Financial crisis

Martin Wolf

Lawrence Summers (c) WEF

On Thursday, I moderated a fascinating lunch-time discussion on “secular
stagnation” with Lawrence Summers, former US treasury secretary,
who has recently propounded this idea.

Other participants were Motoshige Itoh of Tokyo university, Edmund Phelps, Nobel laureate, director of the Center on Capitalism and Society, Columbia University, Adam Posen, director of the Peterson Institute for International Economics, Helene Rey of the London Business School and Kenneth Rogoff of Harvard. This was a notably heavy-weight panel.

The discussion was rich and complex. But here are some conclusions.

First, since the crisis in 2007 and 2008, the equilibrium long-run real interest rate in the high-income countries has been ultra-low and the equilibrium real short rate has been negative. There is no disagreement on this. This was an obvious indicator of sustained and chronic weakness of demand.

Second, the main instrument we have used to deal with condition this has been hyper-aggressive monetary policy. But this creates substantial problems (in some views, at least, including mine): it distributes income towards both the financial sector and the rich, while also generating bubbles. Read more

Chris Giles

Chris Giles, economics editor, finds a mood of optimism among economic experts on the first day of the World Economic Forum in Davos, but concerns remain over the strength of the recovery.

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Chris Giles

The West is forever petrified of Chinese and Indian growth that might destroy advanced economy standards of living. Politicians fuel that fear. In the UK, David Cameron, prime minister, talks repeatedly about a “global race” and the need for sacrifices so Britain can succeed in that race. His predecessor Gordon Brown used to repeat one of his favourite statistics that there were 4 million graduates a year coming out of China and India and only 250,000 in the UK.

In a panel on the world of work, business leaders with experience in working in both advanced and emerging markets had a very different story to tell. There was a huge shortage of skilled workers, they all agreed, and a surfeit of unskilled. Emerging economies education systems were not up to scratch and there was still a need for ex pats and a lot of investment in basic education in emerging markets. Read more

Tony Barber

GEORGES GOBET/AFP/GettyImages

Here is a startling prediction from the European Commission. In the absence of comprehensive economic reforms, living standards in the eurozone, relative to the US, will be lower in 2023 than they were in the mid-1960s.

This forecast, contained in the Commission’s latest quarterly report on the euro area economy, deserves to be displayed prominently on the wall of every president and prime minister’s office in Europe.

It is a sobering prediction for two reasons. First, it contrasts starkly with the comforting tales of economic recovery and financial market stability on which Europe’s leaders are congratulating themselves in these early weeks of 2014. Second, it raises profound questions about Europe’s relative weight in the world and, in particular, about its military alliance and economic partnership with the US. Read more

An elderly woman walks through a wintry Spanish city, sadly bemoaning her country’s fate. “All the studies show we always come last in the rankings,” she exclaims, shuffling past a placard highlighting Spain’s poor performance in international education tests.

She bumps into old friends, all of whom tell her of their plans to leave the country and “become foreigners”. At a nearby market, stalls advertise the benefits of becoming German, Scandinavian or British. She meets a tousle-haired man clutching his German certificate: “I want to know what it feels like when everyone owes you money – not the other way around.” Read more

Esther Bintliff

Want to make your own mind up over Reinhart-Rogoff? Here are links to the original working papers that gave us the mother of all economic dust-ups, the responses of the two sets of authors, and some great secondary sources.

PRIMARY sources:

The working paper by Carmen M Reinhart and Kenneth S Rogoff, published in January 2010:

The critique of the Reinhart-Rogoff research, by Thomas Herndon, Michael Ash and Robert Pollin, published on April 15 2013:

Reinhart and Rogoff respond:

Ash and Pollin respond to the response:

And a selection of SECONDARY sources:

Here’s the post by Rortybomb blogger Mike Konczal that brought the critique to the attention of the masses. Konczal notes that the episode is “good evidence for why you should release your data online, so it can be properly vetted.”

Over at Slate, Matthew Yglesias asked:

FT Alphaville’s Cardiff Garcia and Joseph Cotterill shared their thoughts on the debate:

Paul Krugman has been busy:

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By Gideon Rachman
Travelling between Madrid and Barcelona on a recent weekday afternoon, I wandered into the first-class section of the train. There was only one passenger, snoozing on the black leather seats – and he turned out to be the conductor, who looked up startled at the sound of an intruder.

Gideon Rachman

In the week of Margaret Thatcher’s funeral – and with the euro-crisis bubbling along – it is interesting to take a look back at what Thatcher had to say about the single currency. Much of the commentary since her death has portrayed Thatcher’s views on Europe as irrational and backward-looking. For example, Anne-Marie Slaughter in the FT, wrote that “her attitude to Europe was a throwback to the 19th century”. For good measure, Prof Slaughter adds that Thatcher’s views were “deeply anachronistic and dangerous”. Of course, there was a strong element of emotion in Thatcher’s views of Europe. So what? It is more interesting to note that she also made some quite precise criticisms of the European single currency that look increasingly prescient, as time wears on. Read more

Portugal’s painful austerity programme runs into trouble
Pedro Passos Coelho, Portugal’s prime minister, is one of Europe’s staunchest backers of austerity. But his government’s painful two-year programme of structural adjustment has yet to deliver the results promised. And late last week, the country’s constitutional court issued a ruling that could fatally undermine his efforts to get the economy back on track.

Gideon Rachman

The refusal of the Portuguese courts to authorise the full version of the latest round of austerity cuts will be watched closely in neighbouring Spain – which is, of course, a bigger and more systemically important economy. The Spanish fear that, economically and politically, Portugal offers a vision of their future. The recession there is deeper and so are the cuts to government spending. But with Spain facing another year of recession and cuts – the Spanish too are wondering how long their public will tolerate austerity. Read more