Growthology
Americans living abroad watch the acceptance speech by Barack Obama after he defeated John McCain to win the US presidential race at an election day event organized by the US Embassy in Beijing, Nov. 04, 2008. More young people may persue opportunities abroad if they perceive the US to be fin (AFP PHOTO/Frederic J. BROWN/Newscom)
Will Millennials leave US to avoid becoming the 'chump' generation?
What if they had a fiscal crisis, and nobody came? What if the chump generation figures out the Ponzi scheme? Bob Samuelson thinks the fallout will be political:
... As baby boomers retire, higher federal spending on Social Security, Medicare and Medicaid may boost Millennials' taxes and squeeze other government programs. It will be harder to start and raise families.
Millennials [ages 30 and younger] could become the chump generation. They could suffer for their elders' economic sins, particularly the failure to confront the predictable costs of baby boomers' retirement.
Samuelson asks the question in a political context, and that's how most analysts interpret the looming fiscal crisis, as if young voters will punish fiscally irresponsible representatives in Washington. My alternative theory focuses on the context of immigration. Already you may have heard about the millions of illegals who departed the U.S. when the Great Recession dried up job opportunities. A lot of crass nativists might think "Good Riddance!" but I wonder what they'll say when their own children seek greener pastures abroad in 10 or 20 years?
Consider: almost everyone younger than the Baby Boomers expects to get the short end of the fiscal stick. We were laughing about the unlikeliehood of getting Social Securiyt Checks when I was in high school in the 80s. So now that the reckoning is all but unkickable, do the Boomers think their kids and grandkids will just become fiscal serfs? Think again.
The consequences of U.S. fiscal calamity will go hand-in-hand with globalization. The world is in the early stages of globalization, but already member states in the EU are feeling the effects of combining tax competition with the right of movement. A 2006 BBC report noted that nearly 10 percent of Britons lived aborad, a million in Spain. Two emigrant types dominate: retirees and workers! Here's a more recent report from the OECD
... the share of immigrants in the OECD population almost doubled from just over 4.5% in 1975 to 8.3% in 2005. It is also noteworthy that 45% of immigrants living in OECD countries in 2008 came from other OECD countries.
The threat America faces is a world that competes for our greatest natural resource: it's young. If we make the tax climate hellish, the U.S. is going to suffer outmigration as places like Canada, Australia, Brazil, Mexico, Chile realize what an opportunity they have to cream our entrepreneurial talent. If we don't, and let the deficit spiral out of control, the dollar will fall and workers will go elsewhere for value reasons. There's already a migratory tension in Europe, waged primarily with favorable tax treatment for high net worth immigrants.
Go ahead and worry about the fiscal crisis of 2020, and worry about its implications across the generations. Just make sure you worry on a big enough scale. We all know that globalization will deepen, and the national borders that seem so tall and vital today will look more and more like borders among the 50 states of yesterday. Remind me again, how difficult does Texas make it on fleeing Californians to move in to their state?
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More aftershocks rocked parts of Chile early Thursday, five days after a massive earthquake that killed more than 800 people. On Wednesday, Paul Krugman of the New York Times was critical of Chile's economic reforms over the last thirty years. (Arias Francisco/SIPA)
Tale of two charts: Krugman denigrates Chile
Paul Krugman just can't stand the praise being given to Chile's liberal economic reforms of the last 30-40 years, so he is denigrating them. Why would he do that? He claims the economic liberalization in Chile is nearly mythical, and uses a chart as his key piece of evidence. It's scandalously misleading.
That chart does not jibe with my own experience following Chile's development, especially in contrast to other Latin American economies. And note the source: Total Economy Database. Why not use the Penn World Tables, or World Bank data? Paul's data says Chileans are just 15 percent wealthier than they were in 1970. The PWT Mark 6.3 indicates they are 161 percent wealthier. So who do you trust: the global standard for cross-country economic comparisons or the Nobel prize-winning NYTimes blogger?
Even my kids know the answer. Just look at the wikipedia entry on Chile's economy, and you'll find another chart:
For the record, anyone who travels in Latin America can attest that little Chile's role as a model is not what you might expect. Neighboring nations still like to think of Chile as their poor sibling, and pretend that its economic success does not exist. It's time to take off the rose-colored glasses.
UPDATE: The chart Krugman uses cuts off in 1991, so it's not the data source that's misleading. It's chart trickery with the X axis, a Tufte favorite.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
A camp set up for earthquake survivors surrounds a school in Lota, Chile, March 3. An 8.8-magnitude earthquake hit Chile early Saturday – 500 times stronger than the quake that shook Haiti. But Chile has faired better than Haiti. (Aliosha Marquez/AP Photo)
Chile, Haiti earthquakes show mainstreaming of economic freedom
The earthquakes that struck Haiti and now Chile this winter are creating an unavoidable contrast. It also to my mind marks the moment when the idea of economic freedom is going mainstream. Here's an essay in TIME magazine:
... The 8.8-magnitude earthquake that hit Chile early on Feb. 27 was 500 times stronger than the 7.0 quake that killed an estimated 200,000 Haitians last month. And yet the number of casualties in Chile appears to be exponentially smaller, with the official death toll still in the hundreds.
... Wrong. It's the other way around: Chile is more developed because it's doing things right. The same goes for Brazil, Uruguay, Costa Rica and a handful of other Latin American and Caribbean nations that have decided in the 21st century to stop running their societies like medieval fiefdoms. They've conceded that niceties like rule of law, accountability, education, entrepreneurial opportunity and administrative efficiency actually have merit.
Keep in mind that this theory promoted by TIME is derided as "magical thinking" in Jeff Sach's The End of Poverty.
Still, the recovery in Chile will be long and difficult. They deserve our help. Thank goodness the U.S. and Chile already have an open trade agreement in place, since 2004..
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
A labourer rests at the construction site of a residential complex on the outskirts of New Delhi Feb. 25. The ministry's economic survey for the 2009/10 financial year forecast economic growth at 8.25-8.75 percent in 2010/11, accelerating to over 9 percent the year after, compared with projected growth of 7.2-7.5 percent in the current year. India has been showing that a country need not "industrialize" to grow. (Danish Siddiqui/Reuters)
India: Pioneering a new growth path
Growth economics is filled with errors. The Solow residual has become ingrained in conventional wisdom as "technology" when it is really a measure of intangibles. Technology, sure, but also culture, institutions, creativity. Not to mention, conventional wisdom assumes a linear link between more R&D spending and more innovation. What about entrepreneurs? Most startups I know don't have an R&D budget -- the whole company is a tech gamble! How can government officials measure that? They can't.
But the biggest myth of practical growth economics is getting punctured, thanks to India. The CW still hasn't digested the truth yet, because it is still beholden to the idea that manufacturing is the alpha and omega of prosperity. Well, India has been showing that a country need not "industrialize" to grow. Rather, India is leap-frogging (for the most part) the trail of sweatshop tears by embracing services-led development. You might call it a Globalization strategy instead of Industrialization strategy. And lest we forget, embracing Industrialization was no guarantee of success. Remember Africa circa 1960?
Here's Ejaz Ghani in a VOX essay:
... India’s growth pattern in the 21st century is remarkable because it contradicts a seemingly iron law of development that has held true for almost two hundred years since the start of the Industrial Revolution (Chenery 1960, Kaldor 1966). This law – which is now conventional wisdom – says that industrialisation is the only route to rapid economic development for developing countries. It goes further to say that as a result of globalisation the pace of development can be explosive. But the potential for explosive growth is distinctive to manufacturing only (UNIDO 2009). This is no longer the case.
... Service-led growth is sustainable because the globalisation of services is just the tip of the iceberg (Blinder 2006). Services are the largest sector in the world, accounting for more than 70% of global output. The service revolution has altered the characteristics of services. Services can now be produced and exported at low cost (Bhagwati 1984). The old idea of services being non-transportable, non-tradable, and non-scalable no longer holds for a range of modern impersonal services. Developing countries can sustain service-led growth as there is a huge room for catch up and convergence.
Maintream economics taught students that services dominate the non-tradeable sector (think haircuts) across distance. I always wondered what Elvis or Lassie would say to that. But now I just wonder what the accountants in India would say. Probably the same. Woof.
This is worth keeping in mind the next time someone tells you that "America used to be a place where people made things." It still is, but that's not the future. In the future, manufacturing will be automated. American factories will quietly produced more stuff with less, or no, workers on the line. Indeed, that trend may make China's industrialization strategy a bad bet over the long-term.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
David Stockman, shown here when he was budget director during the Reagan administration, argues that the US is hurtling toward a budget deficit disaster. (Newscom/File)
David Stockman decries runaway deficits. Here are ideas on how to rein them in.
Read David Stockman's tirade about the 30-year fiscal war. Stockman says the U.S. is "hurtling irreversibly toward a budgetary crack-up...." Published in Politico, it nails everyone. This would be great fodder for any classes that covers public finance.
My only quibble is that Stockman doesn't offer solutions. By that I mean he's like a doctor who diagnoses obseity and declares with an ominous scowl, "Be less obese."
Of course! Our government spends more than it taxes, and the gap has been accelerating. But the policy solutions (spend less, tax more) are NOT THE POINT. The point is that the rules that govern fiscal policy-making are broken. If you did not get that message from Evan Bayh's retirement, then you are missing the forest for the trees.
The only discussion worth having now is: What new rules will restore sound policymaking? There are two tests for rules. One, will the rule work and work robustly over time? Two, can the U.S. enact the rule?
The dilemma is that potential rules may never be able to pass both tests. As an example, President Obama's "bipartisan fiscal commission" has already passed the first test, but there is a great deal of skepticism if it can pass the second test. Pay-go is another example. Works for a while, but it has always proved non-robust. Alternatively, rule that would completely satisfy the first test are budgetary Amendments to the Constitution, but again political reality seems to make enactment of these near impossible.
What rules would you like to see?
Let's hope (and suggest) that the President's new commission includes a careful set of recommendations on rules, in addition to the policy options. We've been talking policy options for 30 years, with lone economists like Stockman screaming into the wind, and I don't think that conversation is working.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Anticipating Paul Krugman: Early thoughts on his recent profile in the New Yorker
A lengthy New Yorker bio piece on Paul Krugman is on my to-read list. (Hat tip: Tyler Cowen). I've read about half, but want to blog it before I get busy ...
One of my favorite things about Krugman is that his interest in economics was inspired to some degree by reading science fiction as a kid, especially Isaac Asimov's Foundation.
Krugman explained that he’d become an economist because of science fiction. When he was a boy, he’d read Isaac Asimov’s “Foundation” trilogy and become obsessed with the central character, Hari Seldon. Seldon was a “psychohistorian”—a scientist with such a precise understanding of the mechanics of society that he could predict the course of events thousands of years into the future and save mankind from centuries of barbarism. He couldn’t predict individual behavior—that was too hard—but it didn’t matter, because history was determined not by individuals but by laws and hidden forces. “If you read other genres of fiction, you can learn about the way people are and the way society is,” Krugman said to the audience, “but you don’t get very much thinking about why are things the way they are, or what might make them different. What would happen if ?”
With Hari Seldon in mind, Krugman went to Yale, in 1970, intending to study history, but he felt that history was too much about what and not enough about why, so he ended up in economics. Economics, he found, examined the same infinitely complicated social reality that history did but, instead of elucidating its complexity, looked for patterns and rules that made the complexity seem simple.
Since a wonderful part of being alive is anticipation, I have to say that I am very happy to have Paul Krugman in my life. I have great anticipation for what he will write in 10, 15 years about science and science fiction. My guess is that he will have a voice then, an older man's voice, that he cannot have now. His voice now is very engaged in the trees of our time, not the forest of all time.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Harvard professor and economist Kenneth Rogoff speaks at a conference in Denmark in this October 2009 file photo. He recently called global fiscal policy "out of control." (Newscom)
Fiscal policy is 'out of control.' So what?
Ken Rogoff, a Harvard professor, and one of the few economists who can claim to be prescient (this January 2008 NBER paper with Carmen Reinhart anticipated the economic fallout from the financial crisis in the U.S.), now warns that fiscal policy is out of control ... here, there, and everywhere.
Speaking in Tokyo, he actually used the phrase "out of control" to describe Japanese fiscal policy (debt to GDP is over 200% there), but also focused on Greece, the EU, and the U.S. The difficulty to curb fiscal stimulus during a recession means that monetary policy is likely to tighten first, and last week's Fed announcement pretty much fits in exactly with the Rogoff prediction. Actually, the political economy of fiscal versus monetary policy is something taught in economics classrooms for decades. Rogoff now predicts:
The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said....
“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”
It's interesting to note the 2008 NBER paper said:
A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response. (emphasis added)
What are the consequences?
The first consequence is that the U.S. recovery will be more difficult than it needs to be, followed by a systemic shock. It is impossible to anticipate what the U.S. economy will look or feel like in 2020 after that shock occurs.
The second consequence is global. For growth optimists like Dane, Bob, and me (and our readers, right?), it is very difficult to reconcile the gloomy short-term outlook with all of the historical evidence showing long-term acceleration in economic growth. (I'm reminded of the TED talk Alex Tabarrok gave a year ago). The reconciliation is, of course, growth is heterogenous among countries, states, and cities (people, too, for that matter). Japan and Greece seem determined if not destined to be fiscal train wrecks. America seems to be falling into the same trap, and not just because of next year's projected deficit, but because of the inability to institutionally even think about entitlement realities. So, yes, growth will happen, but it won't surge in nations with fiscal hangovers. Growth leadership starts with fiscal restraint, so we can look at this list of public debt by country to see who has the advantage. Names that stick out: China, Russia, Estonia, Chile, Australia, among others.
Does America eally want to pass the baton of global leadership? Of course not. Such batons are never passed. They're dropped.
UPDATE: Jim Hamilton makes the case that the Fed discount rate increase is not a signal of tighter monetary policy. I don't disagree, per above, but I doubt Jim would disagree with the claim that monetary policy is much more likely to tighten before fiscal policy (I give 50-1 odds). And I can guarantee that Jim would prefer to see real fiscal discipline, because he's been writing about that for years.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Has the 'great recession' ended?
This is the question of the moment for many economists and analysts and policymakers, although the relevance of the answer will vary widely across the country. Will someone who has been unemployed for seven months or longer (which is now the average duration) celebrate when the National Bureau of Economic Research (NBER) officially dates the end of the recession?
In a recent research note, William Hester of Hussman Funds examines the four primary indicators tracked by the NBER Business Cycle Dating Committee: Industrial Production, Real Manufacturing and Trade Sales, Real Personal Income Less Transfer Payments, and Nonfarm Payrolls. Many readers won't be surprised to learn that the first two indicators have bounced back nicely, in line with prior recoveries.
The Manufacturing and Trade chart is similar, although with not quite the same "V" shape as Industrial Production. Personal Income has risen in the last several months, but so far is merely flat-lining rather than rising. But as you can guess, it's the employment situation that will continue to weigh on the economy:
Yikes. Hester points out that the trend of NonFarm Payrolls thus far tracks quite closely the "jobless recovery" that followed the 2001 recession. That recession was said to be over in November 2001, but employment didn't recover for about two years and the bear market persisted for another year. As Hester notes, "it would go against precedent for [NBER] to declare the end of a recession with the mixed signals that are currently in place."
So what do you think? Is the Great Recession over? If it is, does it matter? Don Peck has a very disheartening piece in the newest Atlantic predicting a "long shadow" that will stretch across the economy for several years to come and will even produce a "slow motion social catastrophe," wrecking marriages, cities, and quality of life for whole swathes of the United States.
It's a perpetual temptation for every generation to declare its time to be historic, for everyone to perceive themselves as living through some sort of inflection point. Such time-centrist sentiment often proves unfounded, but occasionally the signals are so overpowering that you can't help wondering: is this the moment when everything changed?
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Where in the world are US troops?
With the hundreds of thousands of US "boots on the ground" in Iraq and Afghanistan, we should wonder how many Americans have been deployed away from home throughout history and whether they have been a force for good (as advertised).
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Copycat survey at the WSJ
My pal EJ tells me that the whiz kids at the Wall Street Journal saw our Econ Blogger Survey and quickly made their own version! Ha, nice try.
Oh, apparently they have been doing it for years, once a month even. And my assistant reminds me that I said they were an "inspiration." Okay, so fine.
The summary is that the economists expect interest rates to be held steady by the Fed all summer long and not rising above 1% the entire year. Inflation remains tame. A quarter of the 8 million jobs lost are structural (that is, permanently gone). Home prices stabilize. GDP growth rate averaging 3 percent. And they even have a report card. Here's an interesting observation from the article:
One of the key issues holding down job growth is a growing disparity between small and large businesses. This week, the National Federation of Independent Business released a report showing another decline in small business optimism. That stands in contrast to the Business Rountable's survey of chief executives of larger companies released last month that showed a strong increase in sentiment.
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