"the advanced economies need a medium-term plan to restore competitiveness and jobs"

The 'Economist' this month published a special report on the future of employment. Unemployment is likely to remain high in the rich economies. Globalisation and technological innovation are bringing about long-term changes in the world economy that are altering the structure of the labour market.

The McKinsey Global Institute in the US says there are three main types of work: physical, clerical and interactional (relying on knowledge, expertise and collaboration with others, such as investment banking or management consultancy). Physical has long been going to emerging markets, clerical is now going, but interactional is likely to stay and earn big profits. Expect national, never mind international, ructions in the short-term especially caused by high youth unemployment.

The presidency of the European Union suggests that unemployment might double in two years with a continental war breaking out within ten years.

The answers are thought to be better education, further deregulation and infinite patience. A sustainable solution?

Very well said. An important contribution to enlarge the visions of some western politicians and elites, who have responsibility for the current economic collapse. However, I think the potential role of IMF and WB has been exaggerated. Simply because, the performances of these two Bretton Woods organisations, to reduce the magnitude of the current economic crisis and of the ongoing human drama in Africa, are obvious. They are simply inefficient and ineffective. In my opinion these organisations, are nothing but a kind of projections of the current economic depression, onto some other plane.       

A pilot confronted with a stall situation shouldn't seize on it as an opportunity to save money on fuel. Fuel saved, plane lost, passengers dead.

This is exactly what the austerity measures being pressed in the major economies are bound to do. You have to assume the decisions are being made by executives who are not on the aircraft. Who do not own the aircraft. Who, perhaps, own hedge positions on the demise of the aircraft.

To choose another analogy, austerity measures in a financial downturn are the modern equivalent of medieval physicians bleeding a patient. It didn't save any patients, and killed many, but the doctors were paid for their efforts.

Global competition with current rules is not going to work for advanced economies to maintain employment and living standards of middle income families. Competition is bad for the losers, and advanced economies have been the losers in the last decade.

We need to change the rules of the “global competition” game. Dani Rodri says as much in his latest book while stopping short of recognizing that protectionism is going to be required.

Education does not work. We have in Spain thousands of college graduates unemployed or underemployed doing manual or clerical work. Education is what politicians and many economists sell to the unemployed, but it does not solve the problem.

The Governments of advanced economies need to regain control of the game, corporations, big money, banks, etc. so that they can really help with unemployment and income distribution. Protectionism will be required. It is no good that a company will move production to another country and keep selling in the market without paying for it. 

May be we will need some kind of “local production content” if you want access to the market.

Why unsustainable solutions [#1]? There seems to be a huge conflict of interest impeding national job creation; illustrated today in <a href="http://prestowitz.foreignpolicy.com/posts/2011/09/19/jeff_immelt_and_the_american_dream">this link</a> .

Great analysis.  In particular, the need to restructure debt and write down mortgages, effectively converting debt into equity, do some investments, and educate our workforces.

However, all the education in the world won't overcome the huge difference in living standards between developing countries and the developed countries. 

CEO's have a responsibility to their board and shareholders to locate labor in the cheapest possible country. For that reason, protectionism is absolutely needed to make that illegal.

1) We only created 2 million jobs in the past decade, vs. 20 million in each of the three decades prior.  Offshoring has killed our jobs engine.

2) The U.S. economy only grew about 1% 2001-2008 per Niall Ferguson, if you exclude home equity extraction / borrowing.  The U.S. needs about 3% growth to avoid increases in unemployment.  In other words, the bubble and leverage hid growing unemployment pressures.

3) The China price isn't that cheap, when you include unemployment and interest on a $650 billion goods trade deficit.  A deficit this size is about 10-15 million jobs, roughly two-thirds of the U.S. unemployment problem.

No Mr. Roubini, the time has come to bring the jobs back home.

Nouriel

Your plan will not work for even it’s not vast enough. There are many things you forget in stating the problem. They include 1.) worldwide baby boomers moving from accumulating to reducing 2) massive debt overhang 3.) the massive debt mispriced assets well above national incomes 4) western incomes going down with globalization along with all the dept and mispriced assets 5.) income inequality and the buying of government to allow this to occur. 6.) China treating economic competition like a war.  I could go on but I think you get the point.

The only way to solve this is an international coordination of reprising assets and printing of currencies to deal with debt. This printing can be done in a way that is not inflationary. Next the governments are going to have to put an excise tax on the super rich to pay down debt. The rich need to be put in a position where starting businesses is the only 15% tax bracket option. I would increase capital gains up to 35% on secondary market activities and make job creating investments near 0%. At this time it makes more sense to invest in commodities and pay 15% versus 35% on a business.

Finally, the western world will need to go through a generation that has less than their parents. We new it was coming. The irony of all this is that businesses must get smaller to increase competition and the day of the multinational must start to end now. They are too powerful and are like nation states within themselves. We need more small business innovating and investing. Big companies corner markets and kill of the competition. For national GDP’s to grow small business not big business must be unleashed to bring in a new highly competitive free market. One that cant be but out the govt. Check out www.theamazingreset.blogspot.com for more ideas.

There is so much nonsense in Roubini's article that I cannot possibly deal with it all here. So I did a special post on my blog:

http://ralphanomics.blogspot.com/2011/09/rubbish-from-nouriel-roubini.html

Mr Roubini, what a long comment just to snick inside: "Only a return to a national currency – and a sharp depreciation of that currency – can restore competitiveness and growth."

I guess when you say "depreciation" you are referring to a labor depreciation. Because i cannot understand depreciation in food prices, in utility prices, or mortgages that an average Greek family has to pay monthly. Your idea would be excellent a year or a year and a half ago, but already salaries, in the public and private sector have "depreciated" about 30%. So what are you talking about. Have you checked the current situation in Greece or you are stack with your model since the beginning of the crisis? Have been informed what is going on in Greece or you just look at the balance sheets of the banks that remain unchanged for the last year or so? The Greek market, the Greek everyday life is almost completely dry from cash. All the liquidity has gone, to pay the bills of the Government. The small and medium companies are straggling to keep their business running, and the people are straggling to pay, almost every week, the new taxes that Government is imposing! So, Mr Roubini, if you still want us to keep on reading your articles, better tell your advisers to bring you the new data from Greece, and refresh the excellent macroeconomic model of depreciation. I am afraid you are 18 months late Mr Roubini!

Somehow I'm not completly happy with Prof. Roubinis analysis of the problem and therefore with his suggested answers, especially from part 6 on.

The Euro zone and the EU has basically no competition problem. There is almost no trade deficit with the rest of the world! http://www.eds-destatis.de/de/press/download/2011/03/038-2011-03-09.pdf

The problems of the Euro zone are just between their own actors (governments, banks, memberstate economies).

Suggested answer one and two are therefore unnecessary!

Answer of the problem number three deflation or leaving the euro with inflation and decreasing value of a new drachme, would have the same consequence: Nothing is solved. 1) Euro's are harder to collect be the government after deflation, and in case of a devaluation: Debt will be still in Euro! There is one solution for the greeks which therefore will be a problem for the other states (through the impact on their banks):

debt relief/cancellation!

To point 7) same like mentioned, the EU isn't the place with the competition disadvantage! The US is, and a Europe centered crises would look different and needed different answers then the crisis of the last 3 years. By the way, the mentioned employment programs will not work very successful. Jobs which require a high amount of education are short in numbers and usually very capital intensive. More educated people don't mean new jobs for them, dompetition for the existing jobs will just rise and pressure wages in this categorie too. You can educate a million solar engineers, without trillions in spending for production facilities, they will wash dishes and the investment in the human capital will not show a profit.

To point 8) China's move to more consumtion would help only the Chinese themselfes and producers of raw materials! It would pressure prices for all kind of goods arround the world, which would pressure down the real wages of the western societies, which could not benefit through a high amound of new employment, because their export-sector is extremly capital intensive! While in developing societies wages would rise through the higher demand of labor in this counties. What happend the last years will just continue!

Prof. Roubini’s analyses and plans have valuable insights that politicians should think about.  From a perspective, however, the key word that will keep the downward path of US’ relative competitiveness much unaltered with Roubini’s plans seems to be “protectionism.”

As far as businesses are concerned, trade protectionism in general is not a good idea because as we all know in global markets trade barriers reduce both consumer’s and producer’s surpluses and thus impede economic growth.

But the motives and implications behind global movements of major investments and capabilities need to be deeply understood to maintain sustainable growth.

Businesses focus on accounting and economic profits for the owners and managers.  Established businesses make decisions to maximize accounting profits which are net incomes given fixed mix of existing assets.  New projects go a step further to maximize economic profits which include both accounting profits and the maximization of returns on newly invested assets given fixed existing real options.

The country’s leaders need to gain even higher levels of accounting foresights.  Leaders need to master (i.e., to know quantitatively) how to calculate socio-economic profits which are net incomes impacted by trade policies not just for shareholders and managers but for the entire nation’s stakeholders including employees, government revenues, and, very importantly, for all supporting and beneficial industries and derivative services. 

To maintain competitive advantage in the long run, the country’s leaders also need to know not how to selfishly protect technologies but to craft treaties which guarantee that domestic institutions can adequately recoup the costs that went into inventing those technologies.

Banks don't lend to SME's because they are not really interested in the 'real world' any more - ie, not much of that old-fashioned business of seeing the bank manager if you want a loan. And if you want a personal loan or credit as an 'ordinary' person the interest rates are at least 15% higher than the 'base rate'. This divorce from reality - the treating of all money transactions as purely that - means that we need a complete re-assesment of how we run the financial side of our civilization, a more far-reaching and inclusive re-examination than suggesting a new economic 'fix', or series of measures.

Economics should be integrated into a multi-disciplinary approach and widely disseminated and debated, otherwise I fear the consequences of carrying on as we are doing now will only lead to violence, war and social upheaval on a truly frightening scale. This will, inevitably, not please the vested interests of the financial world, politicians or, dare I say, many economists, but to carry on as we are now, with an ever-increasing hoovering-up of financial and physical assets by the very few can only lead to wide-spread despair and frustration whose only outlet will be violence.

I think the expression "depression" gives us a great analogy here comparing this economical depression to our state of mind when depressed.

A human being becomes depressed when loses sight of a future goal, something to aspire to, when chasing temporary, superficial goals, pleasures fail to satisfy the desires any longer. Today depression has become the number one disease affecting us, especially in developed countries. We do not see a future worth aspiring for.

The same is happening to our economy. The previous lifestyle model, infinite growth, ever increasing consumption has outlived itself, we have driven ourselves into a corner. We simply lost our purpose, we do not see, that even if continous growth and increasing consumption would be possible, why we would want to run with it. For what aim?

This great analysis provides insight into what an economist thinks about possible solutions to try to push the machinery back into action ignoring one fundamental question: what for?

Besides the system we live in does not aloow us to continue the previous model, in a completely interconnected and interdependent network competition, growth on the account of the other is impossible. The more we keep pushing stubbornly using the old attitude and thinking the more we will be brought down on our knees as we go against the laws of the system we exist in.

Both in terms of our aim, and in terms of the practicality we need to go back to the drawing board, not just in economy, but in our whole way of life.

We are in a new era that needs a new mind and heart.

I disagree with Mr Roubini when he says protectionism is not an option. It is the best option. Economic globalization in a world so unequal is only on the interest of big corporations able to produce in countries with cheap and without rights labour. But this detroys West societies with unemployment and low production and fuel the crisis from its roots. With unemployment and low production, there is no money in society neither in governments nor banks. The crisis in the West is starting there. If we fix this and control the finantial system there will be no crisis.

And I'm not talking about not investing in Asia, but about making mandatory to produce where you sell your products. This with time will increase the number of companies everywhere in the world and develop all the world.

And it is also telling us about the miserable way neoliberalism works: prefering to hire half slaves (people without rights and very poor) than citizens (people with rights). Shame on greed which is ruling the world.

Gamesmith94134: Catching up is so very hard to do  67

Justlistenall said well, ”how about “nations of higher living standards” in lieu of “rich nations”, except for those who really qualify as such?” It was not the yuan or GDP that make China the emerging nation; and the fact is the affordability that gives impetus to growth and not the higher living standard.

If the rich nations must catch up the up-ward growth spiral, they must cut their living standard to make its people live to grow, instead of, strive to survive. The rich nations are only think of their people are rich but they are not; not afford to consume make its economies anemic. If they want to catch up, they must make it affordable for their people.

Even if the troika can get 2 trillion to cover the PIIGS, the onward slow or anemic growth is not getting to the level of the proportion on the normalcy. In addition, the solution is short of the fiscal and tax equation among its EU members. Then, the 2 trillion would be spent in vain if the present higher living standard does not meet its affordability level, then, there is no demand to consume. It is still no growth if the durables or oil do not go down enough to provide the cash flow that will change the marginal affordability level and ready to consume.

The bank or central bank may free of the old debts with the fresh new debts like the 2 trillion with longer term bonds with low interest, however, the low rate will halt lending to commercial based on the non-profitable, eventually, it will die or go bankrupt itself unless banking cut its own size like BOA or JPM. Such condition will turn into another tourniquet to the commercial needs if the bonds are not restructured by 2013 with the short-term basis. Depression will become inevitable even the BRICS can help to restructure the loans.

Inflation and deflation is much as virus in fever and cold to one body as it is to an economy; it is understandable that disease works with one’s body to create its anti-biotic to fight diseases. Now, what our economist is facing the anemic economy with too much of sterilization with sub-prime and long-term interest rate that the body or the economy will not respond till the inflation or deflation can take its effects to make the economy change.

In order to face reality, EU and US must settle on the coming depression, deflation helps in cutting the cost of living in a down turn spiral till the private industries can use human capitals in a lower valuation in wages. If the affordability allows more consumption; then, production will rise. Eventually, growth comes only after there is demand of it.

If there is no systematic cut the valuation of the present, and the lowest interest of today only make the financial industry suffers. Let the nature take its course to adjust. Any attitude like no on my watch can only make it-- Japanification.

If th economy is immune to inflation or deflation, then, valuation on price is not valid. I was not surprise if gold can fall 6% in a day; and how about you, Soros? What is you gold standard of monetization if immunization stands?

Anything else is just excuses, isn’t it?

May the Buddha bless you?

Rather than think in terms of solutions which will not work, let us consider what might resolve the Greek crisis and allow Europe the breathing space necessary to avoid a global financial collapse while it reconsiders the terms of it‘s monetary union.

Allow that the debt of Greece is approximately 350 billion euros. Consider also that Germany, France, Japan and the US themselves can float 30 year bonds for below 3%. Is it inconceivable that these countries' treasuries could not absorb the entire Greek debt at 87.5 billion euros each financed by their own bonds to prevent a world wide financial collapse? The cost over three decades would be insignificant compared to the risk of default. France and Germany alone could do this tomorrow and their economies would be immediately stronger for it.

 Greece may be making a sideshow political effort to pass legislation meeting the terms of the troika, but the Greek people are saying very loudly that they will never pay their government's debts. The collapse of the troika negotiations is imminent and inevitable.

 An international buyout of the Greek debt would remove Greece from the bond markets and revert it to the drachma, allowing the depreciation necessary to reconstitute it's economy. The Euro-zone would get the necessary breathing room to restructure their weak economies without the imminent collapse of the currency Europe would get the year or two necessary to reform its monetary union and the world would be spared an unnecessary collapse unprecedented in history. 

Economists create theories but politicians make law. Both need to step up to fact that this world is headed for chaos. With a cancer one removes it to preserve the body. It is time for the world’s leaders to excise the Greek cancer.

Gamesmith94134: How to prevent a depression?

Raphael,

Twenty years of ClubMed to Thirty years of ClubMad is hard to swallow; so is the 350billion Euro for any politicians even for Troika.

“Japan and the US themselves can float 30 year bonds for below 3%.”It is the price they paid for disinflation and anemic growth with added deficit.

“Is it inconceivable that these countries' treasuries could not absorb the entire Greek debt at 87.5 billion Euros each financed by their own bonds to prevent a worldwide financial collapse?” As for the underperformance countries like PIIGS, their deficits are more severe under the umbilical of the Euro-dollar rulings and often considered as risk when they default. And, they must pay with inflation or loss to competition to the emerging market nations; so, they acquired a “separate but equal’ attitude for Greeks and PIIGS. Would the Greeks accept inflation rather than austerity or privatization if it break itself off from the EU or go OCED instead under the scrutiny of the international community? Or, how is Greeks can tell their dealings are no risky business?

I believe in multispeed of growth in various systems and the Euro-dollar rules is way overdue; therefore, our present monetary system must refresh itself to another standard on exchanges either on currencies or sovereignty debts everyone agrees to a fairer trade.

As a theorist, multispeed economy and multi-currency should work better in our open markets because no system can be immune from defects like inflation or deflation, or valuation by another through competition in economies if growth applies. Read my following assumption to the sovereignty debts in proposal. Can you guarantee a 3%  return on the Greek’s risky business and don’t let the World Bank’s face turn red rather Greeks are going privatization or austerity? It is the foundation of bargaining.

May the Buddha bless you?

Gamesmith94134: the Asset crisis of Emerging Economies

There is the identical crisis in EU and US like the one China had in 1997-1998 Asian financial crises, East Asia’s economies paid heavily for excessive accumulation of dollar-denominated debts; and it is reversed after the inustrialization of the Emerging Market nations. In my calcution of the cash flow or the Circuitry of wealth, the imbalance on the accumulated  and consumed under their nominal standard of living has gone much above what their citizens can afford.

I would suggest the lower nominal living standard would help unemployment and enhance comepitiveness in their exports; but defltionary measures caused the great imbalance on equity to its dollar-denominated liabilities; eventually the outflow to the emerging nations made them defensive as inflation hits. The polarization both the creditor and debtors made the stand-off.

It also create a vaccumn on the exchange rate due to the exporter’s account’s surpluses that US demands RMB to rise to cut deficits , which “China has focus more attention on adjusting the currency structure of the country’s gross assets and gross liabilities. In particular, China should try to replace its dollar-denominated assets with renminbi-denominated assets, and its renminbi-denominated liabilities with dollar-denominated liabilities.” How would china would avoid the soveriegnty leverage and become a “rogue” trader like your oversea operations, or reduce renimbi-denominated liabilities from making itself as a reserve in the gobal economy?

Mr.Yu, would you put your asset in the 10 million Euro worth of bonds in full to the World Bank which garantees a 3% annum in coupon? The coupon to you is tradable in open market to your exporters, and serves for tax credit to your nominated soveriegnty nation like Greece, and the 10 million Euro worth of bonds is withheld a parcel which the World Bank will guarantee Greece will return in full parcel in nominated currency or equity applied. Since the parcel may not adequately applied with equity or privatized assets, such parcel will come through arbitration by World Bank to ensure Greece will comply with integrity for its liabilities. Thereon, the quarterly payments of 4% will come from Greece that 1% no- refunable applies to the services and reserves to World Bank; and 3% will subsidize privatized programs would be used as collerateral, under the scrutiny of the global observers. The funding of these installments are used  to promote growth within Greece in order to create its foundation in the tax system to make it affective in the fiscal processing and politicians. What if Greece default again on its installments of the loan or the loan? The 3% of investment  in the privatised programs will goes to China, and the parcel can settle on the prerformance after  arbitration.

It sounds naieve to accept such  “Seven Percent Solution” when inflation rate is way higher than 7% in China, but what if Euro or its currency dropped over 7%. However, it is more important that the stand-off in the liabilities in both sides, then, rebalancing both the exchange rates or economies could make the situation worsen; then, not even the 3% is garanteed. If the slowdown of EU or US is contagious to the system, I doubt China can run on its 8% growth in the next year; but, the funding to the 7% coupon can stop Euro going down from 1.4 to 1.8 or RMB 4.5 to a dollar; or 15% write-off is demanded by the banking of China after default.

“If China cannot do very much about existing gross assets and gross liabilities, it should address new assets and liabilities in order to minimize future capital losses.” Perhaps, it is not a best solution to the anemic growth to Europe or US, but contagion is immense. It is time for the World Bank and the communities to act, and not to wait, since the everyone knows the outcome of it.

Mr. Yu, It is not your  asset crisis only because our bond crisis could jeopardnize the global economy too. Your highly consequential questions such as full renminbi convertibility and the currency’s internationalization would be resolved; if we are not just debtors and creditors in the system and we can stop contagion and work on the global economy.

If it sound like buying rare stone in your country, everyone bargains inside the bag. Throw in yours on the zoning and multi-speed economic growth, or the system you would agree or allow. It is the foundation of bargaining even in RMB.

May the Buddha bless you?

Dear Sir

What do you think of education as a solution to unemployment.

There are already many overqualified would be workers.

Our economic theories are out-dated in this space-age. Any political action based on these theories is unlikely to prevent depression. Education, using these out-dated knowledge is not going to yield anyone an employment.  

"...the advanced economies need a medium-term plan to restore competitiveness and jobs via massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy..... "

I respectfully disagree. This does not address the root cause, which is tax consequences of globalization. When company A fires Jim in USA and replaces him with Jin in China, the US loses Jim's tax contributions and consumer spending, but it does not affect company A. In effect, company A is getting a free ride on the US government's back.

The societal costs - e.g. lost tax revenue - resulting from globalization must be brought home to company A, by measures such as a  stiff layoff tax.

Just had to comment after a review of this older article:  Does "disinflationary" really sound that much better than "deflationary"?  "Sounding better" doesn't imply "feeling better" or "being better" either.  When does taking care to not contribute to, or not to influence any over reactive behavior of the masses become disguising reality? Sugar doesnt make anything do down any easier. It just disguises what everyone is having to swallow, other than the real actors producing the really nasty stuff. None of this show is palatable.

Excellent anaysis on ways to Prevent a Depression by Nouriel Roubini

Dr.A.Jagadeesh  Nellore(AP),India