How austerity will prolong the recession.
Richard Koo, Chief Economist, Nomura Research Institute at the Closing Panel entitled “Overhangs, Uncertainty and Political Order: Where Do We Go From Here?” at the Institute for New Economic Thinking’s (INET) Paradigm Lost Conference in Berlin. April 14, 2012.
Definately, the best explanation of the worlds economic woes that I have listened to.
Richard Koo is always worth the time.
Excellent analysis- balance sheet recession and minimisation of debt- what want mentioned was that in Japan the key driver of economic growth was absent- A healthy demography. USA still has that driver , EU doesn’t have it , China is coming to the tail end of this driver. Add the overriding context of growing efficiency ( fewer people needed to grow output) and where will the new entrants to the job market find jobs . When will everyone discover and accept that general speaking global economic growth/living standards are on a declining trend. This is not a cyclical phenomena it is a secular /structural change . Regards Imants Kins
Japan, EU and China all have aging populations. But having a younger population does not help the recovery if youth unemployment is high and graduates can’t get jobs. Priority #1 is to get people back to work — constructive work. The only solution I can find is infrastructure projects like in the 1930s, but employing the latest technologies. Transport, communications and (nuclear or green) power generation are the obvious candidates.
Can’t say I agree that economic growth is declining. Look at Asia. Maybe growth is slowing at present with the GFC. But advances in technology should boost productivity and restore growth in the longer term.
The economies are reflective of returns on equities and all forecasts for the next 10 -20 years are for declining growth rates. We can expect only an average long-term return of around 5- 6% from now on. Returns to Superannuation for example we have had over last 10 years will not be repeated. The same will apply to long term average growth rates as the demographic dividend ends for most developed and developing countries. China grows old old before it grows rich metaphor. In that context, the increasing efficiency /productivity will destroy the jobs market at a time of a increasing retirement age and debt minimisation. The growing income inequality is another indicator of this structural change. Certainly this scenario can change however there are no indicators yet to give me any encouragement. By the way thank for your fantastic newsletter that I have looked forward to receiving all these years- wonderful to be able to say thank you to you!
Thank you for your support. If we get it right, we can recover within a decade. Get it wrong and — Japan has been struggling for more than twenty years! Global GDP should benefit from gains in technology, communications and education. The negatives are an unstable financial system and rising trade protectionism. The challenge is to solve the latter and harness the former.
This is one of the most insightful view I have read so far. Thank you for sharing.
Thanks. Glad you enjoyed it.
Looking at the period surrounding WWII you see a partial solution to today’s macroeconomic problem. In the late 30’s, government spending and debt had grown enough that austerity was implemented which led to the severe recession in 1937 and to extension of the depression. The war came along and charged up the economy through government deficit spending. Industry was expanded; the private sector saved and reduced whatever debt they had as there was little to spend money on. The war ended, savings were deployed into housing and consumer goods as the baby boom was created; industries retooled. We certainly do not wish for a world war to break the cycle, but we could give tax breaks that help folks reduce debt and shore up consumer spending. Infrastructure improvement would have long term value to the economy. One weakness that needs work is to increase our exports. Following the destruction of WWII, America was a source of investment and products which gave us a positive trade position. We had the money and the industry. Today, multinationals keep overseas profits away from the high corporate taxes of the US. Trade balance is also handicapped by countries restricting imports. China is industrializing and building infrastructure and is doing what the US and earlier Britain did during their industrial revolutions: maintain a positive balance of trade. Better trade policies, fiscal policy and time will help cure what ails us. We are looking at a generational challenge and shift in attitudes. Hopefully we can achieve first balance then growth without major social and international strife.
Thank you for the insight. So much better to spend deficits on (productive) infrastructure than on the destruction of WWII. Every country wants to maintain a trade surplus — that is not possible. Rather aim for Exports to equal Imports and no capital account surpluses without consent of the recipient.