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June 8, 2010

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Posted: 07 Jun 2010 11:05 PM PDT

"Can Emerging Markets Save the World Economy?"

Posted: 07 Jun 2010 08:19 PM PDT

Michael Spence and Mohamed El-Erian argue that we can be fairly certain that emerging economies will do their part to keep the world economy growing, the problem is the developed economies:

Can Emerging Markets Save the World Economy?, by Mohamed A. El-Erian and Michael Spence, Commentary, Project Syndicate: Over the past two years, industrial countries have experienced bouts of severe financial instability. Currently, they are wrestling with widening sovereign-debt problems and high unemployment. Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today's global economy. ...
So it is important to know whether this breakout growth phase is sustainable. The answer comes in two parts. One depends on emerging economies' ability to manage their own success; the other relates to the extent to which the global economy can accommodate this success. The answer to the first question is reassuring; the answer to the second is not.
While still able to exploit the scope for catch-up growth, emerging economies must undertake continuous, rapid, and at times difficult structural change, along with a parallel process of reform and institution building. In recent years, the systemically important countries have established an impressive track record of adapting pragmatically and flexibly. This is likely to continue. ...
Overall, emerging economies are well placed to continue to navigate successfully a world rendered unstable by crises in industrial countries. Yet, again, the decoupling is not complete. A favorable outcome also requires industrial countries' ... to accommodate the growing size and prominence of emerging economies. The risks here are significant...
[When] advanced countries have stubbornly high unemployment and bouts of financial volatility..., growth in the global economy comes to be seen as a zero-sum game, leading to suboptimal reactions. As a result, the continued openness of industrial-country markets cannot be taken for granted. ...
And then there is the issue of global institutions and governance. Managing a growing and increasingly complex set of transnational connections is an even bigger challenge in a multi-speed world that is being turned upside down. Such a world requires better global governance, as well as overdue institutional reforms that give emerging economies proper voice and representation in international institutions.
In the absence of such changes, the global economy may bounce from one crisis to another without a firm hand on the rudder to establish an overall sense of direction. ...
Where does all this leave us? Emerging economies will be called on to play an even larger role in a multi-speed global economy characterized by protracted rehabilitation of over-extended balance sheets in industrial countries. Left to their own devices, they are up to the task. But they do not operate in a vacuum. Emerging economies' ability to provide the growth lubrication that facilitates adjustment in industrial countries is also a function of the latter countries' willingness to accommodate tectonic shifts in the operation and governance of the global economy. Let us hope that these global issues receive the attention they require.

The political problem will, I think, take care of itself. As the developing countries grow and gain economic power, and they will whether developed economies like it or not, the political and institutional power will follow. The old institutions will either change with the shifting global economy, or be replaced by new ones. I don't think developed economies will have any choice except to "accommodate tectonic shifts in the operation and governance of the global economy." For one, corporations of today do not have traditional national boundaries, and the globalization of production cannot be easily reversed. We can make it hard, or we can accept the inevitable. Other countries are starting to grow up, and we will have to begin treating them like adults. That means, among other things, giving them a seat at the big table.

"We Need Bigger Deficits Now!"

Posted: 07 Jun 2010 02:19 PM PDT

Brad DeLong says that extraordinarily low interest rates, the absence of any hint of expected inflation, and the continuing difficulties in labor markets make the case for more stimulus spending very strong:

We Need Bigger Deficits Now!, by Brad DeLong: We Are Live at The Week: As the disappointing May job numbers confirm, this is still an exceptional time—a time in which many of the normal rules of the Dismal Science are changed and transformed. It is a time for not normal economics but rather "depression economics." The terms on which the U.S. government can borrow now are exceptionally advantageous. And because of high unemployment the benefits of boosting government purchases and cutting taxes right now are exceptionally large.

The result is that the costs of borrow-and-spend policies are overturned for the short run... In normal times, a boost to government purchases or a cut in taxes ... raises interest rates, which crowds out productivity-increasing private investment spending and, dollar for dollar, leaves us poorer after the effect of the stimulus ebbs. The borrowing must then must be financed at a significant interest rate, and thus paid for with higher taxes, which reduce incomes by increasing the wedge between the private rewards and the social benefits of expanded production. ...

Normally, only government spending initiatives or tax cuts that promise a high value for the dollar are worth undertaking, but things are different now. However, right now, as best we can tell, an increase in federal spending or a cut in taxes will produce (in the short run) no increase in interest rates and hence no crowding-out of productivity-increasing private investment. Indeed, government spending that adds to firms' current cash flow may well boost private investment and so leave us, dollar for dollar, richer after the effect of the stimulus ebbs.


Because our debt today can be financed at extremely low interest rates—1.83 percent if financed via 30-year TIPS, and even less in expected real interest if financed over a shorter horizon. In normal times, only government spending initiatives or tax cuts that promise a high value for the dollar are worth undertaking. Now, however, things are very different. Let's run through the arithmetic. [lots or arithmetic]...

Now, net all this out.

The increased cash flows to businesses boost future private-sector incomes by $1 billion a year. The costs of amortization reduce them by $1.07 billion a year. The net cost? $70 million per year. So to gain $150 billion of increased production and incomes this year we incur a $70 million a year cost going forward. That means that using expansionary fiscal policy to boost output today is an investment worth doing at any interest rate greater than 0.05 percent per year.

That is not quite a free lunch—they take away my union card as an economist if I start claiming that free lunches exist. But it is certainly a value meal. We are getting more income and employment now—when we really need it—in return for sacrificing only a tiny bit of production each year in the future, when we believe that we will be richer and will mind the reduction significantly less.

The Limits of Depression Economics:

Thus it is a no-brainer that we ought to be doing more fiscal stimulus. ... The argument for more spending is airtight as long as the arithmetic holds out. That is, until:

  • further increases in the deficit lead to rising expectations of inflation, leading the Federal Reserve to raise short-term interest rates, which then crowds out private-sector investment spending;


  • further increases in the deficit lead to pressure on the federal government's debt capacity, so that we can no longer finance additional federal government debt at such extraordinarily advantageous interest rates.

Back in December 2008 the incoming Obama National Economic Council feared that an increase in the proposed size of the Obama stimulus program, the ARRA, from $800 billion to $1.2 trillion would bring these factors into play. It is now clear that they were overly pessimistic, in large part because they were overly optimistic about the state of the economy.

Right now, bad politics is undermining good policy, hurting the American economy and legions of unemployed workers. It is long past time for another stimulus package.

And Up from the Depths Came a Bubblin' Crude

Posted: 07 Jun 2010 01:08 PM PDT

Use the play button at the bottom to avoid triggering the pop-up.

Any comments on the spill?

Do Census Jobs Count?

Posted: 07 Jun 2010 11:25 AM PDT

Just posted at MoneyWatch:

Do census jobs count?

I argue the answer depends upon the question we are asking, but yes, these jobs count in an important way.

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