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Friday, July 18, 2003


In May and June --- before the hacker-attack and the buggy shutdown --- several articles, close to ten or so, were published here that dealt with the economy and economics as a discipline: among them, whether economics is or can be a science, and then several on the prospects of the US economy . . . short- and long-term. These articles, alas, aren't available yet. Their reappearance here depends on WebXpertz, the buggy prof's web management firm, getting permission from biggie.com (its ISP) to use biggie's server and fetch the buggy archives missing after April 16th. These articles on the economy formed a logical sequence that, over the weeks, unfolded a lengthy analysis of a coherent sort --- in principle anyway, subject to buggy brain-lame aberrations --- so that you needed to read the earlier articles to make sense of the latest.

Toward the end of June, the articles were narrowing in focus to concentrate on the US economy's immediate prospects ---- most of them bright enough (not all) --- and on four theoretical obstacles, it's said, that might impede a much better growth record the remainder of this year and into the next couple of years . . . roughly the short-term. Two of the obstacles --- [1] deflation and [2] a liquidity trap --- were dealt with at length just before the July 1st attack; and both, to say the least, turned out to be noticeably hyped-up dangers. Japan, it's true, might be suffering from deflation, a general fall of the price level; by contrast, there's almost zero probability that it will materialize here. As for a liquidity trap --- first identified theoretically by Keynes in the 1930s Great Depression, in which key nominal interest rates are at or near zero, yet are unable to stop deflation and kick-start economic growth --- it's not clear it ever existed even in those depressing days, let alone hovering as a real threat to the immediate future of the US economy.



That leaves two remaining obstacles, singled out in both economic theory and journalism as potential dangers to more vigorous US economic growth, that we want to deal with in the days to come:

[3] Will the large fiscal stimuli this and following year --- almost a trillion-dollars worth of federal deficit, believe it or not, for 2003 and 2004 --- work to expand the short-term growth rate of the economy, given that lots of recent new classical economic theory claim they won't?

No one, note right off, argues that any form of fiscal or monetary stimuli can raise the economy's growth rate in the long run: potential output, long-term growth prospects, are strictly supply-side matters, above all

1) capital investment,

2) the quality and growth of the labor force,

3) the availability and cost of energy and raw materials,

and 4) technological progress . . . all influenced heavily, in turn, by wider iinstitutional and policy matters.

Such as? Such as the effectiveness and integrity of banks, stock-markets, accounting firms, and venture capital --- financial institutions. And the efficiency or not of the regulatory environment. Or taxes and their impact on incentives to invest and take-risks and get professional training. Or entrepreneurship and risk-taking or its aversion --- something, it appears, widespread in the EU and Japan these days. Or the quality and talents of corporate management, including its openness to new ideas and its response to the challenges of rival firms. Or honesty in government, and the degree of corruption, nepotism, and red-tape that exists.


So, then, any fiscal or monetary expansion, as we'll see, is at best a matter of kick-starting faster growth in a slow-growing economy either in or coming out of a recession. And in the US economy, we've noted, recessions have grown shallower and more infrequent the last two decades; in the upshot, renewed GDP growth and the creation of new jobs are all that slower. Then, too, a series of dislocating blows held back the pace of economic recovery since the recession's end in the fall of 2001: the impact of 9/11, concerns over the Iraqi war in the winter and early spring this year, oil prices that have risen to around $33 a barrel (around $25 seems to be a more desirable level for us, even for oil producers in the long run), and of course --- after the stock market ballooned for years, then tanked in 2001 --- the lingering fears of investors that honest accounting practices in corporate America might still be wanting. Small wonder that GDP growth last year, 2002, was a lackluster 2.4% --- and even slower the first quarter this year. Or that, in consequence, unemployment has continued to rise since the recession's end, now topping around 6.2% or so.

And there's more. Enter, in particular, the big productivity increases of the US economy the last few years, sustained in the recession and rising since. Very good news for the long-term growth potential of the US economy --- rises in our living standards are driven by productivity advances --- these productivity increases have, perversely it turns out, been bad news in the short term.

How so?

In this way: potential output --- the long-term growth potential of the US economy --- is the same as the full non-inflationary employment-level. Rises in it therefore mean that the economy has to grow faster toward its full potential if job-creation is to accelerate. So far, with GDP growth around 2.4% annually, firms find it much easier to cope with so-so sales prospects, keeping their profits and margins up, by working smarter and more efficiently with fewer workers rather than hiring back laid-off workers: in short, staying competitive by tapping the greater productivity of the economy. To clarify further, consider the stats here. If the potential output of the US economy has grown from 1.5% annual growth in the dismal years between 1975 and 1994 to around 2.5 - 3.0% --- thanks to big increases in productivity, technological progress, and more effective corporate and other firm responses to global and national competition --- then US economic growth even in the short-run has to be raised to 2.5 - 3.0% for new jobs to be created. And even that is misleading. The US labor force, you see, grows about 1.0% a year as a result of new entrants into the job market.

The result? We can't expect new jobs to be created on balance and hence reduce unemployment --- now around 6.2% (a good record compared to the late 1970s and 1980s) --- unless we can find a way to stimulate the economy to start growing at a combined potential output of around 3.5 - 4.0%.

So much for short-term needs. Fiscal and monetary policies, to repeat, cannot raise long-term growth output by expansionary short-term means; and even then, as we''ll show, lots of new classical theory throws doubt on the ability of fiscal policy to even have a short-term expansionary effect. But note. Oppositely --- even if fiscal and monetary stimuli work in the short-term yet can't raise the long-term growth rate of an economy --- high governmental deficits sustained over several years can, it seems, adversely influence investment and reduce the trend of long-term economic growth . . . and for reasons that the buggy prof would like to deal with.

Clear? Well, maybe not at this stage. In the days to come, the articles that emerge will try to throw more light on these theoretical and practical matters.



[4] What growth stimuli to GDP can we expect from the lower dollar and any improvements in our current account (trade and services)?

Right now, compared to late 2001 when the eight month recession that year drew to an end, the dollar's down about 8-9% lower on a trade-weighted base: its fell rapidly against the euro (with a partial rise the last few weeks); stayed more or less the same against the Yen as the Japanese Central Bank sold dollars and bought its national currency; has risen against the Mexican peso and other Latin American currencies, but fell against the Canadian dollar. For that matter, its value hasn't changed against the other big Asian currencies, China's, Hong Kong's, Taiwan's, and those of the growing economies of Southeast Asia. In turn, our analysis of the lower dollar's impact on US economic growth will lead to a discussion of the global economy and the US balance of payments generally, and whether a strong dollar or a weaker dollar is desirable? The answer: it depends. (Not very enlightening as it stands, no?)



There'll be more here too --- especially the problem of a big imbalance in the global economy, caused by other rich countries or regions like the EU being way too dependent on export-led growth instead of domestic-induced stimuli . . . which means, in barebones terms, always waiting for the US economy to resume vigorous growth and exporting massively to it.

Just think. Japan, a country of 120 million prosperous people with a GDP --- and a per capita income in purchasing power parity terms about 75-80% of the American level --- continues to lean heavily on such massive exporting to the US (and to a lesser extent elsewhere). The EU is no different. That's especially true of Germany, with 80 million people and still the biggest country economically there. In particular, with nearly 400 million people (to be expanded to almost 480 million next year), and a GDP about 85% of the US's --- and a per capita income in purchasing power parity terms around 65-70% of the American level --- the EU, stagnating for two years now and Germany itself sliding into its second recession after the worst growth record of the last decade in the EU, continues to wait on the US economy's recovery for its own. "The European economy today is dead," Jorma. Ollila, the chairman of Nokia, the world's best cell-phone company lamented yesterday. "There is no growth and consumer confidence is low." The problem of such export-led dependence on the part of rich, highly populated countries or regions also underscores a major imbalance in the global economy. It makes no sense, and it's been around for decades.

Back in the early 1980s, for instance, the prospects of the global economy looked even dimmer than now. The same was true of the US, EU, and Japanese economies. Fortunately, the Reagan tax-cutting and deficits --- as well as a quick end to the start of surging US inflation (at a cost of a deep but short-lived recession in 1981 and early 1982) --- led to a booming US economy. In turn, exports flooded into our country from Europe and Asia and elsewhere, and it was estimated that 40-50% of the growth of the EU and Japanese economies the next few years hinged on that big boost in exports. (Ultimately, the resulting trade imbalance led to a concerted effort by the EU, Japanese, and US authorities responsible for the exchange rate of their currencies to bring the dollar down over the next five years from its soaring height --- almost 12 French francs for $1, and 2.4 German marks for the same --- and by 1991, the US current account of trade in goods and services was almost back to equilibrium, something rare in the last 30 years.)

By now, two decades after the initial Reagan-inspired boom that brought the global economy out of a serious recession --- aggravated by mammoth oil price hikes in the mid- and late-1970s and tremendous strains on developing countries' import bills for oil --- you'd think that imbalance would have been remedied. It hasn't. it continues to fester.

Fortunately, while the EU stagnates, even Japan's short-term economic prospects are brightening, and that economy may grow around 2.0% throughout the year --- hardly a head-spinning performance (the US grew a lackluster 2.4% in 2002, and should, if all goes well, be growing between 3.0 and 3.5% the second half of this year), but well above the EU's stagnation, and far better than Japan's average throughout the last decade of serious slump: around 1.0% annual growth for ten years now.


OTHER ECONOMIC ARTICLES TO COME On top of these economic tasks, as some of you might remember, a lengthy article about the Japanese economy had got under way just before June ended. . . the first section or two of a multi-part series left hanging fire. Prof bug would like to delve back into its long-term economic prospects, along with some future discussions of China's economic prospects --- including, for that matter, its wider power-potential to emerge as a possible great power rival to the US in the decades to come. We'll do the same for the EU: its long-term growth outlook, its wider power-potential to become a coherent great power too. Our analysis should, if things go well, be especially interesting in political as well as economic terms . . . above all, given the different forms of capitalism that prevail in the EU and Japan, to say nothing of the still lopsided statism and Communist authoritarianism that mark the Chinese economy.

A hint: the US has been the richest country in per capita terms for the last 120 years, more than half the length of the industrial era, which began in the late 18th century in Britain and in parts of Belgium and northern France (only for those parts to fall behind during the French-revolutionary and Napoleonic wars in the period 1790 - 1815). What's more, if you grasp the key concept that prof bug referred to in the elusive, not-present articles of May and June here --- which we owe to the great Austrian-American economist, Joseph Schumpeter: namely, creative destruction and the dynamic impact of revolutionary technologies that have surged every 50 years or so in long-wave clusters ever since the late 18th century --- the US has been the pivotal innovative country in the last 3 of those 5 waves:

  • 1780 1820: textiles, iron and steel the leading-edge industries that restructure whole economies, shift economic dynamism across regions and countries, and influence profoundly the distribution of global power. Britain and to an extent France and Belgium the innovators here, with US industrialization not far behind: by the 1820's, American manufacturing productivity was already higher in several related industries than in Britain itself.

  • 1820-1870s: shipbuilding (steam engines), railways, and telegraphs, with Britain and France the breakthrough innovators, the US keenly on their tracks.

  • 1870s-1920s: electrification, the internal combustion engine (cars, trucks), telephones, mass production techniques, and new credit facilities for purchasing houses and consumer durables . . . the US the big pioneer here.

  • 1930s-1980 or so: the mass media (radio, TV, movies), mass tourism, airplanes and the airline industry, mass tourism, consumer electronics, and synthetics, plus the overall emergence of mass affluence in industrialized countries and the big industrial take-off in East Asia. Here the US was again the big pioneer, with Japan emerging as a giant dynamic economy and doing more than any other country to improve the quality of consumer goods.

  • 1980s on: the information age arrives, with the big radically restructuring technologies found in ICT: information and telecommunications, the computer chip its initial symbol and the Internet the latest. Plus big breakthroughs in bio-tech, including genetically modified foods (going on for centuries at a slower pace) that can easily feed the world's teeming population, to say nothing of the medical implications. And nanotechnology, possibly the most radical of all --- reworking the molecular structures of materials --- now set to take off too. The US, once more, the clear pioneer, with Japan and Germany fading noticeably as economic powerhouses, but with East Asia and China and India and parts of Latin America now industrializing rapidly and shifting the economic balance in the world to an extent.

  • Will the information age technologies spend their revolutionary impact in another 30 years or so, like previous long-wave breakthroughs? Don't count on it. We are now dealing with knowledge: directly and in non-mediated ways, with science-driven innovations likely to extend endlessly into the future . . . including, soon, in two or three decades, a shift away from petroleum and other carbon-based fuels to more environmentally benign energy systems that will also, fortunately, erode the overwrought importance of a few backward Arab oil producers in global politics.



    At some point, too, we'll start dealing with the whole issue of economic development and globalization, and why some regions and countries in the developing world have done better than others . . . all matters in large part, though not entirely, of proper policies and institutions --- legal, financial, business organization, regulatory and administrative, and political, with lots of questions here about the degree of corruption, nepotism, and trust or mistrust that mark dozens of developing countries' futures.

    There's more. You can expect some appraisal of the latest US-mediated peace-talks between Israel and the Palestinian Authority, Iraq's likey political future, and the wider, hard-to-deal-with problem of nation-building in general.