http://www.economist.com/blogs/democracyinamerica/2011/07/economic-recovery?fsrc=scn/tw/te/bl/americathesclerotic
http://www.project-syndicate.org/commentary/spence25/English
comments follow
America the sclerotic
Jul 15th 2011, 13:05 by W.W. | IOWA CITY
THIS column by Michael Spence, a Nobel-laureate professor of economics at NYU, struck me as an exceptionally sober way of saying, "Good god! We're screwed!"
Mr Spence emphasises the critical importance of institutional adaptability for emerging economies, most definitely including the adaptability of government. The development of an economy's private sector inevitably brings structural change in its wake. To facilitate and not stall growth, government's vital supporting policies and institutions must adapt to these shifts in the structure of the economy. "The policy framework that has proven to serve the major emerging economies best," Mr Spence reports, "is one that focuses not only on macro and monetary stability, but also on adaptation..."
Mr Spence observes that the governments of large, advanced economies have not made adaptation a priority. In particular, structural shifts in the global economy have been overlooked or ignored by American policymakers, leaving them more or less oblivious to role of these developments in our lingering economic malaise. It is no surprise, then, that the policy response to the great recession has been a bit misguided. Mr Spence offers a "small example":
[A]s recently as July 8, after the latest disappointing employment report in the United States, President Barack Obama expressed the widely held view that an agreement on the debt ceiling and deficit reduction would remove the uncertainty that is holding back business investment, growth, and employment. In other words, America's fiscal problems explain its extremely weak economic recovery. Once a fiscal deal is done, government can step aside and let the private sector drive the structural changes that are needed to restore a pattern of inclusive growth.
According to Mr Spence, misidentifying the fount of our woes creates bafflement over the weak or non-existence recovery. America's deep problem is not cyclical, and that's why conventional counter-cyclical fiscal and monetary treatments have not worked well. Mr Spence says the cyclical elements of the downturn "were accompanied by structural imbalances that had been building over at least 15 years, and that are at the heart of the US economy's inability to bounce back in a normal cyclical way."
Omens of imbalance abounded before the downturn, Mr Spence maintains:
A short list of these signals would include excess consumption (now gone) and deficient savings, based on an asset bubble and high debt; a persistent and growing current-account deficit (signaling that domestic consumption and investment exceeded income and output); and negligible net employment growth (over two decades) in the economy's tradable sector. ...
Missing all of these signals produced the pre-crisis illusion of sustainable growth and employment, and helps explain why the crisis, rather than its causes, is viewed as the culprit. The crisis, however, merely exposed the underlying imbalances and unwound some of them.
I would suggest that many of these signals were ignored, or explained away, because if they turned out to be symptoms of a real disease it wasn't very clear what could be done about it.
I think Mr Spence is right: pretty nearly everyone who matters has been underestimating the importance of the way structural transformation in the global economy has created structural dislocation in America's domestic economy. However, he leaves us with maddeningly general advice. According to Mr Spence "we require a shift to a policy framework that accurately reflects the non-cyclical nature of the longer-term structural adaptations that will be required to restore growth and employment." Well, yes. But I wouldn't mind hearing more about which structural adaptations "will be required".
In a recent post, Kindred Winecoff nicely articulates how the problem of structural adaptation relates to domestic distributive politics:
[A]t the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does.
The president can't just march into the rose garden one morning and announce that we will soon "shift to a policy framework" better adjusted to the fact of America's changed and changing role in the world economy. As Mr Spence says, emerging economies manage to emerge by prioritising adaptation. But adaptation is a way of saying "some pretty important things are going to have to change around here". That's a lot easier to hear when things around here aren't so great to start with, when the baubles of the rich world parade across your TV screen, and you're dying to get your hands on them. "Everything you have built your life around is about to change" is not so easy to hear when you're fat, complacent, monumentally entitled, and proud of it. Americans will for some time continue to resist the fact that we are poorer than we had thought. But it will soon sink in that American distributive politics is now less about who gets how much of the national bounty, and more about who loses how much—about who suffers how much from which broken promises.
http://www.project-syndicate.org/commentary/spence25/English
comments follow
America the sclerotic
Jul 15th 2011, 13:05 by W.W. | IOWA CITY
THIS column by Michael Spence, a Nobel-laureate professor of economics at NYU, struck me as an exceptionally sober way of saying, "Good god! We're screwed!"
Mr Spence emphasises the critical importance of institutional adaptability for emerging economies, most definitely including the adaptability of government. The development of an economy's private sector inevitably brings structural change in its wake. To facilitate and not stall growth, government's vital supporting policies and institutions must adapt to these shifts in the structure of the economy. "The policy framework that has proven to serve the major emerging economies best," Mr Spence reports, "is one that focuses not only on macro and monetary stability, but also on adaptation..."
Mr Spence observes that the governments of large, advanced economies have not made adaptation a priority. In particular, structural shifts in the global economy have been overlooked or ignored by American policymakers, leaving them more or less oblivious to role of these developments in our lingering economic malaise. It is no surprise, then, that the policy response to the great recession has been a bit misguided. Mr Spence offers a "small example":
[A]s recently as July 8, after the latest disappointing employment report in the United States, President Barack Obama expressed the widely held view that an agreement on the debt ceiling and deficit reduction would remove the uncertainty that is holding back business investment, growth, and employment. In other words, America's fiscal problems explain its extremely weak economic recovery. Once a fiscal deal is done, government can step aside and let the private sector drive the structural changes that are needed to restore a pattern of inclusive growth.
According to Mr Spence, misidentifying the fount of our woes creates bafflement over the weak or non-existence recovery. America's deep problem is not cyclical, and that's why conventional counter-cyclical fiscal and monetary treatments have not worked well. Mr Spence says the cyclical elements of the downturn "were accompanied by structural imbalances that had been building over at least 15 years, and that are at the heart of the US economy's inability to bounce back in a normal cyclical way."
Omens of imbalance abounded before the downturn, Mr Spence maintains:
A short list of these signals would include excess consumption (now gone) and deficient savings, based on an asset bubble and high debt; a persistent and growing current-account deficit (signaling that domestic consumption and investment exceeded income and output); and negligible net employment growth (over two decades) in the economy's tradable sector. ...
Missing all of these signals produced the pre-crisis illusion of sustainable growth and employment, and helps explain why the crisis, rather than its causes, is viewed as the culprit. The crisis, however, merely exposed the underlying imbalances and unwound some of them.
I would suggest that many of these signals were ignored, or explained away, because if they turned out to be symptoms of a real disease it wasn't very clear what could be done about it.
I think Mr Spence is right: pretty nearly everyone who matters has been underestimating the importance of the way structural transformation in the global economy has created structural dislocation in America's domestic economy. However, he leaves us with maddeningly general advice. According to Mr Spence "we require a shift to a policy framework that accurately reflects the non-cyclical nature of the longer-term structural adaptations that will be required to restore growth and employment." Well, yes. But I wouldn't mind hearing more about which structural adaptations "will be required".
In a recent post, Kindred Winecoff nicely articulates how the problem of structural adaptation relates to domestic distributive politics:
[A]t the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does.
The president can't just march into the rose garden one morning and announce that we will soon "shift to a policy framework" better adjusted to the fact of America's changed and changing role in the world economy. As Mr Spence says, emerging economies manage to emerge by prioritising adaptation. But adaptation is a way of saying "some pretty important things are going to have to change around here". That's a lot easier to hear when things around here aren't so great to start with, when the baubles of the rich world parade across your TV screen, and you're dying to get your hands on them. "Everything you have built your life around is about to change" is not so easy to hear when you're fat, complacent, monumentally entitled, and proud of it. Americans will for some time continue to resist the fact that we are poorer than we had thought. But it will soon sink in that American distributive politics is now less about who gets how much of the national bounty, and more about who loses how much—about who suffers how much from which broken promises.
