• Jeremy Siegel Still Sees Bright Future for Equities

    Wharton finance professor Jeremy Siegel always strikes us as a glass-three-quarters-full kind of guy--at least when it comes to the markets.  He has been projecting stronger growth than many of his friends and colleagues for some time now.  So the below interview will be welcome to those looking for hope in uncertain times. To be sure, it has been another volatile week in the global markets, with Italy's inconclusive elections and another budgets standoff in Washington.  But Siegel is undeterred and he thinks more bullish investing will be rewarded:

  • How Wall Street Firms Are Like Pro Sports Franchises, and Why That Might Be Bad for Long Term Prospects

    At Scientific America, former Wall Street trader Chris Arnade outlines what he sees as the root problem for "Wall Street's mistakes.": a compensation structure that doesn't add up.  Traders get paid "absurdly well in the good years and just okay in the bad years," leading to a very short-sighted approach.

    This strategy is certainly not in the long-term interest of the firm, but it’s the smartest strategy to benefit the trader.

    The closest other field of employment to Wall Street in compensation is professional sports. They also pay large yearly contracts meant to encourage employees to increase their performances. Sometimes those employees fail miserably, hurting their team.

    Banks are not sports teams though. They are institutions that occupy a special place in the economy and are given special status, and as such, have an obligation to ensure their long-term health. The only harm if the Yankees overpay for a pitcher (and they always do) is distraught Yankees fans. If banks lose, especially ones with $2 trillion in assets, we all lose.

    The incentives at these banks should consequently be structured to discourage, not encourage, short-term speculation and risk taking, with the primary goal of guaranteeing the bank’s solvency. Rather than pay employees based on how much they made the prior 365 days, pay should be based on their entire careers, with the bulk of compensation coming in a form that can be taken away with future losses.

    Independent hedge funds can pay however they want. It is up to the investors to decide how they want to compensate their money manager and few funds are large enough to be “too big to fail.”

    Read Why It’s Smart to Be Reckless on Wall Street here.

  • The Relationship Between Savings Rates and Language

    We can predict how likely a person is to save based on a lot of factors: education and income, for example.  But can we make predictions based on the language a person speaks? (And no, we aren't referring to whether they speak their native language good--sorry, well--or not).  Behavioral economist Keith Chen has spent the last few years looking into this question, and he has found a strong correlation between language and savings rate.  The key variable seems to be whether a language requires a speaker to shift to future tense to speak about the future.  In English, to be grammatically correct, we need to do so, and that means we are less likely to save than people who speak languages like Mandarin or German.  Chen discusses his findings in this TedTalk:

  • The Use of Credit in Roman Times

    When most of us read about the Roman Empire at its height, we imagine coins, and maybe barter items, as essential to every transaction.  But just because there isn't an historical record of banks--at least as far as we think of them--doesn't mean there wasn't a somewhat sophisticated finance system.  At The Big Picture, Marco Del Negro and Mary Tao take us back to the time of Cicero:

    Large sums of money changed hands in Roman times. People bought real estate, financed trade, and invested in the provinces occupied by the Roman legions. How did that happen? Cicero writes, in Epistulae ad Familiares 5.6 and Epistulae ad Atticum 13.31, respectively: “I have bought that very house for 3.5 million sesterces” and “Gaius Albanius is the nearest neighbor: he bought 1,000 iugera [625 acres] of M. Pilius, as far as I can remember, for 11.5 million sesterces.” How? asks historian H. W. Harris (in “The Nature of Roman Money”)–“mechanically speaking, did Cicero pay three and half million sesterces he laid out for his famous house in the Palatine . . . . That would have meant packing and carrying some three and half tons of coins through the streets of Rome. When C. Albanius bought an estate from C. Pilius for eleven and half million sesterces, did he physically send the sum in silver coins?” Harris’ answer is: “Without much doubt, these were at least for the most part documentary [i.e., paper] transactions. The commonest procedure for large property purchases in this period was the one casually alluded to by Cicero [De Officiis 3.59] . . . ‘nomina facit, negotium conficit’ . . . provides the credit [or ‘bonds’–nomina], completes the purchase.”

    What exactly are these nomina?–from which, by the way, comes the term “nominal,” so commonly used in economics. In his Ph.D. dissertation “Bankers, Moneylenders, and Interest Rates in the Roman Republic,” C. T. Barlow writes (pp. 156-7): “An entry in an account book was called a nomen. Originally the word meant just that–a name with some numbers attached. By Cicero’s day . . . [n]omen could also mean “debt,” referring to the entries in the creditor’s and the debtor’s account books.” And this “debt was in fact the lifeblood of the Roman economy, at all levels . . . nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for a great number of others” (Harris, p. 184). Pliny the Younger writes, for example, (in Epistulae 3.19): “Perhaps you will ask whether I can raise these three millions without difficulty. Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble.”

    For concreteness, say that some fellow, Sempronius, owes you one million sesterces. You–or in case you’re a wealthy senator, or eques, your financial advisor (procurator–Titus Pomponius Atticus was Cicero’s)–would record the debt in the ledger. What if you suddenly needed the money to buy some property? Do you have to wait for Sempronius to bring you a bag with 1 million sesterces? No! As long as Sempronius is a worthy creditor (a bonum nomen [see Barlow, p. 156]; in the modern parlance of credit rating agencies, a triple-A creditor), you’d do what Cicero says: transfer the nomina, strike the deal. For example, Cicero writes to his financial advisor Atticus (Ad Atticum 12.31): “If I were to sell my claim on Faberius, I don’t doubt my being able to settle for the grounds of Silius even by a ready money payment.” As Harris (p. 192) observes: “Nomina were transferable, and by the second century B.C., if not earlier, were routinely used as a means of payment for other assets . . . . The Latin term for the procedure by which the payer transferred a nomen that was owed to him to the seller was delegatio.”

    Read Historical Echoes: Cash or Credit? Payments and Finance in Ancient Rome here.

  • Case-Shiller: 'Home Prices Closed Out a Strong 2012'

    After dropping slightly in November, home prices gained again in December and had a strong finish to 2012, according to the latest S&P/Case-Shiller Home Price Indices release.  Average home prices rose 0.2% for the Case-Shiller 10-city and 20 city composite.  On an annual basis, prices rose 5.9% for the 10-city composite index and 6.8% for the 20-city composite. Only New York saw home prices fall on an annual basis.  Here's a look at the long term trend:

    From the release:

    “Home prices ended 2012 with solid gains,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Housing and residential construction led the economy in the 2012 fourth quarter. In December’s report all three headline composites and 19 of the 20 cities gained over their levels of a year ago. Month-over-month, 9 cities and both Composites posted positive monthly gains. Seasonally adjusted, there were no monthly declines across all 20 cities.

    “The National Composite increased 7.3% over the four quarters of 2012. From its low in the first quarter, it surged in the second and third quarter and slipped slightly in the 2012 fourth period. The 10- and 20-City Composites, which bottomed out in March 2012 continued to show both year-over-year and monthly gains in December. These movements, combined with other housing data, suggest that while housing is on the upswing some of the strongest numbers may have already been seen.

    “Atlanta and Detroit posted their biggest year-over-year increases of 9.9% and 13.6% since the start of their indices in January 1991. Dallas, Denver, and Minneapolis recorded their largest annual increases since 2001. Phoenix continued its climb, posting an impressive year-over-year return of 23.0%; it posted eight consecutive months of double-digit annual growth.”

    Read the full release here.

  • The Crack Spread and Gas Prices

    We tend to look away from a lot of reports on rising gas prices.  Much like weather, gas prices are low hanging fruit for news media to attract eyeballs without providing any real analysis.  But there are exceptions.  In the below interview, for example, the Wall Street Journal's Paul Vigna explains exactly why prices are up again, and it provides a nice case study on how the various parts of a supply chain affect consumer costs.  In the case of the most recent rise, it has to do with the gap between what refiners get for the price of crude oil and the price of wholesale--or "the crack spread":

  • SF Fed President: "An aggregate demand shortfall is exactly the kind of problem monetary policy can address"

    San Francisco Fed President John C. Williams visited the Forecasters Club in New York last Thursday and gave his assessment of the economy.  He named four key factors behind the slow, or "tepid" recovery:

    1) the effects of the housing bubble and crash;

    2) austerity measures reducing aggregate demand;

    3) eroding demand for exports with a weakened global economy;

    and 4) unusually high levels of uncertainty.

    He then addressed the question of whether these factors affect supply and demand:

    So, is the problem today inadequate supply, or demand, or both? A useful way to think about this question is to compare the unemployment rate with the natural rate of unemployment. By the natural rate, I mean the unemployment rate that minimizes labor market imbalances and pressures—either upward or downward—on inflation. The unemployment gap—the difference between the unemployment rate and its natural rate—measures the degree to which labor demand is unequal to supply. Movements in the natural rate itself reflect changes in supply. Of course, we can’t directly measure the natural rate of unemployment. Rather, we must estimate it. This topic has appropriately garnered a great deal of attention among economists at the Federal Reserve and elsewhere in recent years.

    Extensive analysis of the labor market comes to a clear conclusion: Supply-side considerations explain only some of the rise in unemployment. Most of that rise is explained by a lack of labor demand. Let’s look at this more closely. Prior to the recession, a typical estimate of the natural rate of unemployment was between 4¾ and 5% (see Williams 2013). The empirical evidence suggests that the recession and policy responses to it, such as extended unemployment insurance benefits, contributed to dislocations in the labor market. These have pushed the natural rate above its pre-recession level by about 1 percentage point (see Congressional Budget Office 2013 and Daly et al. 2012b). Consistent with these findings, my estimate of the current natural rate of unemployment is about 6%, roughly 2 percentage points below the current unemployment rate. This 6% figure is consistent with many other estimates, including the most recent median estimate of the Survey of Professional Forecasters (Federal Reserve Bank of Philadelphia 2012).

    Fortunately, many of the influences that have elevated the natural rate of unemployment since the crisis and recession should fade over time. In fact, this process is already under way. The extended unemployment insurance programs have been scaled back and are affecting fewer and fewer people. Eventually these programs will be phased out. In addition, measures of mismatch between workers and available jobs are receding (Lazear and Spletzer 2012 and Șahin et al. 2012). And, at least so far, we are not seeing permanent scarring effects of long-term unemployment (Valletta 2013). I expect that, in coming years, the natural rate will return to a more historically typical level of about 5½%.

    I should note that the fact that economists are busily studying, debating, and revising their assessments of the supply side of the economy is encouraging. It makes a repetition of the mistakes of the late 1960s and 1970s much less likely. In our research, Orphanides and I found that, if economists and policymakers had similarly reevaluated their views back in the 1960s and 1970s, the stagflation of that period could have been avoided (Orphanides and Williams 2013).

    The conclusion that the economy is suffering primarily from weak demand rather than a shortage of supply receives additional support when the factors weighing on recovery are analyzed. The finding of the research that I mentioned on the economic effects of uncertainty—that heightened uncertainty raises unemployment and depresses inflation—is evidence that uncertainty primarily acts as a barrier to demand, not supply. Other research supports that view. In recent work published by the San Francisco Fed, Mian and Sufi (2013) compare state-level employment performance during the recession and recovery with state-level survey data from the National Federation of Independent Business. The NFIB survey asks small business owners to identify the single most important problem they face. Answers include taxes, poor sales, labor costs, government regulation, insurance costs, et cetera. Mian and Sufi find that declines in state employment were highly correlated with the percentage of respondents in each state citing lack of demand as their most important business problem.

    Read the full speech here.

  • An Evolving Global Risk Environment

    The designers at Mercer/Think have taken some of the top-line data from the World Economic Forum's Global Risks 2013 report and put them into this helpful visualization.  It serves as a nice entry point to the report, and also a good conversation starter.  Take a look:

    The full size graphic is available here.

    And don't forget to read the full report, here.

  • Noah Smith: "If growth does end, does our economic system go with it?"

    Even the good news about GDP for most advanced economies these days is tempered.  Any rate of growth seems welcome in Europe or Japan, for example.  The slow growth/no growth news of late has sparked some discussion of whether we need to adjust our expectations for the long term--or even whether capitalism in danger.  But Noah Smith wants us to be careful not to equate growth and capitalism.  We may have come to think that capitalism is fueled by growth, but Smith argues that not-so-distant history shows otherwise.  From The Atlantic:

    Ask any economist of the free-market persuasion to justify capitalism, and the word "growth" probably won't even be part of his spiel. The simple Econ 101 theories that are used to justify free markets don't even have growth in them! In Econ 101, capitalism works because people gain from trade, not because they have more and more to trade over time. Efficiency, not growth, is the gold ring. In those simple toy economies, people just keep on cheerfully making their bargains of cattle and grain until the Sun explodes.

    In fact, some of the earliest challenges to the free-market orthodoxy came from adding growth to the models. Back in the 1950s, Paul Samuelson showed that growth provides a rationale for Social Security. Later, "endogenous growth" theories called for a government role in supporting research and development.

    But who cares about economic theories, right? What does history tell us?

    Using the past as a guide to the future has always been the most daunting of challenges. But that said, modern history doesn't seem to favor the "end of growth = end of capitalism" thesis. After all, middle-class incomes have been stagnating in rich countries on and off since the early 1970s. Energy and water - certainly the most important natural resources - have become scarcer and more expensive. In other words, we really have started hitting our resource limits. And yet in many ways, rich countries like the U.S., Europe, and Japan have become more capitalist since the 70s, with lower taxes, deregulation, widespread privatization, and a bigger role for financial markets (not that this has always worked out well, obviously!). Despite the increasing prices of oil and gasoline and water, people in the developed world have not clamored for capitalism's downfall.

    Read The End of Growth Wouldn't Be the End of Capitalism here.

  • NYT Chairman on International Digital Growth

    In an interview with Knowledge@Wharton, New York Times Company Chairman Arthur O. Sulzberger, Jr. discusses business leadership, the future of his newspaper company, and the transition of business models in response to the shift to digital media.  While Sulzberger is very careful to avoid making any predictions about where his company and his industry are headed, it is interesting to note the global goals.  His company recently launched its first Chinese language site, and it sounds like this is just the beginning of a bigger outreach strategy in Asia:

  • The Price of Germany's High Savings Rate

    In a piece for Project Syndicate, Michael Pettis, professor of finance at Peking University, reminds us that the act of rebalancing in Europe requires the work of both debtor and creditor economies.  Most global financial crises, Pettis notes, "were the result of strains created by the recycling of capital from countries with high savings to those with low savings."

    A country’s overall consumption rate is, of course, the flip side of its savings rate. Apart from demographics, which change slowly, three factors largely explain differences in national consumption rates.

    First and foremost is the share of national income that households retain. In countries like the United States, where households keep a large share of what they produce, consumption rates tend to be high relative to GDP. In countries like China and Germany, however, where businesses and the government retain a disproportionate share, household consumption rates may be correspondingly low.

    The second factor is income inequality. As people become richer, their consumption grows more slowly than their wealth. As inequality rises, consumption rates generally drop and savings rates generally rise.

    Finally, there is households’ willingness to borrow to increase consumption, which is usually driven by perceptions about trends in household wealth. In Spain, for example, as the value of stocks, bonds, and real estate soared prior to 2008, Spaniards took advantage of their growing wealth to borrow to increase consumption.

    But this is not the whole story. Consumption rates can also be driven by foreign policies that affect these three factors. For example, an agreement in the late 1990’s among the German government, corporations, and labor unions, which was aimed at generating domestic employment by restraining the wage share of GDP, automatically forced up the country’s savings rate. Germany’s large trade deficits in the decade before 2000 subsequently swung to large surpluses, which were balanced by corresponding deficits in countries like Spain.

    Pettis uses Germany and Spain as examples here.  While the situation in Europe may be more pronounced at the moment, Pettis's point is a larger, more global one, about the nature of the relationship between high-saving and low-saving economies.  Read The Saver's Dilemma here.

  • CPI Stays Unchanged in January as Lower Energy Costs Offset Slight Rise in Other Indexes

    The Consumer Price Index for All Urban Consumers was flat in January.  Lower gasoline, natural gas, and fuel oil costs offset a rises for shelter and apparel costs.  From the Bureau of Labor Statistics release:

    The index for all items less food and energy increased 0.3 percent in January. This increase offset another decline in the gasoline index and resulted in the seasonally adjusted all items index being unchanged, as it was last month. Increases in the indexes for shelter and apparel accounted for much of the increase in the index for all items less food and energy, with advances in the indexes for recreation, medical care, and airline fares also contributing.

    The energy index fell 1.7 percent in January. Along with the gasoline index, the natural gas and fuel oil indexes also declined, while the electricity index increased. The index for food was unchanged in January after increasing in each of the previous ten months. The food at home index was unchanged with major grocery store food group indexes mixed.

    The all items index increased 1.6 percent over the last 12 months; the 12-month change has been slowing since its recent peak of 2.2 percent in October. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as the last two months. The food index has risen 1.6 percent over the last 12 months while the energy index has declined 1.0 percent.

    Here's a look at the CPI for All Urban Consumers over the last 12 months:

    Read the release here.

  • Kauffman Sketchbook: The Essence of Entrepreneurs

    What makes for a successful entrepreneur?  Kauffman Foundation senior fellow Paul Kedroksy sums it up with one line: "They were maddened and frustrated at the world and they scratched their own itch and it turned out to be an itch that a lot of us have." 

    Using Craig Newmark, Mark Zuckerberg, and Steve Jobs as examples, Kedrosky helps us understand this key "essence" of entrepreneurs in a Kauffman Sketchbook:

  • St. Louis Fed: 'An Economic Approach to Education Decisions'

    We have long considered return-on-investment when making decisions about what assets we buy.  Scott Wolla, Senior Economic Education Specialist, argues that we need to do a better job of thinking about ROI when making investments in ourselves.  Writing for the Federal Reserve Bank of St. Louis's Page One Economics, Wolla confirms that education is a good investment (maybe the most important one):

    But, Wolla argues we need to be more strategic in how we spend on our own education.  And he gives three things to consider:

    First, an investment in human capital might not pay off. Just as a firm’s investment in physical capital involves risk, there is also a risk that the expected outcome from investing in human capital will not be realized. Research consistently shows a correlation between more education and higher income (see the second graph), but there is no guarantee. One way to think about the ROI in human capital is the college wage premium, which is the percent increase in earnings of those with a bachelor’s degree compared with those with only a high school diploma. Recent research suggests that the college wage premium has been growing—from 40 percent in the late 1970s to 84 percent in 2012. 2

    Second, people should consider what kind of an investment to make. Getting an education will most likely lead to higher income, but there are vast differences in the projected income and job opportunities of the various courses of study available. For example, according to the Bureau of Labor Statistics (BLS), an elementary schoolteacher with a four-year degree earned $51,380 (median) in 2010, 3 while a computer programmer with a four-year degree earned $71,380 (median) in 2010. 4 Both earned a higher income than they would have if they had not acquired a college degree, but the difference between the median earnings is significant.

    The job opportunities available in different professions also vary. The BLS forecasts job outlooks for various occupations. For mechanical engineers (2010-20), the BLS forecasts job growth of 9 percent, 5 while for registered nurses job growth of 26 percent is expected. 6 Again, there is a significant difference. Given these facts, does that mean that you should not become an elementary schoolteacher? Does it mean that you should consider only computer programming or nursing? No, but the median income and the expected job growth rate are two factors to consider when making decisions about future education and training. In fact, there are many opportunities to gain training and valuable job skills besides the usual college route. Vocational, technical, and trade schools teach specific, practical jobs skills that can lead to a good job within 2 to 4 years. For example, many such schools offer programs in computer-aided design and drafting (CADD); law enforcement; heating, ventilation, and air conditioning (HVAC); and information technology (IT).

    Third, people should consider the cost of various kinds of educational institutions when they think about investment in education. For example, the average cost of attending a four-year public university (tuition, room, and board) from 2007 to 2011 was $58,623, while the average cost at a four-year private university for that same period was $125,604. 7 Does that mean you should consider only public universities? No, but cost should be considered in making your decision. The ROI for a would-be elementary schoolteacher would be higher if he or she chose to attend a four-year public university.

    Read Invest in Yourself: An Economic Approach to Education Decisions 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.

  • Crowdsourcing as a Management Tool

    For those executives who have not convinced themselves they have all the answers, strong leadership depends in part on utilizing the collective wisdom of all members of an organization.  At Fast Company, Fort Hill President Michael Papay outlines some best practices for using crowdsourcing techniques to tackle organizational challenges.  One tip is to "Create a Great Experience":

    The quickest way to get to some fast answers is to make the experience a good one, perhaps even delightful. Time compresses when we’re engaged. The trouble is: Most survey methods are too cumbersome and too dreaded because the experience is dry and usually awful.

    What if you engaged people--perhaps even delighted them--in the process of asking them questions? This is less about driving people to do a survey, and more about the experience pulling them into a process where they see where others are, contribute, and shape direction.

    Facebook and other social media took off when the experience was simple and when people knew they’d learn something as they participated. And, in the process, those experiences created “stickiness”--the idea that people are drawn to return for more. In fact, the dominant social media sites--Facebook and Twitter--each ask simple questions to prompt posts and tweets: What’s going on and what are you doing?

    How about something that’s a good experience for the users--a crowdsourcing tool that engages the crowd and people see they can shape the opinion of a company? The process is transparent--people can see what others are doing. You get more engagement and you compress the time.

    Read Crowdsourcing Your Way to More Effective Leadership here.

  • Planet Money: Immigration Reform Ideas from Economists

    Congress is set to debate immigration reform once again (though at the moment most of the debate is taking place outside the Capitol building).  While it is pretty clear that there are sharp political divides on immigration, there may be a lot of common ground among economists.  In their latest podcast, the Planet Money team shares some of the immigration reforms that economists would like to see:

  • Sheena Iyengar on the Global Leadership Crisis

    At the World Economic Forum's annual meeting in Davos this year, Columbia Business School professor Sheena Iyengar heard a consistent theme: there is a global leadership crisis.  But she wants us to reconsider the problem.  Perhaps, she puts forward in this interview, we need to look at the environment in which our current global leaders are operating.  Is it that they are not making quick and effective  decisions, or could it be that we need to change the "decision making environment"?

  • Conglomerates Thriving in Asian Economies

    Conglomerates are thriving in three key Asian markets.  In an article for McKinsey Quarterly, Martin Hirt, Sven Smit, and Wonsik Yoo share some eye-popping statistics about the largest conglomerates in China, India, and Korea.  For example, top conglomerates in China and India have "expanded revenue by more than 20 percent a year.  In Korea the revenue growth is about half that.  From the article:

    When we looked more closely to determine the sources of this revenue growth, we found a strong connection with new business entry. The average rate of revenue growth for companies that entered at least one new business over the period we studied was 25 percent a year—more than two times higher than the revenue growth of companies that didn’t.

    Also notable were the strategic motivations behind the new business entries. Fully 49 percent were step-out moves into businesses completely unrelated to the parent companies’ existing activities—for example, a South Korean chemical company acquiring a life insurer or a Chinese mining group’s expansion into the media industry. The remaining half were about equally split between two kinds of moves: category expansions into adjacent businesses and value-chain expansions that positioned the parent company up- or downstream from its existing business (Exhibit 2).

    Although step-out moves were the most common form of new business entry we observed, they were far from the most successful. Just 22 percent of those we studied had a beneficial impact on revenue growth, profits, and market share relative to those of competitors. In fact, our findings almost certainly understate the difficulties involved in diversifying into entirely new businesses, since companies rarely publicize the full financial and organizational implications of unsuccessful moves. Nonetheless, when step-out moves were successful, they delivered strong results—$3.8 billion in additional revenues, on average.

    Read Understanding Asia's Conglomerates here.

  • Visualizing the Global Economy

    James Glattfelder studies complexity theory.  Two years ago he applied this theory of thinking to the economy (rather than the brain, say, or a flock of birds), and came out with a report provocatively titled The Network of Global Corporate Control.  He spoke about the study at TedX Zurich, and in his talk he shared some helpful ways of understanding highly complicated global networks.

  • 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.

  • WSJ: Why Most Euro Area Citizens Don't Want to Break Up With the Euro

    While the euro has been much maligned in the media, most citizens in euro area nations are reluctant to turn back from the currency.  The Wall Street Journal's Alessandra Galloni reports that many Europeans see the shared currency as a hedge against some corruption, and as important for civic, if not purely economic reasons:

  • Vox: 'Was the currency war inevitable?'

    Writing at VoxEU, Simon J Evenett--Professor of International Trade, University of St. Gallen in Switzerland-likens a currency war to a "rash" likely to break out depending on how policy makers respond to a global recession.  But does that make currency wars inevitable?  Evenett writes:

    Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war.

    Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries.

    There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war.

    Read Root causes of currency wars here.

  • Brookings Paper Calls on Regional Firms to Increase Exports

    Researchers in the Brooking Institution's Metropolitan Policy Program have put out a new paper calling on the federal government to "initiate a short-term competitive Regional Export Accelerator Challenge (REACH) grant program."  They argue that too many U.S. cities are too slow to engage in the global marketplace.  From the paper:

    Despite the size and growth of foreign consumer demand, too many firms and too many parts of the United States remain domestically-oriented, thereby missing out on opportunities to innovate and expand. In addition, the national export service delivery system is too Washington-centric and does not embrace federalism’s opportunities to work directly with leaders in regions, and their state partners, to globalize traditional economic development strategies.

    The key problem is that both individual firms and entire regions under-export.

    -Too few firms are exporting and exporting regularly. As of 2010, less than 1 percent of U.S. firms sell a product abroad, a much lower share than in other countries, including major trading partners such as Canada, Germany, and Korea. While the number of new exporting firms continues to grow (with 16,500 firms beginning to export between 2009 and 2010), that pace is slower than the creation of all new firms, keeping the overall percentage of exporting firms low. As of 2010, the United States has 293,000 exporters. However, only 188,000 firms exported in both 2009 and 2010, suggesting that approximately one-third of exporters may be “accidental exporters” that react to one-time demand from international buyers rather than integrating exports into their long-term sales and marketing strategy.

    -The nation itself remains a patchwork of exporting activity. The share of the U.S. economy that is driven by exports is relatively small, at 14 percent. But even at that level, 74 percent of metro areas—and 86 of the 100 largest metro economies—underperform the national rate. Metro areas as large and diverse as Atlanta, Baltimore, Denver, Miami, New York, and San Antonio all generate less than 8 percent of their economic output through exports, placing them in the bottom quarter of performers among the largest 100 metro economies.

    Read the paper here.

    Amy Liu, co-director of the Metropolitan Policy Program, discusses the need for domestic firms to expand exports in this interview:

  • Atlanta Fed President on Growth and Jobs, and 'Misrepresentations' of the Impact of Small Firms

    We find that a lot of the talk about small businesses as job creators in the U.S.--especially during political campaigns--isn't quite backed up by the data.  The same may be true elsewhere.  Atlanta Fed President Dennis Lockhart was in Spain to speak with students at the Instituto de Empresas.  The focus of his speech was on growth and jobs, and he spent some time tamping down heightened expectations for smaller faster younger firms--or "gazellas"--to drive growth in the U.S. or Europe:

    We found that the role of young firms in job creation is easily overstated. For instance, the claim is often made that new firms alone account for all net job creation. This is true in what you might call an accounting sense. That is, the number of jobs created by new firms about matches or exceeds the net number of jobs created by all firms.

    But this fact ignores the reality that established firms that are growing create many more jobs each year than do new firms. It's just that established firms that are downsizing are responsible for destroying a lot of jobs as well. New firms haven't been around long enough to downsize. In fact, as a group, young firms between one and five years old destroy more jobs than they create because of the high failure rate.

    Moreover, we found that many small firms are not established with an objective to grow and add employees. The landscape of small, young businesses is heavily populated with "mom-and-pop" businesses. They play an important social role, but are not a major source of jobs beyond the initial number of employees at establishment.

    In our investigation we then looked at the argument that it is the relatively small subset of small, young, fast-growing firms—the gazelles—that drive job creation. It's clear that gazelles do contribute significantly, but it's the growth dimension, not the age or size dimension, that matters most. That is to say, fast-growing mature firms also account for a lot of job creation. And heavy emphasis on technology and bioscience industries—so popular among economic development professionals—may also be misplaced. High-growth firms emerge in a number of industries, some decidedly low tech. All in all, it's not so obvious that the likely source of high-growth firms can be identified.

    The recent recession significantly constrained the growth opportunities of companies. By one definition of fast growth, there are about a third fewer fast-growing firms in the U.S. economy now compared to the mid-2000s, and they are adding about half as many jobs compared to the earlier rate. It may seem like an obvious point, but one still worth emphasizing. Innovation and entrepreneurial activity are most likely to achieve maximum impact in terms of job creation in a context of general economic growth.

    Read the full speech here.