Closing America's Growth Deficit E-mail
Wednesday, 21 September 2011 09:15

As the American economy continues to sputter three years after the global financial crisis erupted, one thing has become clear: the United States cannot generate higher rates of growth in GDP and employment without a change in the mix of the economy’s domestic and export-oriented components. Above all, this will require structural change and greater competitiveness in an expanded tradable sector.

THE ECONOMIST - Matt Bishop Explains 'The Great Mismatch' E-mail
Saturday, 10 September 2011 08:27

By Matt Bishop

In the new world of work, unemployment is high yet skilled and talented people are in short supply.In the new world of work, unemployment is high yet skilled and talented people are in short supply.


“FAR AND AWAY the best prize that life offers is the chance to work hard at work worth doing,” observed Theodore Roosevelt, then America’s president, in a Labour day speech on September 7th 1903. Today the billions of people the world over who seek that prize are encountering simultaneous feast and famine. Even in developed economies that are currently struggling, many people, perhaps more than ever, are doing the job of their dreams, taking home both a good salary and a sense of having done something worthwhile. In booming emerging countries such as China and India, many at least have a better job than they ever thought possible. Yet at the same time in much of the world unemployment is persistently high and many of the jobs on offer are badly paid, onerous and unsatisfying.

This has serious political implications, not least for America’s current president, Barack Obama, who risks losing his own dream job because of his perceived failure to have created enough work for his fellow citizens. As Mr Obama entered the White House in January 2009, the country’s unemployment rate was about to climb above 8%, up from around 5% a year earlier. It has not recovered since and is currently around 9%. Until the presidential election in November next year Mr Obama is likely to be dogged by the phrase “jobless recovery”—always assuming that the recovery does not double-dip into an even more jobless recession.“FAR AND AWAY the best prize that life offers is the chance to work hard at work worth doing,” observed Theodore Roosevelt, then America’s president, in a Labour day speech on September 7th 1903. Today the billions of people the world over who seek that prize are encountering simultaneous feast and famine. Even in developed economies that are currently struggling, many people, perhaps more than ever, are doing the job of their dreams, taking home both a good salary and a sense of having done something worthwhile. In booming emerging countries such as China and India, many at least have a better job than they ever thought possible. Yet at the same time in much of the world unemployment is persistently high and many of the jobs on offer are badly paid, onerous and unsatisfying.

This has serious political implications, not least for America’s current president, Barack Obama, who risks losing his own dream job because of his perceived failure to have created enough work for his fellow citizens. As Mr Obama entered the White House in January 2009, the country’s unemployment rate was about to climb above 8%, up from around 5% a year earlier. It has not recovered since and is currently around 9%. Until the presidential election in November next year Mr Obama is likely to be dogged by the phrase “jobless recovery”—always assuming that the recovery does not double-dip into an even more jobless recession.

Much as Americans complain, compared with some other countries their economy presents a picture of good health. In the weaker economies of the euro zone, jobs have been sacrificed in the name of austerity, especially in the public sector, to avoid defaulting on debts built up by free-spending governments. Anger at high unemployment has caused unrest and may have been a contributory factor in the riots in Britain last month. In late July thousands of unemployed young Spaniards, known as los indignados (the indignant), having protested in cities across their own country, began a long march to Brussels to draw attention to the shockingly high jobless rate of over 40% among their age group.

Outside the rich world, the Arab Spring that brought down the governments of Tunisia and Egypt earlier this year was triggered in part by the lack of decent work for young people. Even in booming China and India policymakers worry about how to ensure there are enough decent jobs, especially for young people and graduates. Both countries still have hundreds of millions of people living in abject poverty, especially in rural areas. A good job would be the best way out.

Yet even as many people face a job famine, a minority is benefiting from an intensifying war for talent. That minority is well placed to demand interesting and fulfilling work and set its own terms and conditions. But above all the pay of such people—from executives to investment bankers and software engineers in Silicon Valley—is soaring. The most talented increasingly get a multiple of the salary of the average performer. This has led to rising inequality in incomes in many countries which may be increasing social tensions.

Mr Obama can reasonably point out that he was elected in the wake of a financial meltdown that had threatened to bring about another Great Depression, with an unemployment rate that would make the current one look like a lucky escape. The co-ordinated global stimulus by members of the G20 in 2009, though far from perfect, helped save the world from something much worse—though that probably provides little comfort to the 205m people round the globe who are now unemployed. Nor is there much scope for further stimulus.

But today’s jobs pain is about more than the aftermath of the financial crisis. Globalisation and technological innovation are bringing about long-term changes in the world economy that are altering the structure of the labour market. As a result, unemployment is likely to remain high in the rich economies even as it falls in the poorer ones. Edmund Phelps, a Nobel prize-winning economist, thinks that in America the “natural rate” of unemployment (below which higher demand would push up inflation) in the medium term is now around 7.5%, significantly higher than only a few years ago.

Michael Spence, another Nobel prize-winning economist, in a recent article in Foreign Affairs agrees that technology is hitting jobs in America and other rich countries, but argues that globalisation is the more potent factor. Some 98% of the 27m net new jobs created in America between 1990 and 2008 were in the non-tradable sector of the economy, which remains relatively untouched by globalisation, and especially in government and health care—the first of which, at least, seems unlikely to generate many new jobs in the foreseeable future. At the same time, says Mr Spence, the mix of jobs available to Americans in the tradable sector (including manufacturing) that serves global markets is shifting rapidly, with a growing share of the positions suitable only for skilled and educated people.

Fear of continuing high unemployment also made a bestseller of Tyler Cowen’s book, “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better”. It argues that for much of its history America (and to some extent other rich countries) enjoyed the benefits of free land, lots of immigrant labour and powerful new technologies. But over the past 40 years these advantages have faded and America has found itself on a technological plateau, he says. To the obvious question about the internet, he retorts that the web has provided lots of utility for users but much less in the way of profits—and relatively few new jobs.

Lowering this new natural rate of unemployment will require structural reforms, such as changing education to ensure that people enter work equipped with the sort of skills firms are willing to fight over, adjusting the tax system and modernising the welfare safety net, and more broadly creating a climate conducive to entrepreneurship and innovation. None of these reforms is easy, and all will take time to produce results, but governments around the world should press ahead with them.

As this special report will explain, the changes now under way will pose huge challenges not only to governments but also to employers and individual workers. Yet they also have the potential to create many new jobs and substantial new wealth.

To understand why these changes are so exciting for some people and so scary for others, a good place to start is the oConomy section on the website of oDesk, one of several booming online marketplaces for freelance workers. In July some 250,000 firms paid some 1.3m registered contractors who ply their trade there for over 1.8m hours of work, nearly twice as many as a year earlier.

ODesk, founded in Silicon Valley in 2003, is a “game-changer”, says Gary Swart, its chief executive. His marketplace takes outsourcing, widely adopted by big business over the past decade, to the level of the individual worker. According to Mr Swart, this “labour as a service” suits both employers, who can have workers on tap whenever they need them, and employees, who can earn money without the hassle of working for a big company, or even of leaving home.

It is still small, but oDesk shows how globalisation and innovation in information technology, the two big trends that have been under way for some time, are moving the world nearer to a single market for labour. Much of the work on oDesk comes from firms in rich economies and goes to people in developing countries, above all the Philippines and India. Getting a job done through oDesk can bring the cost down to as little as 10% of the usual rate. So the movement of work abroad in search of lower labour costs is no longer confined to manufacturing but now also includes white-collar jobs, from computer programming to copywriting and back-office legal tasks. That is likely to have a big impact on pay rates everywhere.

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MARKETPLACE - Kai Ryssdal 'An Economist Roundtable on Jobs' E-mail
Friday, 09 September 2011 11:05

Kai Ryssdal sits down with three economists to talk about their ideas on jobs: where new jobs may come from, what needs to be changed, the roles of education and deficit reduction, and more.

- Michael Spence from New York University's Stern School of Business

What makes the current situation so hard is that we're trying to solve a long-term problem with a very constrained fiscal situation.

- Catherine Mann from Brandeis University

    I think if we look at the type of policies that were put forward in the president's speech last night, they are get-back-to-work policies. They are designed to move people from just taking an unemployment check to you can get unemployment but you've got to go train. We're going to give a payroll tax, because we'd like you to spend in the local economy. So the local economy gets some job creation and they get some spending.

- Michael Greenstone from MIT and the Hamilton Project at Brookings

I think the for the short-run problem, some of the policies around incentivizing hiring through payroll tax cuts for new hires are really excellent ideas, and ways to get lots of bang for the buck, given the current fiscal environment.

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BLOOMBERG - 'U.S. Too Focused on Fiscal Policy vs. Growth' E-mail
Thursday, 08 September 2011 08:12

Nobel laureate Michael Spence, professor of economics at New York University, talks about his book "The Next Convergence," global economic growth, and U.S. fiscal and monetary policy. Spence speaks with Tom Keene and Michael McKee on Bloomberg Television's "Surveillance Midday."


NEW YORK TIMES - 'A Closer Look at Romney's Economic Plan' E-mail
Wednesday, 07 September 2011 08:22

By Mokoto Rich

Now that we’ve had a day to digest Mitt Romney’s economic plan, Matthew Yglesias looks between the lines and finds what he calls an “agenda on social welfare policy that’s basically every bit as extreme as anyone else’s.”

So although Robert Reich calls the plan “unremarkable” and “way too reasonable for the current G.O.P.,” Mr. Yglesias points out that Mr. Romney’s commitment to lower taxes will have to come at the expense of something, and that something could very well be Medicare.

In the plan, Mr. Romney says that “before President Obama exploded the size of the federal government, our existing tax rates were more or less adequate to pay for the government we needed.”

True, in 2006, the Bush-era tax rates were able to finance government spending with a much smaller deficit. But even without a financial crisis, the aging demographics of the United States population mean that in the absence of serious health care cost reform, the government will need more money to pay for Medicare and Medicaid services for the elderly, disabled and poor in coming years.

“Maintaining America’s commitment to health insurance for senior citizens is going to require higher taxes,” writes Mr. Yglesias. “When politicians try to say that we can get by with Bush-era levels of taxation indefinitely, they mean we can get by with Bush-era levels of taxation if we scrap Medicare.”

The Romney camp argues that some of the tax cuts — particularly the drop in the corporate tax rate from a high of 35 percent to 25 percent — will be offset by more companies’ bringing their operations back to the United States and more investment here by companies, generating more corporate income to be taxed at the lower rate. But many economists and tax experts say that without reforming the tax code and eliminating the many loopholes that already allow companies to pay far less than 35 percent — or less than 25 percent, for that matter — it’s hard to imagine such a corporate tax cut being that effective.

Mr. Romney’s campaign officials declined to say just how much they believed the lower rate would be offset by generation of taxable revenues in the United States by more companies. And the plan also specifically “does not promise the immediate creation of some imaginary number of jobs, because government cannot create jobs.”

Campaign officials did say that the plan, in its totality, would raise economic growth over all to an average of 4 percent on an annual basis, induce private companies to create 11.5 million jobs and reduce the unemployment rate to 5.9 percent by the end of Mr. Romney’s first term in office.

That strikes economists as hugely ambitious. “I think it’s a stretch,” said Michael Spence, a Nobel Prize-winning economist and the author of “The Next Convergence: The Future of Economic Growth in a Multispeed World.” “Nobody knows how well we’re going to respond both on the public- and private-sector side and restore competitiveness.” Acknowledging that the plan was of course an “opening shot,” Mr. Spence, a senior fellow at the Hoover Institution, said: “Does his set of policies do it? My answer would be no.”

There are several challenges for Mr. Romney, one of which he would create on his own. By calling for a shrinking of government, he is promising to shrink the federal work force. Although the private sector dominates employment, layoffs by government at all levels have weighed heavily on the labor market during the weak recovery. Mr. Romney said he planned to reduce the federal work force by about 10 percent, which works out to about 282,000 workers at current levels.

And one thing Mr. Romney did not address at all in the plan unveiled on Tuesday was housing. The recent crisis was set off by a collapse in the housing market, and millions of owners currently owe more than their homes are worth. Despite record low interest rates, home sales are still sluggish. That’s bad news for the more than 1.1 million unemployed construction workers, not to mention the millions of others in banking, real estate, retail and home improvement whose livelihoods depend at least in part on a robust housing market. It’s hard to imagine a healthy economy without some fix for housing. Mr. Romney’s campaign officials say a plan for that is coming.


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BLOOMBERG - 'Fed could focus more on housing sector' E-mail
Monday, 29 August 2011 10:54

BLOOMBERG - 'Significant risk of downturn in Europe or America' E-mail
Friday, 26 August 2011 10:58

THE FINANCIAL TIMES - A Coherent Voice for Asia? E-mail
Friday, 26 August 2011 10:49

By David Pilling


Just what the world needs – another think tank. Except that maybe, just maybe, this is a good idea. This week saw the launch of the Fung Global Institute, a self-styled Hong Kong-based independent research institute that wants to be the Brookings of Asia. Its mission is to produce “business-relevant research on global issues from Asian perspectives”.

There are a few red flags here, of which later. But the idea itself is timely. If Asia continues to grow at anything like its current pace, it will play an increasingly important role in the global economy. Yet it lacks anything like a coherent, intellectual voice. The global dialogue is being held in Washington, New York and London. Asia’s views deserve to be heard more – and not just in cacophony of a forum like the G20.

The institute kicks off with $15m, courtesy of the Victor and William Fung Foundation. Not enough to start a football team, but still. The Fungs are the brothers who built Li & Fung into the world’s largest trading company. If you’ve ever bought anything at Walmart you have Victor and William to thank – or to blame.

They’ll be looking for another $85m from business to get the institute started and hope eventually to have 30-50 research fellows, plus a network of associated scholars.

The president of the institute will be Andrew Sheng, former chairman of the Hong Kong Securities and Futures Commission. Michael Spence, winner of the 2001 Nobel Prize for economics and former dean of Stanford Business School, will be chairman of the academic board, although he won’t live in Hong Kong. Victor Fung will be chairman of the board of directors.

The institute, which will hold an annual forum in Hong Kong, will concentrate on four main areas of research. First is the global supply chain, an area obviously near and dear to the Fungs, but a useful way of looking at a global economy that is no longer always best divided into nation states. Second is global governance, concentrating on finance. That sounds a bit dull. But it does play into the global debate about financial regulation, tax regimes and so on. Third comes China’s new growth model – what Prof Spence describes as a look at a “middle income transition economy” – and a rather important one at that. This presumably will study such areas as China’s efforts to shift its focus towards domestic demand and to move up the value chain.

Last, and most intriguingly, comes “global growth sustainability”. If the Chinese and Indians all start living like Americans, then we are all doomed. (I checked with Nobel prize-winning Prof Spence, and “doomed” – or “cooked” in his version –  is apparently the technical term for it.) So what kind of lifestyles should Asians be seeking if they are to marry their absolutely legitimate aspiration for advanced-country incomes with sustainability? No doubt Nicholas Stern, author of the eponymous report on global warming and one of the institute’s “founding experts” (whatever that means) will have something to say on the subject.

These are promising subjects of inquiry. Done well, such research could fill a genuine gap. What about the potential pitfalls? One is that the lack of a coherent Asian voice is not for want of an institute. It is because Asian nations have vastly different experiences and agendas. To put it bluntly, there really isn’t any such thing as Asia at all. What Japan, China and India might like to say about regional security issues, for example, would be rather different, not to say diametrically opposed. Ditto their likely views on banking reform, floating exchange rates, or corporate governance. These varying views reflect different levels of development, different political systems and competing national interests.

Promisingly, Victor Fung stresses “Asian perspectives”, adamantly and consistently in the plural. Thankfully, too, the institute shows no signs either of trotting out tired clichés about “Asian values”. It is unlikely to become a forum for lecturing the Americans on the virtues of thrift.   

What about the $85m from business and the association with the Li & Fung company itself? The institute makes no apologies for wanting to work closely with business and for seeing business as a catalyst for change. That is fine. The danger is that its academic independence falls hostage to a business agenda and the institute becomes just another lobby group for low taxes and light regulation. At all costs, it must guard against that.


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THE NEW YORK TIMES - Economic Research Institute Created in Hong Kong E-mail
Thursday, 25 August 2011 10:44

Michael SpenceBy Keith Bradsher


HONG KONG — The leader of one of the most influential business families in Hong Kong announced Thursday that the family’s foundation was setting up a nonprofit research group here to analyze economic and corporate issues from an Asian perspective.

The research group, the Fung Global Institute, is the latest in a series of efforts by Asian tycoons, universities and governments to set up institutions to match the kind of analysis produced in the United States by groups like the Brookings Institution.

But research groups in Asia have struggled so far to attract prominent international scholars or to establish reputations for independence in a region where democracy and freedom of speech are still limited in many countries.

The first president of the Fung Global Institute will be Andrew L.T. Sheng, the former chairman of the Hong Kong Securities and Futures Commission. A. Michael Spence, the winner in 2001 of the Nobel Memorial Prize in Economic Science and the former dean of the Stanford Graduate School of Business in California, will be the chairman of the academic board.

The Victor and William Fung Foundation, named for the brothers who built Li & Fung into the largest trading company providing Asian consumer goods to the American market, is providing an initial $15 million for the endowment, and seeking to raise $85 million from other business leaders in Asia, said Victor Fung, who will be the founding chairman.

Mr. Fung and Mr. Spence said that the institute would not have fixed positions on issues but would allow its fellows to hold and articulate a range of views. Mr. Fung said that Hong Kong’s protections for free speech had helped make it the clear choice for the headquarters of the institute, although many of the top experts will be allowed to live elsewhere.

The initial four areas of research for the institute are less controversial than political themes would be. The areas are global supply chains, global financial governance, China’s economic growth model and sustainability of global economic growth.

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The U.S. Employment Challenge E-mail
Wednesday, 24 August 2011 13:34

Behind the US unemployment numbers


Unemployment induced by the crisis is likely to turn out to be stubbornly high because it’s in part structural, and before the crisis it was sort of hidden from view or overcome by some unusual forces that are not sustainable. In the study of the evolving structure of the American economy and the employment problem, we looked at employment over an 18-year period coming up to 2008, just before the crisis, and we looked at value added sector by sector, and we looked at value added per person.

COUNCIL on FOREIGN RELATIONS - Reviving U.S. Economic Leadership E-mail
Wednesday, 24 August 2011 11:45

Interviewer: Christopher Alessi, Associate Staff Writer

Standard and Poor's historic downgrade of U.S. debt on August 5 damaged the United States' global reputation, but U.S. treasuries are still the safest asset in the world (Reuters). But that will certainly change if the United States does not enact long-term, bipartisan measures to reduce its fiscal deficit and debt-to-GDP ratio, says Nobel Prize winning economist A. Michael Spence. International investors are more concerned by political inaction in Washington than by the downgrade. "The debate in Washington seems to be deadlocked on taxes and the size and role of government--and restoring economic and financial health seems to be sidelined in the process," says Spence. At the same time, he explains, the ballooning U.S. debt crisis, coupled with that of the eurozone, is contributing to a global economic slowdown.

How, if at all, has the United States' role in the world shifted following this month's S&P downgrade?

Our reputation was damaged, mainly by allowing the integrity of our sovereign debt to be in question. The S&P downgrade reflected that, though I think it was premature. The political gridlock over fiscal stabilization and growth is also damaging our reputation externally; the downgrade also reflected that.

U.S. treasuries continue to remain the safest bet for global investors. Can that be maintained?

Yes, but not if we cannot find a way to progress to a credible--meaning with bipartisan support--five to seven year plan for the restoration of fiscal stability. [That] means reduced deficits, growth to get the debt-to-GDP ratio down to safe levels--50 to 60 percent--and plans to eliminate, reduce, or fund future liabilities, which are rising.

What does the downgrade signify for the role of the U.S. dollar as the world's reserve currency, and is an alternative likely to emerge?

Not in the short run. It means the only viable reserve currency is less safe. The euro may stabilize and become a second reserve currency. The yuan will expand its role in trade settlement [and in global] value, but cannot function as a reserve currency for at least a decade. [The yuan] needs capital controls and exchange rate management. Perhaps over time, after the current volatility and issues in Europe and the United States are behind us, some sort of international reserve currency could be created. But that is some time in the future.

You have written about the "inadequacy of policy responses" to the debt crisis. What policies, then, should the United States pursue in order to restore international faith in its credit and its economy at large?

The main item is fiscal balance. But restoring growth and employment is key, too. We are not making progress on the first and are only starting to address the second two, despite all of the talk. Once that is done, and we are back on a sustainable growth path--with a balance on the trade account, as well--the Fed can unwind the balance sheet expansion. What worries investors and others is that the debate in Washington seems to be deadlocked on taxes and the size and role of government--and restoring economic and financial health seems to be sidelined in the process.

We need to decide on a sensible plan to reduce deficits over five to seven years, without doing it too fast and flattening the economy. Part of that plan has to include investment in people, skills, competitiveness, and technology in various sectors of the tradable part of the economy, so that it becomes an employment engine. Remember we had excess domestic demand, and lost it in the crisis; to do this requires real sacrifice in the short run.

The employment problem is structural and that takes time to change. Probably five years or so, perhaps more. It cannot be done with incomes and consumption levels at their current levels. [Consumption levels] need to adjust down and saving and investment [levels] up. We have been living beyond our means and expectations are still set there, with the current difficulty being regarded as somehow temporary. We need to share the burden and take care of the unemployed. I would suggest a limited-term surtax to fund this.

What policy steps can the Fed take to restore confidence?

The Fed is doing what it can--and that is mainly not to do anything to damage a fragile return to economic health. But it cannot restore fiscal balance, address other structural and competitiveness issues, and tackle related employment challenges. It may help, but it is a misconception of their instruments, mandate, and powers to think the Fed can do this alone. That kind of thinking produces lack of action in other areas and further delays in restarting the economy.

How do the U.S. and European debt crises compare?

Both are the result of a combination of fiscal imbalances, and growth and productivity problems. But there are differences: Several European countries [peripheral economies, like that of Greece] used excess public sector debt to sustain growth and employment, benefiting from [access to] the euro and low interest rates. The United States--along with Britain and Spain--used excess private-sector debt to produce an unsustainable growth pattern. Then, with the financial crisis and the response, the private sector deleveraged and the public sector leveraged up to compensate. And now we find ourselves in similar positions.

Europe, however, has a multi-country discussion and burden-sharing to get through. That makes [finding policy solutions] harder than it should be in the United States.

What's the joint impact of the two crises on the global economy?

A global slowdown, including in some of the emerging economies. The latter can keep up high growth if we are stalled, but not if we take a big downturn. Too much export demand will be lost.

What does recent the global market volatility mean for both the U.S. and global economic outlook?

The market volatility is really a reflection of declining growth prospects combined with political inaction or gridlock. Prices are resetting downward to reflect the headwinds for growth and the more realistic growth expectations. Policy uncertainty is contributing to risk and volatility--all not great for the outlook.

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WASHINGTON POST - 'I don't think there's a solution to the employment problem in the short run' E-mail
Friday, 19 August 2011 06:25

By Ezra Klein

Michael Spence is a Nobel laureate in economics and a professor of economics at New York University’s Stern School of Business. His latest book is The Next Convergence: The Future of Economic Growth in a Multispeed World, and it brings a global perspective to an economy we too often think about primarily in national terms. I reached him last week in Milan, Italy, where he shared his frankly depressing, but quite realistic take on where the economy is going. An edited transcript of our conversation follows. If you read only one part of it, read the final question.


Ezra Klein: One of the reasons I was looking forward to talking with you is that your take on the economy is quite global in perspective, which I think is a useful corrective to those of us in Washington who can get caught in thinking this is all about what we do here. So what do you think we’re missing?

Michael Spence: I think in America in particular, probably because we’ve been dominant for so long, we have very deeply embedded habits of thought, economists included, that pay very little attention to the international linkages that affect our economy. In this situation, it will be a lot easier for us to solve a very difficult economic problem if the rest of the world is growing. The same should be said about Europe and even Japan. It could also become easier if we could manage to agree on the importance of fairly simultaneous, coordinated growth strategies. Growth is going to be pretty important to dig ourselves out of the fiscal hole.

E.K.: And what should those strategies be? What can we do that would actually work to get, say, unemployment down?

M.S.: I don’t think there’s a solution to the employment problem in the short run. If you look at the situation, the domestic economy is demand short. That neutralizes the non-tradable part of the economy [Note: by non-tradable, Spence means things that don’t get traded across borders, such as education and health care. You can read more on the distinction here — E.K.], which is 70 percent of what we do, and neutralizes the domestic component of the tradable part. And the tradable part, even if it’s growing, won’t generate much employment. So we’re just not positioned to solve this unless the non-tradable sector starts to grow again.

So I may be missing something, but I can’t figure out a short-term fix. If somebody in the administration asked me what we should do with the unemployed, I’d say treat them well in terms of access to basic services and income supports, and then we need to have an argument about how to get to work on growth.

E.K.: You’ve argued before that what the crisis has really done is uncover problems we’ve had for a long time, but managed to paper over through consumption and credit bubbles. Can you expand on that a bit?

M.S.: We had all these productivity improvements and all this outsourcing in the economy, but we still managed to employ those people. That was the critical thing that happened. Instead of outsourcing and productivity improvements creating an instantaneous employment or wage problem, those people managed to find employment in the non-tradable side of the economy. A lot of them were employed in government, in health care, and many of them were employed in industries, like construction and retail, fueled by a consumption bubble. But we were just delaying the adjustment. Some things looked wrong during this period: The middle incomes were stagnating and the jobs didn’t look very challenging. But these are big industries, so when they’re humming along, they employ a lot of people.

E.K.: So what happens now?

M.S.: Some leader is going to have to stand up at some point and say we really need to spend money putting people back to work, period. And that’s going to mean sacrifices on the part of the people who are working. We’re trying right now to keep our lifestyles going, and it’s not really working, but the way we’re doing it is putting all the burden on the unemployed while trying to leave the employed untouched. Eventually, this is going to require a redistribution of that burden.


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The Road Ahead: Will the West Stabilize and Grow Again? E-mail
Sunday, 14 August 2011 21:57

Coming home from my Italian vacation this year was an abrupt transition. From the calm waters of southern Sardinia, I was plunged into the global economy’s stormy seas. Financial markets were plummeting, driven by pessimistic growth forecasts in Europe and America. Investors were fleeing for safety pretty much everywhere. Systemic risk—the statistical likelihood of outright economic collapse—was rising. Yields on Italian and Spanish sovereign debt were climbing into the danger zone, threatening to fly out of control. America was on the verge of a technical default on its sovereign debt.

Stagnant and Paralyzed E-mail
Monday, 08 August 2011 06:23

The recent dramatic declines in equity markets worldwide are a response to the interaction of two factors: economic fundamentals and policy responses – or, rather, the lack of policy responses.

First, the fundamentals. Economic growth rates in the United States and Europe are low – and well below even recent expectations. Slow growth has hit equity valuations hard, and both economies are at risk of a major downturn.

A slowdown in one is bound to produce a slowdown in the other – and in the major emerging economies, which, until now, could sustain high growth in the face of sluggish performance in the advanced economies. Emerging countries’ resilience will not extend to double-dip recessions in America and Europe: they cannot offset sharp falls in advanced-country demand by themselves, notwithstanding their healthy public-sector balance sheets.

BLOOMBERG – "Italy Must Show Debt Crises Will End" E-mail
Tuesday, 02 August 2011 06:47

Michael Spence, a Nobel Prize-winning economist, talks about the outlook for a political resolution to Italy's debt woes. Spence, speaking from Milan, also discusses the U.S. debt-ceiling debate and the country's credit rating with Maryam Nemazee on Bloomberg Television's "The Pulse."

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