Thursday, November 27, 2014

A Year on the Brink

NEW YORK – The year 2012 turned out to be as bad as I thought. The recession in Europe was the predictable (and predicted) consequence of its austerity policies and a euro framework that was doomed to fail. America’s anemic recovery – with growth barely sufficient to create jobs for new entrants into the labor force – was the predictable (and predicted) consequence of political gridlock, which prevented the enactment of President Barack Obama’s jobs bill and sent the economy toward a “fiscal cliff.”

The two main surprises were the slowdown in emerging markets, which was slightly sharper and more widespread than anticipated, and Europe’s embrace of some truly remarkable reforms – though still far short of what is needed.

Looking to 2013, the biggest risks are in the US and Europe. By contrast, China has the instruments, resources, incentives, and knowledge to avoid an economic hard landing – and, unlike Western countries, lacks any significant constituency wedded to lethal ideas like “expansionary austerity.”

The Chinese rightly understand that they must focus more on the “quality” of growth –rebalancing their economy away from exports and toward domestic consumption – than on sheer output. But, even with China’s change in focus, and despite adverse global economic conditions, growth of around 7% should sustain commodity prices, thereby benefiting exports from Africa and Latin America. A third round of quantitative easing by the US Federal Reserve could help commodity exporters as well, even if it does little to promote US domestic growth.

The US, with Obama re-elected, is likely to muddle on, much as it has for the past four years.  Inklings of recovery in the real-estate market will be enough to discourage dramatic policy measures, like a write-down of principal on “underwater” mortgages (where the outstanding loan exceeds the market value of the house). But, with real (inflation-adjusted) house prices still 40% below the previous peak, a strong recovery for real estate (and the closely related construction industry) seems unlikely.

Meanwhile, even if Obama’s Republican opponents do not push the country over the fiscal cliff of automatic tax increases and spending cuts on January 1, they will ensure that America’s own form of mild austerity will continue. Public-sector employment is now roughly 600,000 below its pre-crisis level, while normal expansion would have meant 1.2 million additional jobs, implying a public-sector jobs deficit of almost two million.

But the real risk for the global economy is in Europe. Spain and Greece are in depression, with no hope of recovery in sight. The eurozone’s “fiscal compact” is no solution, and the European Central Bank’s purchases of sovereign debt are at most a temporary palliative. If the ECB imposes further austerity conditions (as it seems to be demanding of Greece and Spain) in exchange for financing, the cure will only worsen the patient’s condition.

Likewise, common European banking supervision will not suffice to prevent the continuing exodus of funds from the afflicted countries. That requires an adequate common deposit-insurance scheme, which the northern European countries have said is not in the cards anytime soon. While European leaders have repeatedly done what previously seemed unthinkable, their responses have been out of synch with markets. They have consistently underestimated their austerity programs’ adverse effects and overestimated the benefits of their institutional adjustments.

The impact of the ECB’s €1 trillion ($1.3 trillion) long-term refinancing operation (LTRO), which loaned money to commercial banks to buy sovereign bonds (a bootstrap operation that seemed as peculiar as the ECB’s financing of sovereigns to shore up the banks), was impressively short-lived. Europe’s leaders have recognized that the debt crisis in the periphery will only worsen in the absence of growth, and they have even (sometimes) recognized that austerity will not help on that front; nonetheless, they have failed to deliver an effective growth package.

The depression that European authorities have imposed on Spain and Greece already is having political consequences. In Spain, independence movements, especially in Catalonia, have revived, while neo-Nazism is on the march in Greece. The euro, created for the avowed purpose of fostering the integration of a democratic Europe, is having precisely the opposite effect.

The lesson is that politics and economics are inseparable. Markets on their own may be neither efficient nor stable, but the politics of deregulation gave scope to unprecedented excesses that led to asset bubbles and the rolling crisis that has followed their collapse.

And the politics of crisis has led to responses that are far from adequate. Banks have been saved, but the underlying problems were left to fester – no surprise there, given that, in both Europe and America, the task of fixing them was assigned to the policymakers who had caused them. In Europe, it was politics, not economics, that drove the creation of the euro; and it was politics that led to a fundamentally flawed structure that created ample room for bubbles, but little scope for dealing with the aftermath.

To forecast 2013 is to predict how divided government in the US and a divided Europe respond to their respective crises. Economists’ crystal balls are always cloudy, but those of political scientists are even cloudier. That said, the US will probably muddle through another year, neither pushed over the cliff nor put on the road to robust recovery. But, on both sides of the Atlantic, the polarized politics of bravado and brinkmanship will be much in evidence. The problem with brinkmanship is that, sometimes, one does go over the brink.

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    1. CommentedKathy Holland

      Let's get past discussion of austerity and policy solves nothing. Around the globe, we have monetized sovereigns trying to cope with fallout from huge global prices swings due to a variety of missteps but also waste of resources such as that associated with intragovernment transfers that are nothing more than a coverup of poor fiscal planning and refusal to live within appropriately budgeted means.

      I wouldn't think China relying too heavily on consumer spending as the structural foundation -- look what has happened in the U.S. I think more sustainable opportunities for private enterprises across borders would benefit society on a broader scale. The emphasis must focus on resources underutilized. That, in part, has created drag on investment returns (the V12 engine running on 6 pistons). Capitalism has to be rethought. This is due to flaws in the policies enacted (over-thinking) but also due to errs in the industry (not thinking enough).

    2. CommentedRonald Abate

      Truly written by a man living is an ivory tower. No mention of the millions of retired seniors who, practicing prudent financial management, switched their investments from equities to fixed income as they neared retirement, only to find that their Central Bank has made the income from these investments none existent. These are the pre-baby boomers who actually saved for their retirement, many of whom retired with defined benefit pensions.

      Now that the baby boomers are starting to retire, who have hardly saved for their retirement and do not have the defined benefit pensions, things can only get worse. It's not that these baby boomers will stop saving and now start spending. They don't have much in the way savings with which to spend, and their Central Bank has made what savings they do have non-income producing.

      Then we have had a education system that has been and is today run by the Liberal establishment, producing the most tolerant, egalitarian, brainwashed, clueless, underachieving, coddled, ill-educated high school and college graduates in the history of our nation. I fail to understand how this generation of Americans will be able to compete with foreign competition that it has been America's good fortune not to have had to compete with for our entire history (read Niall Ferguson's "Civilization: the West and the Rest", how the world has cottoned on to our six killer apps and is now applying them and improving upon them with great effect), and how this generation of coddled, poorly educated young Americans will be able to generate enough wealth to offset the huge wealth destruction that is caused by our political class and the ideology of the welfare state.

      In a welfare state, everyone has an NPV. Some NPV's are wildly positive, many mildly positive, if we are lucky, a good many break even and, if we are not lucky, too many negative and wildly negative. I think the welfare state shifts the curve of NPVs toward the negative end. Read Charles Murray's "Falling Apart", section 2.

      After many years working in Asia (Singapore, Japan, China) with a very large, very well run multinational corporation, I have, in retirement, come in contact with a world that Professor only knows by statistics and I knew existed but had never been in contact. Oh my God! These uneducated, clueless young people are America's future and what a future it will be.

      By the way, my father was an elementary school teacher who became an elementary school principal. My sister is an elementary school librarian, my brother an elementary school teacher and another sister a retired college librarian.

    3. CommentedJohn James

      "The Chinese rightly understand that they must focus more on the “quality” of growth – re-balancing their economy away from exports and toward domestic consumption – than on sheer output."....
      Not to put too fine a point on it but, isn't the shift to consumption relative to export led growth a natural and predictable result of growing GDP in a developing economy?
      "The lesson is that politics and economics are inseparable."
      Mill, Smith, Marx, Locke, Ricardo, et al, "political economists" until we got into the degree inflation mode of the 20th century academic treadmill?
      My general perspective is that the experiment with the "democratic" part of "democratic capitalism" is over and we are regressing to a quasi feudal global economic/political structure. Increasing consolidation of the means of production/distribution and the withering of national political power is the logical result of Jacques Barzuns' observation that the Industrial Age ushered in a "machine age" where individuality is replaced by a commoditization of existence.

    4. CommentedJoshua Ioji Konov

      Which are the worst current economics’ compatibility points to the present accelerating globalization and rising productivity? By Joshua Konov, 2012

      • Relying on high productivity as main economic/market agent for growth (1/f noise), whereas, many economic/market agents and tools should be considered “noise” to diversify business activities to maintain economic/market development
      Someone has to lose money,” Guo Qigang, the plant’s general manager, said in a recent interview. “We’re a state-owned corporation, and it’s our social responsibility.”

      just as occurred decades ago with agriculture, the declining role in our economy of manufacturing, which over the last half-century is down from 32 percent of the work force to 9 percent, will continue. Let’s also recognize that retreating into protectionism would turn a win-lose into a lose-lose.

      Tallying the Toll of U.S.-China Trade Many Americans believe low-priced Chinese imports kill U.S. factory jobs. Most economists say the benefits of the trade far outweigh its costs. But new research suggests the damage to the U.S. has been deeper than these economists have supposed.

      A typical General Motors worker costs the company about $56 per hour, which includes benefits. In Mexico, a worker costs the company $7 per hour; in China, $4.50 an hour, and in India, $1 per hour. While G.M. doesn’t (yet) achieve United States-level productivity in China and India, its Mexican plants are today at least as efficient as those in the United States.

      'In this perspicacious and persuasive book, Tom Palley shows how Conventional Economic Thinking led ultimately to the disaster of the Great Recession and how it is now threatening to culminate in the Great Stagnation. His thoughts on how to avoid that and how to recover are compelling and important.' Clyde Prestowitz, President, Economic Strategy Institute
      • Low economic/market security founded on the shady business practices and lack of rule of law that gives major advantage to the large transnational corporations, and grieving disadvantages to the small and medium businesses
      Small Business Majority and the American Sustainable Business Council reports that's not the case. On the contrary, 78 percent of small-business owners in the study think regulation is important to help level the playing field with big business, and 76 percent believe existing regulations should be enforced.

      Whenever government wants more power it ignores the regulations that are in place, and then everything goes to hell. I don't believe in a lot of regulation but I do believe you've got to have the proper structure in place to minimize the conflicts of interest involving greed and corruption. But regulations are not worth the paper they are written on if they are not enforced
      • High interest rates lending to the small and medium businesses and investors that’s is accumulative in short term cyclical adjustments, and dysfunctional in another way
      Struggling euro-zone economies like Greece, Portugal, Spain and Italy cannot cut their way back to growth. Demanding rigid austerity from them as the price of European support has lengthened and deepened their recessions. It has made their debts harder, not easier, to pay off.

      • Industrial production as a main and fundamental economic/market agent for fiscal reserves that could have worked-out short term downturns, whereas, well exampled by the last 2007-09 Recession, the downturns are neither short, nor moderate, and could be followed by long rebuilding term
      a study released on Wednesday found that entry-level wages for students who graduated from college in 2010 was lower than a decade earlier, after adjusting for inflation.

      Technology and cheaper goods from overseas have replaced many of the not-especially-creative professions. A tax accountant loses clients to TurboTax; many graphic designers have been replaced by Photoshop; and the small shopkeeper by Home Depot, Walmart or Duane Reade. Though a lottery economy is valuable to various industries, the thought of an entire lottery-based economy
      • Business cycles as main and fundamental economic/market agent for adjusting economic/market redundancies, whereas the economies/markets fluctuations are less predictable and cycles progressively untraceable, the economic agents and tools should be used much more random “as it comes, as it goes, instead
      Companies are focused on jittery consumer confidence, an unstable stock market, perceived obstacles to business expansion like government regulation and, above all, swings in demand for their products.

      It is encouraging to see the Bank of England, the Bank of Japan, and the Federal Reserve all working to raise growth through stimulus primarily focused on the domestic economy. (While Japan's central bankers would surely be happy to see the yen fall, they're not, for the moment, following Professor Ben Bernanke's advice to print yen and buy foreign exchange.

      (VIDEO: Watch From Davos: Is Capitalism Failing? A TIME Discussion With the World’s Top Business Leaders) Third, and most importantly, the evidence is mounting that the austerity-led reform programs are not working to help countries exit the crisis. Take a look at Portugal Read more:
      • The trickle-down approach of capital supported by political and fiscal economic/market agents that in the time of China and rising productivities carries on and accelerated wealth concentration into progressively the very few, in large disadvantage to the middle class in national plan, and less developed economies/markets in global such
      President Obama issued his sharpest warning yet about the German-led solution. He said the focus on long-term political and economic change was well and good, but emphasized that failure to react quickly and strongly enough to market forces threatened the euro’s survival in the coming months Unlike •

      Lacking such evidence, the obvious conclusion seems to be that economic growth, and employment growth, would have been significantly stronger over the last two years without government cuts. But I’d invite readers to point us to any research that bears on the question, one way or the other.
      • Short term investment and capitalization by business practices prompted by the high interest rate lending, and the corporate structures business practices of short term profit and distribution
      • Practiced corporate limited liability laws mainly serving large transnational corporations thus giving to these competitive advantages and lowering market security over all
      Large corporations can often squelch their competition. They can minimize their costs by dumping waste products into the environment, contributing to pollution and global warming. They can use their profits to buy political influence. If they don’t like the regulatory policies of one nation-state, they can simply shift their operations to another.
      • Hurting the earth environment short term investment and capitalization business practices, by the high interest rate landing, by the shady business, by the lack of liability and accountability transnational corporations, by the deepening devising between poor and rich people and countries, by the imposed by the developed countries and the international organizations: WB, IMF, WTO austerity and restructuring measures on the less developed and developing economies
      A collapse in household spending, exports and manufacturing sucked the life out of the euro zone's economy in the final months of 2011, the EU said on Tuesday, showing the scope of the downturn that looks set to become a fully fledged recession.

      Waning Support for Wind and Solar By DIANE CARDWELL Wind and solar companies say they need more government support to be competitive. But in Washington, there’s little enthusiasm for more subsidies.
      • The governments growing inept involvement in finances and business actually making the gap between rich and poor wider
      Over the long term, the top 1 percent have seen much larger gains than everyone else.

      The currency intervention also functions as a massive inequality-creation machine. U.S.-based behemoths, which own or use many of those exporting Chinese factories, benefit, as do their shareholders. And because more than 90 percent of U. S. stocks are owned by the wealthiest 20 percent, the spoils are disproportionately concentrated at the top

      • The bureaucratization of economic/market agents well presented in the European Union VAT and the EU funds for development that prompt corruption, politicization, and injustice
      The campaign group says there are 1,212 farm subsidy millionaires across Europe, including 268 in Germany, 174 in France and 29 in Britain. Charities such as the RSPB and corporations such as Nestle are believed to receive more than £1m a year. The Queen qualified for £473,500 in farm aid in 2009 for Sandringham farms.

      Economy: Rich Countries’ Farm Subsidies Benefiting Royals by Julio Godoy (Paris)Friday, August 06, 2010 Inter Press Service Subsidies for agriculture in the industrialised countries of the world grew again in 2009, benefiting the largest companies and land owners, such as Prince Albert of Monaco and Queen Elizabeth of Britain.
      • The lack of laws preventing market and commodity exchanges from shady transactions and activities that gives market advantage to the large investors, and greatly hurts the small and medium investors
      JPMorgan Sees Clients With Less Than $100K as Unprofitable - By Laura Marcinek - Tue Feb 28 16:54:17 GMT 2012 Enlarge image Jamie Dimon Jamie Dimon, chief executive officer of JPMorgan Chase & Co., center, at the World Economic Forum (WEF) in Davos, Switzerl...
      • Debit/Credit finance accounting, which because of the low economy/market security keeps very tight economic/market development, whereas the transnational corporation are expected to expand business and raise productivities attracted by lower taxes and unregulated labor marked: the transnationals not only raise money on the public market exchanges but also are credited on very low interest rate, however under these new conditions transnationals cannot maintain or expand industrial production any closer to the global markets need of employment
      Mr. Fillon “made clear it had not been his intention to call into question the U.K.’s rating but to highlight that ratings agencies appeared more focused on economic governance than deficit levels,” Mr. Clegg’s office said.
      • The pro-supply a priory economics cannot maintain balanced market demand-to-supply under this new emerging markets environment
      The economists that I spoke to estimated that China’s currency policy has cost the U.S. between 200,000 and 3 million jobs. Of course, the wide range suggests that these are little more than educated guesses. But a broad picture does emerge. U.S. manufacturing employment has fallen by around 6 million over the last decade. If China had allowed its currency to adjust naturally, life might be much b
      by Joshua Konov, 2012

    5. CommentedRobert Davies

      I would agree with the analysis presented here, but with one exception, China. We must not under-estimate the challenges that the perilous road to democracy presents. With a population of some 1.3bn this will be a significant transition for the workshop of the world to manage.

    6. CommentedPaul Mathew Mathew

      We are in the calm before the storm.... and the calm is supported by one thing - endless money printing.

      Take away the money printing and the global economy collapses both because all assets are being artificially inflated by QE - and also because if you remove central banks from the equation interest rates on sovereign debt MUST go up to attract takers - and this will render countries insolvent at worst - or stagnant at best as debt servicing costs on massive debts drag down growth

    7. Commenteddonna jorgo

      just a bad politice have bad consecuences for the socity..
      every aspect of the life ..thank you

    8. CommentedEd Jansen

      The 'muddling on' in Europe i think has two causes:
      First, the belief that austerity is the way to react to the crisis.
      Second, and maybe more important, the fact that 'Europe' was more a political thing than something that was supported 'bottom up'.
      Speaking for my country the Netherlands, i think it is safe to say that the idea of a united Europe has never found much support among the folks. Our politicians tried to convince us that it was in the best interest of the country ('s economy) to go for more integration. People were reluctantly willing to accept that, but now the 'cost' of the integration/euro seems high (at least that is the perception). Politicians and journalists in my country are not very aware of macro-economic issues, and even less in promoting 'Europe' these days. We have to pay Greece and Spain so many billions, but don't say that our government is saving a lot of money as the state can now borrow money at close to 0 intrest. Thanks to the crisis in the South of Europe that is.
      And they are not stressing enough that we are exporting a lot to the South. Exports that may not be 'natural', but were 'created' by the euro and its flaws. If the South still had their own currencies, and thus would be more competitive, would we still be selling our tomatoes, grown in greenhouses (!), to the South were they would grow under the sun! (which provides for much better taste as well)?

    9. CommentedAntónio Correia

      I agree that "The recession in Europe was the predictable (and predicted) consequence of its austerity policies and a euro framework that was doomed to fail".
      The Euro has been designed – by Delors et al – as a "single currency" instead of a (much more realistic) "common currency", and now it is very clear that this was a very bad choice. It is quite obvious that the “bad romance” between France and Germany must come to an end and be replaced by a solid, long lasting friendship:

      Twenty years after the Maastricht Treaty, a "Maastricht 2.0" Treaty is required, as soon as possible, so as to avoid a sad situation, in the near future, where the foreseen "European common home" becomes replaced by a true "European house of correction". We need to build a true European Union through a cooperative European disunion:

      " - The Euro should be a COMMON currency within the future EU - including the EU27 members outside the current 'Euro Area' - but not necessarily the SINGLE currency.
      - In this context, the coexistence of TWO parallel currencies should be allowed in each EU member state (under certain conditions, established in a novel European Treaty), within the framework of an appropriate "Cooperative European Disunion" .
      - Besides the "Common Euro", the complementary currency in each member state could be either a "national currency" (...) or a completely new currency, shared by that member state and some other "compatible" EU member states, taking into account both the relevant macroeconomic issues and appropriate geographic, historic and cultural issues."

      We believe that this concise proposal can be a good basis for the required "Plan B", jointly saving the Euro and the European people.

    10. Commentedarnim holzer

      Well put Dr. Stiglitz. The problem for democracies (or republics) with difficult economic choices at points of inflection is that often those that will suffer the consequences do not have a say or vote on the outcome. In contrast to China where command/ control policies are in effect and the population culturally understands authority's mandate, In the west we believe that open dialogue and consensus protect the individual. This faith in the west's political processes will be sorely tested as the class warfare of changing demographics and wealth drive governments to redistribute and delay rather than face reality. China will not be wasting resources on such arguments and has already begun transitioning to moderate consumerism taking into account that its demography will roll over in about 20 years. Concommitant with our freedoms comes the responsibility to protect them for our future generations. If Europe and the US' policymakers don't start acting in concert with the demographic and financial realities through reasonable negotiation, we will lose our economic (and potentially other) freedoms to nations that were willing to do the hard and painful work.