Italians and the world have now been told that their economy slipped back into recession in the first half of 2014. This characterization is based on the criterion for recession that is standard in Europe and most countries: two successive quarters of negative growth. But if the criteria for determining recessions in European countries were similar to those used in the United States, this new downturn would be a continuation of the 2012 recession in Italy, not a new one. A common-sense look at the graph below suggests the same conclusion: the 2013 “recovery” is barely visible.
After the recent Draghi press conference announcing new measures to ease monetary policy in euroland, I responded to live questions from the Financial Times: “The ECB Eases,” podcast, FT Hard Currency, June 5, 2014 (including regarding my proposal that the ECB should buy dollar bonds).
And also to questions in writing from El Mercurio, June 5:
• Many critics point that these measures do not solve the economic problems of the Eurozone and in that they only benefit the financial markets. Do you agree?
The ECB should further ease monetary policy. Inflation at 0.8% across the eurozone is below the target of “close to 2%.” Unemployment in most countries is still high and their economies weak. Under current conditions it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% euro-wide, then the periphery countries have to suffer painful deflation.
Markets can fail. But market mechanisms are often the best way for governments to address such failures. This has been demonstrated in areas from air pollution to traffic congestion to spectrum allocation to cigarette consumption. Markets for emission allowances – in which those firms that can cheaply cut pollution trade with those that cannot – achieve desired environmental goals at relatively low economic costs. As of a decade ago, that long-standing economic proposition had become widely recognized and put into action. Yet the political tide on both sides of the Atlantic has been against “cap and trade” over the last five years.
A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress. This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership.
The IMF reform would have been an important step in updating the allocations of quotas among member countries. From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power. (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.) But one would then be wrong. The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other Emerging Market countries, coming largely at the expense of European countries. The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.
On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the European Union. China agreed to constrain its exports to a minimum price and a maximum quantity. The solution is restrictive relative to the six-year trend of rapidly rising Chinese market share (which had reached 80% in Europe), and plummeting prices. But it is less severe than what had been the imminent alternative: EU tariffs on Chinese solar panels had been set to rise sharply on August 6, to 47.6%, as the result of a “finding” by the EU Trade Commissioner that China had been “dumping.” The threat of likely retaliation by China helped persuade the Europeans to back off from their determination to impose such high protective walls around their own solar panel industry.
The recent release of a revised set of GDP statistics by Britain’s Office for National Statistics showed that growth had not quite, as previously thought, been negative for two consecutive quarters in the winter of 2011-12. The point, as it was reported, was that a UK recession (a second dip after the Great Recession of 2008-09) was nowerased from the history books — and that the Conservativegovernment would take a bit of satisfaction from this fact. But it should not.
Several of my colleagues on the Harvard faculty have recently been casualties in the cross-fire between fiscal austerians and stimulators. Economists Carmen Reinhart and Ken Rogoff have received an unbelievable amount of press attention, ever since they were discovered by three researchers at the University of Massachusetts to have made a spreadsheet error in the first of two papers that examined the statistical relationship between debt and growth. They quickly conceded their mistake.
Then historian Niall Ferguson, also of Harvard, received much flack when — asked to comment on Keynes’ famous phrase “In the long run we are all dead” — he “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.”
An amazing thing has happened over the last five years. Against all expectations, American emissions of carbon dioxide into the atmosphere, since peaking in 2007, have fallen by 12%, back to 1995 levels. (As of 2012. US Energy Information Agency). How can this be? The United States did not ratify the Kyoto Protocol to cut emissions of greenhouse gases below 1997 levels by 2012, as Europe did.
Was the achievement a side-effect of reduced economic activity? It is true that the US economy peaked in late 2007, the same time as emissions. But the US recession ended in June 2009 and GDP growth since then, though inadequate, has been substantially higher than Europe’s. Yet US emissions continued to fall, while EU emissions began to rise again after 2009 (EU). Something else is going on.
There is a danger that some investors will lose sight of the purpose of a benchmark index. The benchmark exists to represent the views of the median investor dollar. For many investors, going with the benchmark is a good guideline – especially those who recognize themselves to be relatively unsophisticated and also those who think they are sophisticated but really aren’t. This is the implication of the Efficient Markets Hypothesis (EMH), for example.