Why Do Economies Stop Growing?
23 May 2012
MILAN – Over the years, advanced and developing countries have experimented, sometimes deliberately and frequently inadvertently, with a variety of approaches to growth.
Unfortunately, many of these strategies have turned out to have built-in limitations or decelerators – what one might call elements of unsustainability. And avoiding serious damage and difficult recoveries requires us to get a lot better at recognizing these self-limiting growth patterns early on.
It is better to allow specialization, and build effective social safety nets and support systems to protect people and families during economic transitions. Such “structural flexibility” is better adapted to enabling the broad changes that rapidly evolving technological and global economic forces require.
While people in a wide range of countries accept some degree of market-determined income variation, based on differential talents and personal preferences, there are limits. When they are breached, the typical result is a sense of unfairness, followed by resistance and, ultimately, political choices that address the inequality, though sometimes in counter-productive, growth-impeding ways.
Michael Spence, a Nobel laureate in economics, is currently Chairman of the Commission on Growth and Development, an international body charged with charting opportunities for global economic growth. He is also Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, and Senior Fellow at the Hoover Institution at Stanford University. He was previously Dean of Stanford’s School of Business and Professor of Economics at Harvard University.
May 22, 2012 7:24 pm
Sensible Keynesians see no easy way out
By Raghuram Rajan
The first is in a fully fledged panic where demand collapses, banks and companies fail and organisational capital is destroyed. Save, possibly, for Greece, it is hard to argue any industrial country is there today.
The second is when persistent high unemployment leads the long term unemployed to lose the habits and skills that make them employable. This is probably the more pertinent case in several industrial countries, such as the US and Spain. Increasing employment in a sustainable way today could more than pay for itself if people who would otherwise drop out of the workforce earn incomes.
The key question then is whether more government spending can make a real difference to the most severe employment problems. Here the case for a general stimulus becomes less compelling. In the US, demand is weakest in communities where a boom and bust in house prices has left an overhang of household debt. Lower local demand has hit employment in industries such as retail and restaurants. A general increase in government spending may be too blunt – greater demand in New York is not going to help families eat out in Las Vegas (and hence create more restaurant jobs there). Targeted household debt write-offs in Las Vegas could be a better use of stimulus dollars.
However, the past build-up of debt in now depressed areas may suggest that demand was too high relative to incomes. If so, demand, without the dangerous stimulant of borrowing, will stay weak.
Policy should instead help workers move where there are suitable jobs – for instance, by helping them offload their homes and the associated debt without the stigma of default.
Employment is also lower in states that experienced a housebuilding bust. In these states, unemployment is higher among construction workers and in related jobs such as real estate brokerage.
Could big publicly funded infrastructure projects, modelled on those in the 1930s, re-employ them? Possibly not, since today’s built-up US is less in need of infrastructure on that scale. Moreover, it is not clear that a worker used to putting up drywall can move easily to laying fibre-optic cable. Perhaps it would be better policy to support retraining for private jobs.
Japan, which had a huge property boom and bust in the late 1980s, provides a salutary warning of the difficulties of stimulus through infrastructure spending. Even though Japan covered much of the country with concrete, it never fully emerged from the crisis. For the Japanese, the long run has arrived, and they are older, fewer and have the highest government debt in the G7.
.The US government can still spend. The UK is more on the margin. With a huge financial sector dependent on the government’s financial standing, it can take fewer chances with its finances.
Austerity is painful, which is why austerity tomorrow is not credible. Yet shared tax increases and spending cuts can instil a sense of national purpose to help a country weather tough times.
For Greece, government spending is the problem, not the solution. A responsible government would implement judicious austerity, firing the party hacks who were hired in the go-go years, cutting wages and pensions and restructuring itself to collect taxes and provide useful services, even while retaining transfers to the indigent and elderly. As public sector workers share the private sector’s pain, national solidarity could improve. Also, improved government efficiency and other structural reforms will make it easier for Europe to provide the financing that will prevent even more savage cuts to government functions. And it will make it easier to write down Greek debt further and attract private investment, giving people hope of growth.
Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery. But we should examine each policy based on a country’s circumstances. We should be particularly wary of populist Keynesians, who parrot “in the long run we are dead” to justify any short-sighted government action.
They do the world a disservice by suggesting there are easy ways out. By misleading people and their leaders, they may well precipitate revolution rather than recovery.
The writer is a professor at the University of Chicago’s Booth School
05/23/2012 12:53 PM
German Central Bank Issues Zero-Rate Bonds.
For the first time in history, Germany issued long term bonds with a zero percent coupon rate on Wednesday. The demand reveals the deep concerns investors have about the euro zone and their desire for a safe place to park their capital -- even if it costs them money to do so.
For now at least Germany and Greece share the same currency. But don't tell that to investors. On Wednesday the German Finance Ministry pulled off a remarkable feat for a country in a threatened currency union: It issued €4.6 billion of two year bonds with a rate of zero percent. In other words, once inflation is factored in, investors are essentially paying to park their money with the German government.
Because of the strength of its economy, Germany has emerged as a significant benefactor from the problems being experienced by Greece as well as Spain, Italy and Portugal. In Greece worries that a government uncooperative with the European Central Bank could come to power after next month's election forcing an exit from the euro zone has investors as well as ordinary citizens pulling their money out in droves. In Spain concerns over the health of the banking sector have driven up borrowing costs.
According to German officials on Wednesday, demand for the zero percent bonds was robust and added that Germany does not intend to offer up bonds with a negative interest rate. "As such, a coupon of zero percent is the lower limit," Reuters quoted a finance official as saying.
Still, it seems likely that, with investors looking for safe havens for their money, even negative interest rate bonds might sell. "Many investors are putting their money only in places where they are guaranteed to get it back," Commerzbank analyst Alexander Aldinger told the Berliner Morgenpost. "For a large degree of security, investors are willing to give up returns."
Even while borrowing costs have spiked in other euro-zone countries, rates on shorter term German bonds have already hit zero and even ventured into negative territory, meaning investors have been paying the German government to hang on to their cash. Rates on longer-term bonds have been trading consistently below the rate of inflation.
The zero percent bond issue is just the latest sign that concern about the crisis facing Europe's common currency is rampant. As are worries that the situation could become much worse before it gets any better.
In this season of concern, low interest rates on two-year bonds are hardly out of the ordinary as investors focus more on conserving capital than growing it. US two-year bonds offer an interest rate of 0.29 percent while the same bonds in Japan produce a 0.1 percent rate. According to the German daily Frankfurter Allgemeine Zeitung, the Finance Ministry in Berlin won't say whether future bond issues will also be at zero percent.
Yet even as investors seek safety, analysts are concerned that the low interest rates will produce a bubble. "If this isn't a speculation bubble, then I don't know what a speculation bubble is," Marc Oswald, research analyst at Monument Securities, told the Berlin daily Morgenpost. He expects the move to drive investors towards hard assets like real estate, gold and art. Pension funds and other institutional investors will suffer, however, as they are required to put a certain percentage of their assets into state bonds.
Oswald also says that the move is a sign that paper money has no meaning anymore. Pretty soon, he says, central banks could be forced to step back in time to the 1970's when gold anchored paper money.
© SPIEGEL ONLINE 2012
Is China running out of options?
May 23, 2012
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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