Game Changers for Growth

Laura Tyson

31 July 2013

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BERKELEYThe recent G-20 meeting of finance ministers in Saint Petersburg confirmed that the debate between growth and austerity is overat least for now. With protracted recession in Europe and slowdowns in emerging markets, concern about budget deficits has given way to apprehension about growth. In July, the International Monetary Fund revised its global growth forecast downward for the second time this year.
Both Japan and the United States stand out as bright spots in the subdued global outlook, but for different reasons. In Japan, Prime Minister Shinzo Abe has unleashed a combination of aggressive monetary and fiscal expansion along with promised reforms of the labor market, corporate governance, regulation, and trade.
In response to rapid and bold stimulus measures, Japan’s economy is expected to grow at a rate of around 3% this yearone of the highest rates among advanced economies – and the Nikkei index rose 80% in the six-month period ending in May of this year. Now Abe has signaled his intention to move forward with tough structural reforms. If he delivers, his policies will be game changers for Japan.
In the US, the story is one of continued recovery as the headwinds slowing growth dissipate. State- and local-government budgets are improving, the housing market is strengthening, and households are deleveraging and repairing their balance sheets.
Counterproductive and excessive fiscal austerity at the federal level has dampened growth this year, but the private sector has proved more resilient than expected. Under current law, fiscal contraction is slated to ease next year and monetary policy is likely to remain supportive, so most forecasters predict an acceleration of growth.
But growth prospects could be undermined by another bruising political battle over the federal budget, resulting in deep spending cuts. The current Republican rhetoric in the House of Representatives portends additional fiscal austerity.
Earlier this year, the Congressional Budget Office warned that the potential US growth rate has declined as a result of years of subpar investment rates, the aging of the population, and smaller productivity gains. Every year of below-capacity growth means lower growth capacity in the future, owing to lost investment, erosion of worker skills and experience, and diminished risk-taking.
Still, there are often-overlooked reasons for optimism about America’s future potential growth. A recent McKinsey Global Institute study identifies five mutually reinforcinggame changers” that could have a significant effect on GDP growth, productivity, and employment in the US by 2020: shale energy, big-data analytics, exports in knowledge-intensive industries, infrastructure investment, and talent development. Two of theseshale energy and big-data analyticsbuild on ongoing technological breakthroughs in which the US has a strong lead and depend primarily on private-sector action, not macroeconomic or structural policies.
US production of shale gas and oil has been growing by more than 50% annually over the last five years. As a result of increasing supplies, US natural-gas prices have declined by two-thirds since 2008 and are likely to remain significantly lower than prices in the rest of the world at least through 2020. This price advantage will enhance America’s competitiveness as a manufacturing location, particularly for energy-intensive activities.
The US has the largest recoverable shale-gas reserves and the second-largest recoverable shale-oil reserves in the world. It also enjoys a technological lead in shale-energy technologies, and it already has a vast network of pipelines, refineries, and ports in the energy sector that can be repurposed for shale gas and oil (though much more investment will be needed).
Growth in shale energy will mean more investment, production, and jobs in the energy sector itself. Lower gas prices will boost manufacturing production, particularly in downstream industries like petrochemicals and primary metals that use natural gas as fuel and feedstock.
Growth in energy and energy-intensive industries will fuel additional demand, output, and employment across a wide swath of supporting activities, including transportation, construction, and professional services. Overall, McKinsey estimates that growth in shale energy could add 2-4% to annual GDP and create up to 1.7 million jobs by 2020.
But extracting shale energy involves environmental risks and uncertainties, among them groundwater contamination, higher methane emissions, and potential seismic effects. And shale gas emits CO2 when burned, even though it has half the carbon content of coal and has played a significant role in cutting US carbon emissions to mid-1990’s levels.  
Not surprisingly, the President of the Natural Resources Defense Council, an admired environmental group, recently remarked that “fracking is about the most complicated thing I have encountered.” More research on the environmental risks and benefits of shale energy, and the development of new standards and regulations to control these risks are required.
Big data and advanced analytics are another technology-driven game changer for US growth. As more data are generated, stored, and transmitted in digital form, new data sets relevant to personal and business decisions are growing exponentially. As a result of advances in computing power, the advent of cloud computing, and new software tools, more of these data sets can be quickly analyzed and used by businesses to reduce costs, boost productivity, and create new products and services.
Big data and advanced analytics can also reduce costs and enhance efficiency in health care and government, and can create value for consumers through greater product variety and quality, as well as enhanced conveniencebenefits that are not captured in GDP statistics.
McKinsey estimates that big-data analytics could add about $325 billion, or 1.7% to annual GDP in the retail and manufacturing sectors, while generating up to $285 billion in productivity gains and cost savings in health care and government by 2020. The potential savings in health-care costs would ease pressures on government budgets and release resources to boost growth in the rest of the economy.
New information and communications technologies were game changers that boosted the potential growth rate of the US economy in the 1990’s. McKinsey’s research suggests that shale energy and big-data technologies will be game changers with similar benefits for the economy’s potential growth over the next several years.
Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

Greece should defy the gunboat creditors

By Ambrose Evans-Pritchard

Last updated: August 1st, 2013

Photo: AP

The IMF’s latest report on Greece lays bares the country’s grotesque situation, and exposes the charade of EMU policy.

It states that public debt will reach 176pc of GDP this year, despite the haircut already imposed on pension funds, insurers and sovereign wealth funds (Norway for instance) who loyally stood behind Greece after categorical assurances by EMU leaders that Europe would never let an EMU sovereign state default.

The debt level is supposed to return to 124pc by 2020; a figure for some reason deemed sustainable. Such a feat is obviously preposterous in an economy that is still contracting violently, has seen a decline in exports over the last year, still has a structural current account deficit of 6pc, and (in my view) still has a badly over-valued currency. This target can be achieved only by massive debt write-downs.

“The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program,” said the Fund.

The IMF’s mission chief Poul Thomsen was explicit yesterday, saying the only question is how much it will have to be. There is already an €11bn shortfall to meet targets by the end of the year, but that is a fraction of the losses that must inevitably come.

Yet German Chancellor Angela Merkel insists there can be no second package of debt relief. She knows all too well that the next haircut is for German taxpayers — and of course Dutch, Finnish, Austrian, French, Italian, and Spanish taxpayers — who have yet to suffer one bent Pfennig in losses from all the EMU guarantees handed out like confetti.

All EMUsolidarityso far has been in the form of loans, adding further debt. There have been no grants or transfers. The rhetorical pledges to save the euro have been entirely cost-free for taxpayers of the creditor states. The moment that this starts to cost real money, we will enter a new phase of the EMU saga. That is why Greece remains neuralgic, even if it is completely insignificant (apologies to Greek friends) in global macro terms.

At that point, Mrs Merkel will have to explain to the Bundesbank why large losses will have to be written into the budget, and why other line items may have to be cut: perhaps social welfare benefits in Ruhr. She will have to explain why the liability ceiling of €211bn for EMU rescues agreed with such solemnity — after furious debate — has been breached.

This cannot be countenanced before the German elections in September, and for the sake of appearances it cannot be carried out immediately afterwards either. That would be too cynical. So the ghastly decision has been quietly deferred to some vague point in 2014, and even then it may not happen unless the Greeks start playing rough.

So Greek society continues to be broken on the wheel to suit the electoral calendar of northern Europe, and because Greece’s own ruling elites still refuse to acknowledge that continued membership of EMU is blocking recovery.

The IMF admitted in its famous mea culpa earlier this year that the Troika bail-outs had been scandalously botched, that the growth forecasts had been delusional, that loans been disbursed (the biggest in IMF history as the share of any country’s quota), in violation of three of the IMF’s four key guidelines on rescue packages, and that the whole policy was designed to save the euro, not to save Greece.

In other words, they admitted that the Fund had allowed itself to be hijacked by European politicians, for the benefit of the European Project. Yet having bravely come clean, they are still playing along with this game. Let us hope that this dirty episode does not destroy a splendid organisation that has served the world well (with hiccups, like East Asia in 1998) since the Second World War.

The IMF says Greek GDP has already contracted 25pc since the peak in 2007. It expects the economy to contract by 4.2pc this year, with tentative recovery of 0.6pc next year.

Well perhaps, but the Greek think tank IOBE expects GDP to fall by 5pc this year, and it has been far more accurate throughout this crisis. Its latest report says “sudden death” has been prevented by the Troika, but little else.

Stabilisation is a relative concept. Private consumption contraction is likely to intensify during the current year to reach around -9.0%. The fall of investment is expected to reach about 10%. The illusion that the threat of economic collapse has irreversibly passed should be avoided."

One gets the impression that the external partners and large sections of the Greek economy and society more easily accept the solution of adjustment through deep recession than active policies that will remove the key weaknesses of the economy.”

“The restructuring of the public sector has made a minimal progress, while the relationship of the public administration with the general public and the business sector, a major weakness in the past, has not been put on new foundations. The downsizing of the public sector through horizontal cuts of wages and jobs certainly provides a fiscal respite, however it is not sufficient in order to improve its efficiency. Moreover, the tax system has not yet become more simple, stable and transparent.

The restructuring of the mechanism for tax collection and audit has not made much progress. The full computerisation and linking of the information systems of the public institutions has not been completed. Red tape, overregulation and ambiguous and uncertain legislative framework still create an unbearable burden on the households and the enterprises, while the justice system has not improved significantly.”

You get the drift. The Troika is nothing more than an enforcer for the northern creditor powers, insisting on its pound of flesh, and the rest is eyewash. Lord Palmerston used gunboats. Less hypocrisy, same objective.

Professor James Galbraith has an excellent piece here on Naked Capitalism. He makes the point that Gazprom pulled out of the privatisation deal for Greece’s gas monopoly quite correctly because it did not believe the underlying economic assumptions supposed to underpin the future income stream.

“And did I mention that this is a gas monopoly? We are talking here about a reasonable projection on the part of a competent firm that the economy underpinning the revenue stream of the gas monopoly is failing. Right? It doesn’t take much if we ask ourselves, on what basis does a rational government sell a gas monopoly for cash? The only reasonable answer is: When it needs cash immediately and does not expect to survive for very long, because a gas monopoly is a revenue stream that goes on forever unless you sell it, in which case it goes away. It’s just crystal clear what the situation is from the eyes of the government of Greece at the present time.

Now when they fail to sell the gas monopoly, then on six hours’ notice with no cabinet discussion and no parliamentary debate and no vote, they shut the state radio and television, ostensibly to save 200 to 250 million euros over the course of a year in order to satisfy an arbitrary demand for that amount from the Troika, and to show how tough and resolute they were.

Well, the Greek people said, no, that’s enough. That’s enough. You can put up with a lot of privation, but you cannot put up with a direct attack on the onehowever flawedinstitution of public discourse that the country actually has. You can’t do it, so the journalists took over the buildings, the trade unions kept the power on, and the crowds went outside to protect them. It was fantastic.

But it was something that really tells you you’re not far away from the brink. And there are more things that can and will happen over time, but you’re not far away from having a confrontation that will lead to a real, let’s say, breaking point.”

Quite so. Nothing whatsoever has been resolved, either in Greece, or in Portugal, or in Cyprus, or in Spain, or in Italy. Nor will there be under the current contractionary policy structure. There is no Deus Ex Machina.

These nations will remain trapped in slump and mass unemployment until they take matters into their own hands, form a debtors cartel, confront the head-on gunboat creditors from a position of strength, and dictate the outcome. But first they have to defenestrate out their own cowed elites.

Revised US data paint better picture of economy last year; broader trends little changed

By Associated Press,

Published: July 31


WASHINGTONThe government says the U.S. economy grew at a much faster pace last year than previously estimated. The revised growth figures signal a more sustainable economic recovery and help explain why job growth has accelerated this year.

The economy expanded at a 2.8 percent annual rate in 2012, up from a previous estimate of 2.2 percent. Consumers and businesses spent more and governments cut back on their spending less.
The updated growth figures reported Wednesday by the Commerce Department are part of comprehensive revisions going back several decades.

The upgrade to 2012 growth helps resolve a disparity that has puzzled economists. Hiring picked up late last year and has remained solid this year. The economy has created more than 200,000 jobs a month on average since last fall.

Yet the government had said that economic growth was tepid last year. Faster growth typically drives more hiring. The previously reported growth figures had economists worried that employers would eventually have to slow hiring.

But growth is now closer in line with the job gains, a sign that the more robust hiring may endure.
The revisions are part of comprehensive changes, made roughly every five years, to the nation’s gross domestic product.

GDP is the broadest measure of the output of goods and services and includes everything from restaurant meals to television production to steel manufacturing. The revisions alter the data all the way back to 1929, though the largest changes were made to the past five years.

Still, the economy’s broad trends are roughly the same as before. The government now says the economy shrank 4.3 percent during the recession, which lasted from December 2007 through June 2009. That’s better than the previous estimate of a 4.7 percent decline. But it still remains the deepest downturn since the Great Depression.

And the recovery is still subpar. The economy expanded 8.2 percent from June 2009 through the end of last year, up from 7.6 percent, but still the weakest recovery since World War II.

Most of the change in growth rates stems from newly available and updated data from agencies such as the Census Bureau and Internal Revenue Service. Many monthly surveys of manufacturing, retail and other businesses are updated with more comprehensive annual reports.

The department has also made substantial alterations in how it defines GDP. Those changes have increased the size of the economy, through 2012, by 3 percent, or $560 billion. They include:

Research and development spending is counted as an investment, rather than an expense. That’s because it is similar to other investments, such as factories, industrial machinery and housing, Commerce officials say. R&D can have long-lasting benefits and be used in the production of other items.

Spending on entertainment and the development of movies, books, music and TV shows are counted as investments. That’s because they can generate sales and profits for years after they’ve been produced. Only long-lasting TV shows, such as sitcoms and dramas, are counted as investment. Reality shows and game shows, which have shorter shelf lives, aren’t.

Future pension benefits promised by governments and private companies are counted as income. Previously, only cash payments by companies and government agencies into their pension plans counted as income. This change boosted Americans’ savings rate by about 1.5 percentage points in 2011 and 2012 — to 5.6 percent and 5.7 percent, respectively. The government says the change better reflects the retirement plans of those Americans with pensions and is less subject to manipulation than the cash payments.

Economists say that treating R&D spending as investment recognizes the critical role that intangible assets, such as patents or other intellectual property, now play in the U.S. economy.

“It brings the GDP accounts out of the dark ages and into the 21st century,” says Joe Carson, an economist at AllianceBernstein.

Carson notes that much of the value of a smartphone is in the design, rather than the manufacture of the product, and that wasn’t fully captured under previous calculations.

Copyright 2013 The Associated Press. All rights reserved.