisco Fed Economic Letter , economists Òscar Jordà , Moritz Schularick , and Alan M. Taylor try to settle the debate over whether private credit or public debt was the bigger culprit in the global economic crisis. They award points to each. In short, their research seems to show that private credit booms put economies in difficult positions. And public debt makes it difficult for economies to recover. The narrative of the recent the global financial crisis in advanced economies falls into two camps. One camp emphasizes private-sector overconfidence, overleveraging, and overborrowing; the other highlights public-sector profligacy, especially with regard to countries in the periphery of the euro zone. One camp talks of rescue and reform of the financial sector. The other calls for government austerity, noting that public debt has reached levels last seen following the two world wars. Figure 1 Credit and debt since 1870: 17-country average Credit and debt since 1870: 17-country average Source: Jordà, Schularick, and Taylor (2013). Figure 1 displays the average ratio of bank lending and public debt to GDP for 17 industrialized economies (Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States). Although public debt ratios had grown from the 1970s to the mid-1990s, they had declined toward their peacetime average before the 2008 financial crisis. By contrast, private credit maintained a fairly stable relationship with GDP until the 1970s and then surged to unprecedented levels right up to the outbreak of the crisis. Spain provides an example of the woes in the euro zone periphery and the interplay of private credit and public debt. In 2007, Spain had a budget surplus of about 2% of GDP and government debt stood at 40% of GDP (OECD Country Statistical Profile). That was well below the level of debt in Germany, France, and the United States. But by 2012, Spain’s government debt had more than doubled, reaching nearly 90% of GDP, as the public sector assumed large losses from the banking sector and tax revenues collapsed. Thus, what began as a banking crisis driven by the collapse of a real estate bubble quickly turned into a sovereign debt crisis. In June 2012, Spanish 10-year bond rates reached 7% and, even at that rate, Spain had a hard time accessing bond markets. Once sovereign debt comes under attack in financial markets, banks themselves become vulnerable since many of them hold public debt as assets on their balance sheets. The new bout of weakness in the banking system feeds back again into the government’s future liabilities, setting in motion what some have called the “deadly embrace” or “doom loop.” The conundrum facing policymakers is this: Implement too much austerity and you risk choking off the nascent recovery, possibly delaying desired fiscal rebalancing. But, if austerity is delayed, bond markets may impose an even harsher correction by demanding higher interest rates on government debt. Matters are further complicated for countries in a monetary union, such as Spain. Such countries do not directly control monetary policy and therefore cannot offset fiscal policy adjustments through monetary stimulus by lowering domestic interest rates. In addition, central banks in these countries have limited capacity to stave off self-fulfilling panics since their lender-of-last-resort function evaporates. Fluctuations in fiscal balances over the business cycle are natural. As economic activity temporarily stalls, revenues decline and expenditures increase. With the recovery, fiscal balances typically improve. But the debate on what is a country’s appropriate level of public debt in the medium run continues to rage. It is unclear whether high debt is a cause or a consequence of low economic growth. That said, public debt is not a good predictor of financial crises. Read the full letter here .
  • Retail Sales Rebound in February

    After a rough January for retailers, consumers picked up the purchasing pace in February, as retail sales improved, according to the latest data from the Commerce Department . Advance estimates for U.S. retail and food services came in at $427.2 billion, a 0.3% increase over January. Sales were up 1.3% over February 2013. From the Census Bureau : Bloomberg 's Victoria Stilwell reports that the retail data was welcome news and exceeded economists' expectations by 0.1%. Read the release here .
  • Lagarde: Three Reform Steps for Spain (and Europe)

    Christine Lagarde was in Bilbao, Spain this morning to discuss the state of the economy in Europe in general, and Spain in particular. The IMF managing director noted that there are encouraging signs of growth across the EU. But the big challenge remains the high unemployment rates in member nations. Spain, of course, is the poster child for the jobs problem. Lagarde: I am here reminded by President Rajoy who said: “Spain is out of recession but not out of the crisis….The task now is to achieve a vigorous recovery that allows us to create jobs." I fully agree—creating jobs must be the overriding focus for Spain. What does this mean in practical terms? It means there can be no let-up in the reform momentum. The strong reform momentum must be maintained. And we can see three key areas where further progress will be crucial. The first area is labor market reforms—which need to be deepened so that they can work for all. Both firms and their workers need to be assured that they can reach appropriate agreements on working conditions and wages. This is essential for jobs to be protected and created. Workers need to be directly supported as well—through enhanced skills training and job-search assistance for the unemployed. And by further cutting the tax costs of employing people, especially the low-paid, the unemployed would face fewer barriers in finding work. The second area concerns debt—which needs to be lowered. For firms, this means helping insolvent but viable ones restructure their debts, so they can stay in business and continue to invest and hire people. For the government, it means continuing to reduce the fiscal deficit in a gradual, growth-friendly way—especially by relying more on indirect taxes. The third and final area is the business environment—which needs to be strengthened. Making it easier for businesses to start up and grow will lift their capacity to create employment. Making domestic firms more competitive will also boost their employment and productivity. The government’s plans to liberalize professional services and promote free trade among Spain’s regions go very much in this direction. Read the full speech here .
  • NY Fed Household Debt and Credit Report for 4th Quarter 2013

    When the global financial crisis hit, Americans got more concerned about debt. Household debt continued to drop almost every quarter over the next 5 years, with only tiny increases in the first quarter of 2011 and the fourth quarter of 2012. That trend seems to have turned. Household debt increased $127 billion in the third quarter of 2013, and then another $241 billion last quarter, according to the New York Fed . That's a 2.1% increase. From the NY Fed quarterly report: Mortgages, the largest component of household debt, increased 1.9% during the fourth quarter of 2013. Mortgage balances shown on consumer credit reports stand at $8.05 trillion, up by $152 billion from their level in the third quarter. Furthermore, calendar year 2013 saw a net increase of $16 billion in mortgage balances, ending the four year streak of year over year declines. Balances on home equity lines of credit (HELOC) dropped by $6 billion (1.1%) and now stand at $529 billion. Non-housing debt balances increased by 3.3%, with gains of $18 billion in auto loan balances, $53 billion in student loan balances, and $11 billion in credit card balances. Delinquency transition rates for current mortgage accounts are near pre-crisis levels, with 1.48% of current mortgage balances transitioning into delinquency. The rate of transition from early (30-60 days) into serious (90 days or more) delinquency dropped, to 20.9%, while the cure rate – the share of balances that transitioned from 30- 60 days delinquent to current –improved slightly, rising to 26.9%. Read the full report here .
  • Growth Picks Up the Pace in Europe

    The rate of growth picked up in Europe at the end of the year. According to data released by Eurostat this morning, GDP across the euro area rose 0.3% in the fourth quarter of 2013. That's following third quarter growth of 0.1%. For the EU overall, the numbers were better. GDP for the EU28 rose by 0.4% in the fourth compared with 0.3% for the third quarter. . The Czech Republic and Romania had standout quarters, with growth rates of 1.6% and 1.7%, respectively, for the quarter. Cyprus, on the other hand, had the biggest drop at -1.0%, and Finland came in at -0.8%. The data for each country is available here .
  • Treasury Secretary Lew on the "End" of Too Big to Fail

    Treasury Secretary Jacob Lew is feeling good about the economy. In an interview with Charlie Rose last night, Lew expressed optimism that growth will pick up in 2014, and though he tended to remain cautious about his predictions, he suggested that our elected officials in Washington are making progress in economic policy around debt and immigration. Rose and Lew covered a lot of ground--from domestic issues to emerging markets and China. In this excerpt, Lew argued that banking rules are significantly stronger now than they were six years ago: We will post the full video when it becomes available. See also: Damian Paletta 's "12 Takeaways" from the interview at the Wall Street Journal Washington Wire blog, here .
  • Russia's Market Volatility and Economic Diversity Problem

    The Winter Olympics are beginning their second week in Russia, and most people want to talk about the figure skating, the hockey, the medal count, maybe even the pageantry. But some economists have other thoughts on their minds. At Vox , World Bank economists Alvaro González , Leonardo Iacovone , and Hari Subhash are focusing on a major Russian weakness, and it isn't a lack of strong two-way forwards on the ice hockey team. No, they are concerned about Russia's "limited economic diversification." The nation's policy leaders have struggled to help limit market volatility, the authors note. Russia is susceptible to economic bad times that are really bad and last longer than for other large economies, and that makes it hard for new sectors to grow: Volatility in Russia is a nearly all-encompassing event. When things are booming, the boom is shared by nearly all manufacturing sectors. When things go bust, practically all sectors go bust. The relatively high level of concentration of output across firms and sectors exacerbates the problem. Further, when analysing slumps and surges across time and comparing these to other economies, we find that although surges in Russia have similar looking peaks and last about as long as those in comparator countries, the slumps are deeper (Figure 2) and longer (Figure 3). For slumps of less than 6 years (the horizontal axis), the probability (the vertical axis) of a slump persisting for another period is higher in Russia (the step-like line is above that of the other economies). The survival of new, relatively efficient firms (particularly during longer and deeper slumps) is a central weakness and likely key issue limiting economic diversification in Russia. Our analysis shows that during slumps, more productive firms tend to have lower odds of surviving relative to less productive ones than during surges. During long and deep slumps, older firms and firms facing less intense competition are more likely to survive. Unfortunately these firms are often not the champions of change and innovation that form the basis of diversification. In Russia the slumps do in fact wipe away some of the hard fought gains made by new, emerging entrants. So much for the new blood needed for the economy to diversify. Read Russian volatility: Obstacle to firm survival and diversification here .
  • The Revival of 'Guaranteed Basic Income' Proposals

    In this week's Boston Globe 's Ideas section, Leon Neyfakh briefs us on a "guaranteed basic income" policy--what it is and how some "policy wonks" are putting it forward as a potential solution for the impact of slow growth on the vast numbers of people living below the poverty line. It is an idea that seems so far from ever getting serious consideration given today's intractable debates over social welfare spending, but has had support from economists across the political spectrum. In the United States, the idea of handing out unconditional government allowances is seen, understandably, as a nonstarter, despite enjoying some recent buzz among policy wonks. If nothing else, in today’s political environment, it just sounds too much like a socialist fantasy. But the idea has a deep legacy in the United States that almost uniquely stitches together figures on the left and right: Its prominent supporters have included Martin Luther King Jr. and John Kenneth Galbraith, and a version initially suggested by free-market economist Milton Friedman nearly became law under President Nixon. Recently, conservatives like Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, and Charles Murray, author of “The Bell Curve” and a scholar at the American Enterprise Institute, have stepped forward to support the idea; it’s also been embraced by the “Occupy”-affiliated academic David Graeber. “You usually don’t have people from different ends of the political spectrum getting on board with the same sort of program,” said Brian Steensland, an associate professor of sociology at Indiana University and the author of the book “The Failed Welfare Revolution,” about how basic income went from being a marginal academic idea to a congressional bill and back again. “There’s just something in there that’s really appealing for people from a whole range of intellectual, philosophical, and economic perspectives.” For pragmatists on the left, cash payments to all would be the fastest way to eradicate poverty, by making sure everyone, no matter their circumstances, has enough money to live on. For the utopian-minded, it holds the promise of a liberation from work—a way to make sure that the next John Lennon doesn’t have to waste all his time lifting boxes in a warehouse. For conservatives, it is a tool for rebuilding the bonds of civil society, putting people’s fortunes back in their own hands, and wiping out the messy, piecemeal, nanny-state safety net in one swoop. At the moment, the idea is widely seen as too radical a departure from the status quo. Working out the mechanics would be a nightmare, and even that 8-year-old might suspect—rightly—that some people would just give up working. But even if the idea isn’t politically feasible in the short term, its proponents see it as the kind of deep-seated rethinking that may soon be needed to face a problem that doesn’t have an easy solution in our current system: that as technology, outsourcing, and other structural shifts transform our economy, it’s becoming increasingly clear that national prosperity does not necessarily mean there are enough good jobs for everyone who needs one. Read Should the government pay you to be alive? here
  • Feldstein on Steadily Improving Standard of Living

    Looking for some cheery economic analysis? Then Martin Feldstein is your man. Stop fretting over the slow rate of growth. Looking beyond 2014, Feldstein makes the case that slow, steady growth will bring significant improvement in the standard of living. From Project Syndicate : The Congressional Budget Office (CBO) projects that real per capita GDP growth will slow from an annual rate of 2.1% in the 40 years before the start of the recent recession to just 1.6% between 2023 and 2088. The primary reason for the projected slowdown is the decrease in employment relative to the population, which reflects the aging of American society, a lower birth rate, and a decelerating rise in women’s participation in the labor force. While the number of persons working increased by 1.6% per year, on average, from 1970 to 2010, the CBO forecasts that the rate of annual employment growth will fall to just 0.4% in the coming decades. A drop in annual growth of real per capita GDP from 2.1% to 1.6% looks like a substantial decline. But even if these figures are taken at face value as an indication of future living standards, they do not support the common worry that the children of today’s generation will not be as well off as their parents. An annual per capita growth rate of 1.6% means that a child born today will have a real income that, on average, is 60% higher at age 30 than his or her parents had at the same age. Of course, not everyone will experience the average rate of growth. Some will outperform the average 60% rise over the next three decades, and some will not reach that level. But a 30-year-old in 2044 who experiences only half the average growth rate will still have a real income that is nearly 30% higher than the average in 2014. But things are even better than those numbers imply. Although government statisticians do their best to gauge the rise in real GDP through time, there are two problems that are very difficult to overcome in measuring real incomes: increases in the quality of goods and services, and the introduction of new ones. I believe that both of these problems cause the official measure of real GDP growth to understate the true growth of the standard of living that real GDP is supposed to indicate. Read The Future of American Growth here .
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