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.read more
Now that Janet Yellen is to be Chair of the US Federal Reserve Board, attention has turned to the candidate to succeed her as Vice Chair. Stanley Fischer would be the perfect choice. He has an ideal combination of all the desirable qualities, unique in the literal sense that nobody else has them. During his academic career, Fischer was one of the most accomplished scholars of monetary economics. Subsequently he served as Chief Economist of the World Bank, number two at the International Monetary Fund, and most recently Governor of the central bank of Israel. He was a star performer in each of these positions. I thought in 2000 he should have been made Managing Director of the IMF.read more
October 4 is the first Friday of the month, the day when the Bureau of Labor Statistics routinely reports the jobs numbers for the preceding month. Is the havoc created by our current political deadlock over fiscal policy showing up as job losses? We have no way of knowing. On October 1 the BLS closed for business, like many other “non-essential” parts of the government. There will be no more employment numbers until the shutdown ends.
Last week, Wall Street economic analysts responded to the usual surveys as to what they thought the upcoming employment numbers would be. (These surveys are what the media refers to each month when they tell you that employment rose or fell “more than economists expected.”) The median forecast in last week’s Bloomberg survey, for example, was a prediction that the BLS would report that “Payrolls increased by 175,000,” the biggest gain in four months. But there was no word on how many of the respondents recognized that there would in fact probably be no number at all on October 4, because the Labor Department would have been closed by the government shutdown.read more
Needless to say, the US has a long-term debt problem. The problem is long-term both in the sense that it pertains to the next several decades rather than to this year. (Indeed, the deficit/GDP ratio has been falling since 2009, despite the weakness of the economy.) The problem is also long-term in the sense that we have known about it for a long time; it was clear in 1991 and should still have been clear in 2001.
It should be almost as needless-to-say that the approaching debt ceiling bomb is not helpful in solving our fiscal situation, any more so than were previous standoffs: the January 1, 2013, fiscal cliff; before that, the August 2011 debt ceiling standoff, which led Standard and Poor’s to downgrade the credit rating of US debt for the first time in history; and before that, the 1995 shutdown of the government, which largely discredited Republican House Speaker Newt Gingrich.
The current debt ceiling bomb is, of course, another attempt to hold the country hostage under threat of blowing us all up. The conflict is usually phrased as a question of ideological polarization, a battle between fiscal conservatives and their opponents. This familiar frame does not seem right to me. There is in fact no correlation or consistency between the practice of federal fiscal discipline and the political rhetoric, either across states or across time.
Throughout history, big economic and political shocks have often occurred in August, when leaders had gone on vacation in the belief that world affairs were quiet. Examples of geopolitical jolts that came in August include the outbreak of World War I, the Nazi-Soviet pact of 1939 and the Berlin Wall in 1961. Subsequent examples of economic and other surprises in August have included the Nixon shock of 1971 (when the American president enacted wage-price controls, took the dollar off gold, and imposed trade controls), 1982 eruption in Mexico of the international debt crisis, Iraq’s invasion of Kuwait in 1990, the 1991 Soviet coup, 1992 crisis in the European Exchange Rate Mechanism, Hurricane Katrina in 2005, and US subprime mortgage crisis of 2007. Many of these shocks constituted events that had previously not even appeared on most radar screens. They were considered unthinkable.read more
- The Obama Recovery. The U.S. economy was in free fall in late 2008, whether measured by GDP statistics, the monthly jobs numbers, or inter-bank spreads. Was the end of the recession in mid-2009 attributable to policies adopted by President Obama? A full evaluation of that question to economists’ standards would require delving into the complexity of mathematical models. The public generally has a simpler standard: was the impact big enough to be visible to the naked eye? Amazingly, the answer is “yes.” Whichever of those statistics one looks at, and whether it is coincidence or not: the economic free-fall ended almost precisely the month that Obama took office, January 2009.
- Emerging markets have generally had much better economic fundamentals over the last decade than advanced economies. For example, one third of developing countries have succeeded in breaking the historical syndrome of procyclical (destabilizing) fiscal policy. For the first time, they took advantage of the boom of 2003-08 to strengthen their budget balances, which allowed a fiscal easing when the global recession hit in 2008-09.
- The 15-year cycle in EMs. Market swings that start out based firmly on fundamentals can eventually go too far. Some emerging markets like Turkey look vulnerable this year. A crash would fit the biblical pattern: seven fat years, followed by seven lean years. Here are the last three cycles of capital flows to developing countries:
- 1975-81: 7 fat years (“recycling petrodollars”)
- 1982: crash (the international debt crisis)
- 1983-1989: 7 lean years (the “Lost Decade” in Latin America)
- 1990-1996: 7 fat years (Emerging Market boom)
- 1997: crash (the East Asia crisis)
- 1997-2003: 7 lean years (currency crises spread globally)
- 2003-2011: 7 fat years (the triumph of the BRICs)
- 2012: ?
Emerging markets have performed amazingly well over the last seven years. They have outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios, and countercyclical fiscal policy. Many now receive better assessments by rating agencies and financial markets than some of the advanced economies.
As 2012 begins, however, emerging markets may be due for a correction, triggered by a new wave of “risk off” behavior among investors. Will China experience a hard landing? Will a decline in commodity prices hit Latin America? Will the sovereign-debt woes of the European periphery spread to neighbors such as Turkey in a new “Aegean crisis”?read more
THE BIGGEST THREAT TO THE GLOBAL ECONOMY IS …
Anti-market bias. -Bryan Caplan • Procrastination. -Peter Diamond • Short-term thinking. -Esther Dyson • A euro meltdown. -Dean Baker • Tax-cut fanatics. -Jeffrey Frankel • The bond market. -Andy Sumner •
MY OUT-OF-THE-BOX SUGGESTION TO REVIVE THE GLOBAL ECONOMY IS
Wipe out debts. -Daron Acemoglu • Require candidates for national office to pass ninth-grade tests on arithmetic, history, and geography. -Jeffrey Frankel • Double down on science. -Tyler Cowen • A government lottery where winners have mortgages, student loans, or other debt paid off. -Mark Thoma • We don’t need “out-of-the-box” solutions; we need “head-out-of-the-sand” ones. -Adam Hersh • Pray. -David Smick
The Hour of the Technocrats has arrived. In desperation from debt crises that their gridlocked political systems have created, Italy and Greece both in November chose new Prime Ministers who are technocratic economists rather than politicians: Mario Monti and Lucas Papademos, respectively. One can even describe them as professors: Monti has been president of the prestigious Bocconi University when not a European Commissioner in Brussels, and Papademos has been my colleague at Harvard Kennedy School in the year since he finished his term as Deputy Governor of the European Central Bank (even teaching a class I usually teach).read more
US News and World Report asks, “Who is handling its debt crisis better: Europe or the United States?” My answer follows.
In both Europe and the United States, the current public debt woes are attributable to mistakes made by political leaders going back more than a decade. In both cases the tremendous magnitude of the long-term debt problems has only become evident for all to see recently, by which time it was too late for the straightforward policy solutions that were viable options previously.read more