Roubini: Moving From the Post-Bubble, Post-Bust Economy to Growth
Below are highlights from a recent paper by Daniel Alpert, Robert Hockett, and Nouriel Roubini on how to get the global economy out of this mess. I think it is something policy makers should take seriously. Bill Gross of PIMCO recently tweeted he agrees with much of it.
Here are the important extracts in terms of the causes of the crisis. I have also embedded the full pdf version, which has suggested policy prescriptions as well.
- It is not only the U.S. economy that is in peril right now. …Europe is struggling to prevent the sovereign debt problems of its peripheral Euro-zone economies from spiraling into a full-fledged banking crisis… Meanwhile, China and other large emerging economies… are beginning to experience slowdowns…
- Nor is renewed recession the only threat we now face. Even if a return to negative growth rates is somehow avoided, there will remain a real and present danger that Europe and the United States alike fall into an indefinitely lengthy period of negligible growth, high unemployment and deflation, much as Japan has experienced over the past 20 years following its own stock-and-real estate bubble and burst of the early 1990s.
- Our economic straits are rendered all the more dire, and the just mentioned scenario accordingly all the more likely, by political dysfunction and attendant paralysis in both the United States and Europe… For despite the standoff over raising the U.S. debt ceiling this past August, the principal problem in the United States has not been government inaction. It has been inadequate action, proceeding on inadequate understanding of what ails us.
- The questions now urgently before us, then, are these: First, why have the policies attempted thus far fallen so far short? And second, what should we be doing instead?
- First, the present slump is a balance-sheet Lesser Depression or Great Recession of nearly unprecedented magnitude, occasioned by our worst credit-fueled asset price bubble and burst since the late 1920s.4 Hence, like the crisis that unfolded throughout the 1930s, the one we are now living through wreaks all the destruction typically wrought by a Fisher-style debt-deflation.
- Our present crisis is more formidable even than would be a debt-deflation alone… For the second key characteristic of our present plight is that it is the culmination of troubling trends that have been in the making for more than two decades… The first of those developments has been the steady entry into the world economy of successive waves of new export-oriented economies, beginning with Japan and the Asian tigers in the 1980s and peaking with China in the early 2000s, with more than two billion newly employable workers. The integration of these high-savings, lower wage economies into the global economy, occurring as it did against the backdrop of dramatic productivity gains rooted in new information technologies and the globalization of corporate supply chains, decisively shifted the balance of global supply and demand. In consequence, the world economy now is beset by excess supplies of labor, capital, and productive capacity relative to global demand.
- The second long term development that renders the current debt-deflation, already worse than a mere cyclical downturn, worse even than other debt-deflations is this: The same integration of new rising economies with ever more competitive workforces into the world economy also further shifted the balance of power between labor and capital in the developed world. That has resulted not only in stagnant wages in the United States, but also in levels of income and wealth inequality not seen since the immediate pre-Great-Depression1920s.