It was way back in April 2009 that Barry Eichengreen and I first compared the world industrial output collapses of 1929 and 2008. The situation looked pretty alarming at that stage, but it turned out that we were a good leading indicator of recovery: the world economy started turning around almost immediately afterwards, thanks to a coordinated reflationary macroeconomic policy response. Then 2010 happened, reflation turned to austerity in Europe, and the global recovery slowed, to the point where at times it seemed to be petering out almost altogether.
And in August of this year, the inevitable happened: measured in terms of industrial output, our current recovery was overtaken by that of the interwar period. Pretty dismal stuff. Let’s hope that we can at least avoid the famous 1937-38 double dip, visible at the end of the interwar series.
Eduardo Porter, one of the most highly respected economic analysts in the US media, has an interesting, thoughtful new article on European immigration pressures. He argues that European economies and societies need to prepare for large-scale immigration from Africa, the Middle East, and South Asia. These regions are close to Europe, are notably poor by world standards, and have a forecast population increase of three billion in coming decades, on top of the large increases which have already occurred in the recent past. Porter argues that attempts to stop completely this migration pressure will not succeed, and instead Europe should try to adjust to an inevitable large inflow.
Yesterday, the First of July, was Canada Day.
Discussing the crisis in the Eurozone with some visiting Canadian relatives led to the question How stable is the Canadian currency union?
At first sight it seems to be much more stable than its European counterpart. The Canadian banking system is renowned for its solidness. It is dominated by five national banks that operate coast to coast, supervised by the much-admired Bank of Canada. There is a large national budget that includes important elements of inter-provincial fiscal equalization. Internal labour mobility is relatively high.
But on the other hand the provincial governments are not constrained in their borrowing, there are enormous differences between the economic structures of the provinces, and there is always the Quebec question.
In fact, to a surprising extent, the stability of the Canadian union appears to depend on the fact that, as the author of this article puts it,”there are no Greeces here”. He draws attention to flaws in the design of the Canadian currency union that could come home to roost some day.
Michael O’Sullivan’s latest Dublin Review of Books piece is here, and it is well worth reading.
In between grading exam papers I have been wading through the Piketty book. Its a bit like walking through a muddy field. The going is sometimes a bit stodgy, but you eventually get there. There have been many reviews and commentaries on the book – one of the best I think is by Debraj Ray (http://debrajray.blogspot.co.uk/2014/05/nit-piketty.html ), who also wrote what I believe to be the best textbook on Development Economics in 1998, which, alas, I don’t think was ever updated.
Ray is sceptical about Piketty’s “Fundamental Laws of Capitalism”, but believes that the book makes a major contribution in highlighting the concentration of top incomes, arising from both an increasing share of income accruing to capital and also the phenomenon of very high returns to human capital at the top of the wage distribution.
All of this I am sure is very familiar to readers of this blog – Piketty’s must be one of the most reviewed economics books of the last 30 years. But what seems to get less coverage is what has been happening to the approximately 75% of the world population not covered by the Piketty book. A recent World Bank study by Lakner and Milanovic (covered here in Vox http://www.voxeu.org/article/global-income-distribution-1988 ) shows that over the 1988-2008 period, growth for the bottom 75% of the world (with the exception of the very bottom 7% or so) has been well above average, thus contributing to an overall compression of the world income distribution. There have basically been three broad changes in world income distribution over the last 30 years. Yes, the top 1% have seen high growth, while those between about the 75th and 99th percentiles have done relatively poorly – these are the phenomena covered in Piketty. But the vast majority of the bottom 75% have also done relatively well, particularly those just above the median – effectively the Chinese and Indian middle classes are catching up with lower income groups in the OECD countries. The net effect of these three changes is a fall in overall world income inequality. The data stops at 2008 but my guess is that developments since then have probably only accentuated these trends. And further globalisation is likely to have the same effect.
The piece finishes off with some speculation about the political implications of all this, which I am not quite so convinced by. But overall, given that inequality seems to be flavour of the moth these days, it is interesting to get a more global view.
The chairman of the US Senate Finance Committee, Max Baucus (D) has published some proposals for reform of international aspects of the US tax code. There is lots to read here.
This six-page summary is a good place to start. It is probably better to stop before you get to the 85-page technical explanation from the staff of the Joint Committee on Taxation.
One could look for possible implications for Ireland through the references to foreign income, Subpart F, “check the box”, the “same country exemption”, the CFC “look-through rule”, inversions or section 482 (transfer pricing) and other provisions in the US tax code that we have heard about but don’t fully understand. However, there are lots of reasons why this set of proposals may not get very far. Trying to find a word of support in the statement from the chairman of the House Ways and Means Committee, Dave Camp (R) is one and the impending retirement of Baucus in 2014 is another. The point is simply that the debate is not standing still even if actual reform still appears to be a way off.
Here is a report from Bloomberg on the proposals.
Paul Krugman has an interesting and alarming post here, in which a key question that is posed is: “So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures?”.
I have often thought that China may provide a partial answer to the question: an elastic supply of Chinese workers meant an elastic supply of Chinese goods, that were vented onto Western markets at a fixed exchange rate and financed by internationally mobile capital. Presumably many others have said something similar in the past, since it seems like an obvious point to make. I wonder if you could make the case that similar forces were — at least at part — at work in the 1920s, with an overhang of primary products on international markets following the disruptions of World War 1 helping to keep a lid on commodity price inflation. (The international monetary context was obviously very different.)
And, while I’m not a theorist, it has often struck me that it wouldn’t be so surprising if inflationary pressures that don’t show up in commodity prices showed up in asset prices instead.
I was once at an after-dinner talk by Tommaso Padoa-Schioppa in which he said something similar, and then went on to make the point that whereas commodity price inflation is self-limiting — it makes us unhappy, and tends to lead to retrenchment by private agents and/or central banks — asset price inflation makes us happy and encourages expenditure, and is thus a process that feeds on itself (until it goes into reverse).
If there is anything to this, then when China and the rest of Factory Asia eventually hits its “Lewis point“, Western inflationary pressures may once again begin to show up in commodity price inflation. If Western economies were less able to finance imports from Asia, or if their currencies started weakening, then something similar might happen. Perhaps that wouldn’t be such a bad thing.
Alan Taylor sends me to this post: the chart is definitely one for the classroom.
Peter Temin and David Vines have a piece based on their recent book here.
This Conference, jointly organised with the European Commission, is an associated event of the Irish Presidency of the Council of the EU. It will present and discuss the main findings of the 2012 edition of the European Competitiveness Report as well as recent related empirical evidence and their implications for industrial and innovation policies in Europe and Ireland. The Conference Programme and more information are available here.
The European Competitiveness Report 2012 provides empirical evidence about industrial competitiveness in the post-crisis recession in Ireland and the other EU countries as well as EU’s neighbouring countries. A presentation of the report can be found here.
Barry Eichengreen and I provide an update to our original Vox column here.
Kevin O’Rourke delivered a hugely insightful talk on the crisis and the global situation at a conference in Dublin last week. His presentation is here.
Doug Irwin provides a nice account of the historical links between exchange rate and trade policy here.
One of the most important economics books aimed at wider audiences to emerge in the last few years is Poor Economics by Abhijit Banerjee and Esther Duflo. Banerjee and Duflo are two of the leading economists of their generation and are particularly associated with the use of randomised controlled trials in development economics. However, this book is broader in its scope and tackles a wide range of issues in the economics of poverty, development economics and the economics of the family. The book has ten chapters and two major sections, one dealing with individual behaviour among the poor and the second dealing with the role of institutions. Like the best popular economics works, each chapter deals with very big issues backed with the recent literature but presented in a punchy and readable fashion. It is a cracking read. The first section deals with nutrition, public health interventions, education interventions and fertility. The second section looks at insurance for the poor, microcredit, savings and entrepeneurship. Chapter 10 sets their argument in the overall context of development debates raging between people like Sachs and Easterly.
The book pushes strongly for the continued development of experimental approaches to economic development that attempt to find workable solutions that large-scale philantrophic and government funding initiatives could be aimed toward. It is important reading for anyone working in microeconometrics and development economics broadly defined and also would be great reading for anyone in Ireland working around the area of foreign aid policy. I open up this thread for anyone who wants to debate aspects of the book or the surrounding issues. From an irisheconomy perspective, it is worth thinking about how the ideas in the book might influence how the Irish government directs the overseas aid budget.
Jeff Sachs weighs in on the corporate tax rate question in a Financial Times op-ed.
The report of the US Financial Crisis Inquiry Commission was released last week to controversy and criticism. The report contains a wealth of information and is interesting reading even for those whose interest is mainly in our own financial crisis. Much of the story has been about the partisan squabbling since the report’s release, with the Commission failing to agree on the final product. Republican commissioners issued two separate dissents to the “majority” report (see here for the dissent of Hennessy et al.). This just underlines how politicised the narrative of the crisis has become. Strangely enough, though, I find the duelling perspectives actually add a useful analytical edge – otherwise lacking – to the report. (Update: See here for an interesting discussion at the NYT.)
Anger at our government is probably too raw to have a much of a productive debate until after the election. But to draw the proper institutional and policy reform lessons, it will be useful to similarly consider the competing extremes of the “rotten institutions” and “blameless bubble” explanations for the crisis, and to explore where the truth lies.
Some short extracts follow after the break to give a flavour of both the majority report and the dissent. Continue reading ““Rotten Institutions” or “Blameless Bubble”?”
This is a very useful primer on interwar protectionism by the leading historian of US trade policy. (I had never heard of ‘Smoot Smites Smut’, which is worth the price of admission alone.) Although Doug could have usefully mentioned that the biggest costs of protectionism then were geopolitical, and those ended up being fairly catastrophic.
Economists sometimes assume that the right way to talk about protectionism is to moralize. I prefer analyzing the causes of protectionism: it may be a very bad idea, but sometimes, in democracies, it becomes inevitable. Doug, in a manner reminiscent of Adam Posen, argues that expansionary monetary policies in the US are a good way of keeping the protectionist wolf at bay there right now. The same logic applies to Europe as well.
Last week’s news was terrible, but I felt even more depressed the week before. If we enter a spiral in which we get worse news on GDP and GNP than expected, and then conclude that we will have to push through even more deflationary budgets than previously planned, then we have entered a doom loop from which there is no escape.
Unless the cavalry comes charging to the rescue, is what. Unless Ireland is bailed out economically by the rest of the world, via a world trade boom that allows us to export our way to recovery.
Unfortunately, there are lots of question marks hanging over this scenario right now. The cavalry is uncertain as to where it is headed, and for every piece of good news we get from overseas, there is a corresponding piece of bad news (and vice versa). Any honest forecast of where we are headed in the immediate future will have extremely wide confidence bands associated with it, which in the Irish case will surely straddle the zero axis.
This is why it is so utterly in Ireland’s interests that policy makers overseas listen carefully to Adam Posen (short version here, longer version here). I strongly urge people to read the full speech. It is a carefully argued (and, for a central banker, passionate) plea for further stimulus measures, as well as for a certain way of thinking about the macroeconomy. It is nice to know that some central bankers, at least, understand how serious are the downside risks facing the world economy right now.
I am sure that our political leaders enjoyed their moment in the sun this spring as poster boys for austerity. But insofar as they contributed to a feeling that austerity was the right policy everywhere — and not just in basket cases like Greece and Ireland — they did their country a disservice. Far better to have a quiet word with their colleagues in more solvent states, pointing out to them our nine successive quarters of shrinking real GNP, and to say to them: this is what austerity can do, even in an economy as small and open as ours. Are you really sure you want to follow suit?
The FT is full of depressing news stories this morning, none of which are surprising.
In the US, a Tea Party candidate won the Republican nomination for the Senate elections in Delaware.
In France, Sarkozy suggested that Luxembourg (home of the Commissioner who sharply criticized him for the Roma expulsions) would do well to welcome a few Roma itself.
In Sweden, the Sweden Democrats, a party with roots in the neo-Nazi movement, may be on the brink of an electoral breakthrough that might see it hold the balance of power after the elections there.
And the Japanese decision to weaken the yen is provoking tension with Europeans and Americans.
Lots of zero sum thinking out there this morning: history rhyming.
This FT article is well worth reading. It asks a question I had been idly wondering about: is German growth just a reflection of Chinese growth? If so, then the issue of whether Chinese (or more broadly, perhaps, Asian) growth can become self-sustaining, or will continue to largely depend on sales to over-indebted American households, is a question with major implications for the European economy.
Update: I have just come across this piece by David McWilliams on similar themes. I guess the hope for Germany is that their growth is based on more, ultimately, than Chinese exports to the likes of us.
Barry Eichengreen and Peter Temin have written classic accounts of the Great Depression. If you haven’t read Golden Fetters, and Lessons from the Great Depression, you should.
But if you don’t have time for that, they have a piece on Vox which reprises the main conclusion of their work:
an international monetary system is .. a system in which countries on both sides of the exchange rate contribute to its smooth operation. Actions by surplus countries, and not just their deficit counterparts, have systemic implications. They cannot realistically assign all responsibility for adjustment to their deficit counterparts.
This is as true for EMU and “Bretton Woods II” as it was for Bretton Woods, or the Gold Standard, but it is a lesson that at times seems to have been completely forgotten.
Economic policy advice on reducing the risks to macroeconomic and financial stability from the housing market, restoring competitiveness and preparing to adjust in a downturn was available to the Government prior to the financial crisis.
In a research paper which I presented in the plenary session of the Annual Economic Policy Conference in Kenmare on 13 October 2006 (attended by a good number of senior civil servants), after discussing the adjustment mechanisms available to Ireland as a member of the European Economic and Monetary Union, I pointed out four main challenges facing the Irish economy and suggested a combination of policy measures to respond to these challenges. The four challenges that I identified were as follows:
a) maintaining a high potential output growth rate
b) restoring competitiveness
c) managing potential risks to macroeconomic and financial stability from the housing market
d) adjustment to a slowdown in the United States and an expected appreciation of the euro against the dollar
The policy measures suggested to respond to these challenges included the following:
a) fiscal tightening to reduce domestic demand pressures
b) a wage restraint in the public sector
c) fiscal measures to reduce the risks to macroeconomic and financial stability such as phasing out the tax relief on mortgage interest payments, a tax on imputed rents, a broader capital gains tax, or a property tax on vacant of secondary dwellings (as options available to the Government)
d) limits on the use of real estate as collateral to protect the banking system against over lending and bad loans
e) running a large fiscal surplus during the current boom to prepare for a downturn in the world economy
The Irish Times of 14 October 2006 covered extensively my main points. The paper was published in the Quarterly Economic Commentary in March 2007.
Martin Wolf has a really nice column here. For those of you who can’t access the article, the bottom line is that German and Asian savers have (via their banks) invested their savings in an exceptionally foolish manner — that is, by lending to the likes of us, to finance our excessive consumption habits. There is a clear possibility that they are, sooner or later, going to lose a lot of money as a result.
This brings to mind Keynes’ famous line that
“If the Grand Trunk Railway of Canada fails its shareholders by reason of legal restriction of the rates chargeable or for any other cause, we have nothing. If the underground system of London fails its shareholders, Londoners still have their underground system.”
At least 19th century Britain was investing in overseas railways, rather than in overseas housing bubbles!
One wonders whether the threat of ‘restructuring’ will eventually prompt the ants of Germany and Asia to start investing more of their savings in domestic investment projects, which might provide them with the foundations of sustainable growth.
The current issue of the New Yorker has a profile of Esther Duflo. In the article, the views of Angus Deaton on the limitations of randomised controlled trials are assessed as wondering if “someone put sand in Angus’s toothpaste”. Readers will find the offending substance here.
You will undoubtedly make your own assessment of the following direct quote from Duflo in the New Yorker piece: “I want a baby goat” she mused. “I’ll take good care of it”.
Given all the worries concerning the Eurozone right now, I thought it might be appropriate to post a link to this.
Paul Krugman and Robin Wells have a lengthy discussion of Reinhart and Rogoff here.
Barry and I have updated our graphs here.
To recall: the red lines show what happen when governments respond to a worldwide economic crisis with monetary and fiscal stimulus. The blue lines show what happens when governments stick to monetary and fiscal orthodoxy. All very purgative and morally satisying no doubt, except that it led directly to the election of Adolf Hitler (something that I have been meaning to blog about for a while, but now I have to prepare for class..)
Not wanting to be outdone by Martin Feldstein, Laurence Kotlikoff (recently based known for his Limited Purpose Banking proposals) is the latest US-based economist to bring his analytical skills to bear on the Greece’s problems to diagnose an instant solution:
Is there some way that Greece can devalue without devaluing?
There is, indeed. The government can implement wage and price controls for, say, the next three months, with these controls covering not just the growth in wages and prices over the next three months, but also their initial levels. Specifically, the Greek government would decree that all firms must lower their nominal wages and prices by 30 per cent, effective immediately, and not change them for three months. After three months, everyone would be free to put prices and wages back up.
This is an interesting proposal. Indeed, if this decree-based approach proves to be successful, it could then be applied to other areas. For instance, in the sphere of justice, the Greek government could decree that people should obey the ten commandments. And, if it works in Greece, we should try the decree approach here. After all, we’re all in favour of evidence-based policy formulation.