September 29, 2002
Managing the World Economy

The Economist despairs of any sort of rational global management of the world economic business cycle. In its view, neither the Bush administration, the Japanese government, nor European central banks and governments have any statesmanlike qualities.


Economist.com: The days of co-ordinated policymaking begin to look attractive, especially to old hands in Washington who believe Europe and Japan should play a bigger role in global recovery. But it is one thing to think Europe and Japan should do more: quite another to think policy co-ordination currently offers a way forward. In the first place, it is hard to see how, even with goodwill on all sides, it would work... There is a second, more immediate, obstacle to such co-ordinated policymaking: there is simply no appetite for it among the key policymakers. The Bush administration has shown no enthusiasm for it and indeed, Paul O'Neill, the treasury secretary, is known for his dislike even of discussions about current-account imbalances, for instance. The IMF has, on several occasions, noted that these imbalances pose a threat to global economic stability--sudden corrections could lead to large and potentially painful exchange-rate realignments. Mr O'Neill, though, sees no point in everyone rehearsing their views when there is no prospect of a meeting of minds.

The Europeans and the Japanese can be equally stubborn in their own ways. The Japanese never want to appear unco-operative: but for more than a decade they have, to the despair of their economic partners, managed to ignore most of the advice offered on how to free their economy from deflation and recession. The result in their case has been three recessions in ten years and, as Mr Rogoff put it, without far-reaching reform "there can be no guarantee against a similarly bad decade".

Persistent attempts to persuade the European Central Bank to cut European interest rates to stimulate growth have been met with fierce protestations of the bank's independence. On fiscal policy, too, euro-area governments have been reluctant to ease the requirements of the growth and stability pact, despite a widespread view that some fiscal loosening would give a much-needed spurt to European growth. Only now that Germany and France (along with Italy and Portugal) look set to breach the budget-deficit limits imposed by the pact, does the EU look ready to admit defeat and delay the deadline by a couple of years...


The fragile world recovery
Sep 27th 2002
From The Economist Global Agenda


The world’s finance ministers are meeting in Washington against a gloomy economic backdrop: global recovery is under way, but a period of slow growth seems to be the best that most big economies can hope for—provided nothing else goes wrong


AMONG economists and policymakers, it is no longer the subject of much debate. The world economy has been blown off course. Nor has this year seen the sort of smooth, rapid recovery that so many economists were predicting even just a few months ago. The latest projections from the International Monetary Fund (IMF), published on September 25th, show a gloomier assessment than that produced in April.

It is not just a question of revising growth forecasts downwards—though most of them have been. The IMF is also concerned that the balance of risks has shifted. As Kenneth Rogoff, the IMF’s chief economist, acknowledged when commenting on the forecasts, most of the risks are now on the downside. Horst Köhler, the IMF’s managing director, said on September 26th that he was by nature perhaps slightly more optimistic than Mr Rogoff, but even he noted the considerable uncertainty which currently affects the global economy.

Economists can—and frequently do—argue about the specifics of economic forecasts, sometimes behaving as if it were possible to fine-tune these with any great degree of accuracy. Some think the IMF is too downbeat, others that it is, even now, too optimistic. But for the policymakers in Washington for the annual meetings of the IMF and the World Bank, and the many smaller, but often more important, meetings which take place at the same time, the challenge is a different one. Given the prospect of, at best, sluggish growth in the next year or two, what can they do to improve the situation and reduce the risk of things turning out worse than expected?

Ultimately, it is the performance of the big industrial economies which will determine global economic performance. And it is the meeting of the G7 finance ministers which could, in theory at least, nudge economic policies in the right direction. The recent record hardly encourages great expectations, though. There are those, especially some former policymakers turned academics, who hanker after the old days, when the finance ministers of the big economies would get together and agree on detailed policy objectives.

So they look back fondly to exchange-rate agreements such as the Plaza Accord of 1985 and the Louvre Accord in 1987; those with greyer hair even cast their minds back to the Bonn Summit of 1978, when Germany agreed to shift policy to increase its growth-rate target by one percentage point. The days of co-ordinated policymaking begin to look attractive, especially to old hands in Washington who believe Europe and Japan should play a bigger role in global recovery.

But it is one thing to think Europe and Japan should do more: quite another to think policy co-ordination currently offers a way forward. In the first place, it is hard to see how, even with goodwill on all sides, it would work. Even in the 1980s, when foreign-exchange markets were much smaller and less liberalised, exchange-rate co-ordination had limited success, not least because agreements which set national interest in conflict with international commitments were prone to unravel. And the Bonn Summit deal, which helped fuel inflation in Germany and which the Germans came to regret, was not an experiment policymakers wanted to repeat.

There is a second, more immediate, obstacle to such co-ordinated policymaking: there is simply no appetite for it among the key policymakers. The Bush administration has shown no enthusiasm for it and indeed, Paul O’Neill, the treasury secretary, is known for his dislike even of discussions about current-account imbalances, for instance. The IMF has, on several occasions, noted that these imbalances pose a threat to global economic stability—sudden corrections could lead to large and potentially painful exchange-rate realignments. Mr O’Neill, though, sees no point in everyone rehearsing their views when there is no prospect of a meeting of minds.

So stubborn

The Europeans and the Japanese can be equally stubborn in their own ways. The Japanese never want to appear unco-operative: but for more than a decade they have, to the despair of their economic partners, managed to ignore most of the advice offered on how to free their economy from deflation and recession. The result in their case has been three recessions in ten years and, as Mr Rogoff put it, without far-reaching reform “there can be no guarantee against a similarly bad decade”.

Persistent attempts to persuade the European Central Bank to cut European interest rates to stimulate growth have been met with fierce protestations of the bank’s independence. On fiscal policy, too, euro-area governments have been reluctant to ease the requirements of the growth and stability pact, despite a widespread view that some fiscal loosening would give a much-needed spurt to European growth. Only now that Germany and France (along with Italy and Portugal) look set to breach the budget-deficit limits imposed by the pact, does the EU look ready to admit defeat and delay the deadline by a couple of years.

American frustration with Japan and Europe is understandable. For the past decade or more, the world has relied on America as the engine of global growth. Japan, the world’s second biggest economy, has been sidelined because of its persistent failure to push through the fundamental reforms needed to overcome its problems—reforms in the banking sector, and in fiscal and monetary policy. Europe, too, is not just suffering from an excess of counter-inflationary zeal (at a time when deflation is also a risk) and inappropriate fiscal restraint: fundamental reforms are needed to labour and capital markets in several countries if domestic demand is to grow significantly.

Nowhere in Europe is the need for change more urgent than in Germany, now the sick man of the continent. The negative reaction of the financial markets to Gerhard Schröder’s re-election on September 22nd reflects concern that Mr Schröder does not have the stomach for, or commitment to reform. Yet the Bush administration may have undermined its potential influence on German economic policymaking with its decision to snub the German chancellor because of his views on Iraq and the anti-American comments of a minister he subsequently sacked.

In the short-term, at least, much of the burden on combating slow growth and the threat of deflation about which some economists are now seriously concerned, falls on the central bankers. Until recently, they were the new heroes of economic policymaking. Disillusionment has set in with the end of the boom years. A readiness to respond to further signs of economic deceleration by cutting interest rates might help them recover some of their popularity among economists, as would signs that the central bankers recognise that they need to be on their guard against deflation as well as inflation. But the central bankers can’t work miracles. Political leaders, too, need to show they are ready and willing to deliver structural reform—even when it is not popular.

Posted by DeLong at September 29, 2002 09:16 AM | Trackback

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We are simply denying there is any significant economic problem for America. Since fiscal policy will be constrained for quite a while by the growing tax cut and resulting deficit, we are especially reluctant to discuss fiscal health. There will soon need to be an additional tax cut to cope with the rise in the alternative minimum tax incidence.

A significant decline in the value of the dollar would present problems for Japan and Europe, and there is little reason Europe and Japan would use monetary policy for spurring growth if the dollar were to be talked down. Besides, after all these years why should the balance of payments gap finally be viewed as a problem?

Perhaps our stored strengths and monetary policy will be sufficient to bring us to 4% growth.

Again Latin America is increasingly struggling, Africa has need on need. The IMF is assisting Brazil, but there is scant concerted effort to ease fearful problems in Argentina while Africa is being attended to mostly for access to oil.

Difficult time for lack of interest in concerted policy.

Posted by: on September 29, 2002 10:08 AM

September 29, 2002

In Trenches of a War on Unyielding Poverty
By JOHN W. FOUNTAIN - New York Times

Late one afternoon, LeeArius Daniels, a 6-year-old boy with string-bean legs, squirmed on a dingy sofa near his front door.

"I'm hungryyyyy," he moaned, his eyes wet with tears.

His mother, LaCheir Daniels, who sat nearby on the stoop of their wood-frame home in Pembroke Township, Ill., plaiting her eldest daughter's hair, did not answer. Her eyes were fixed toward the ground, her lips taut and silent.

The cupboards were bare. The food stamps were exhausted, the staples from the local food pantry depleted. Ms. Daniels, a single mother of five children, was down to that time at the end of the month when the sun rises and sets on her incessant worry: What will we eat tomorrow?

The Danielses are among 32.9 million Americans — 11.7 million of them under 18 — who live in poverty, while untold others teeter on its edge. After the economic boom of the 1990's, the poverty rate fell slightly, even as the nation increasingly moved from welfare to work.

But now the number of Americans in poverty has risen again, for the first time in eight years, according to census figures reported last week. The gap between rich and poor is growing. The Census Bureau's report showed that the weakening economy had begun to affect large segments of the population, whatever their race, region or class.

For the largely black population of Pembroke, the report was a reflection of the problems here. Yet it was also a collection of dry numbers that do not fully convey how entrenched poverty can be in places where the escape routes to a better life are blocked — by the lack of transportation, jobs and child care, by geographic isolation, by hopelessness.

....

Posted by: on September 29, 2002 10:13 AM

in a world of hate, reinflate! /me protest sloganeering :)

anyway, the economist is also running a survey on the world economy (available in full this wednesday?) with the ominous conclusion(s):

"Its two main conclusions will not make comfortable reading. They are, first, that after decades of declining economic volatility in developed economies, the business cycle is likely to become more volatile again over the coming years; and second, that America's “recession”, defined as a period of growth significantly below trend (and hence accompanied by rising unemployment), is far from over. Until America's excesses have been purged, robust growth is unlikely to resume."

Posted by: kenny on September 29, 2002 12:10 PM

The Economist has adopted a liquidationist purge-the-excess philosophy too?

Hmm... it seems to be so fashionable lately that I'm thinking of joining it myself.

Julian Elson

Posted by: Julian Elson on September 29, 2002 10:02 PM

(from the survey article)
"at the trough of the previous bear market in 1982, the S&P 500 traded at only eight times profits".

Excellent point. Time to liquidate my stock holdings and put all the proceeds in my bank savings account at 10% interest.

date fed funds
------------------
01/1982 13.22
02/1982 14.78
03/1982 14.68
04/1982 14.94
05/1982 14.45
06/1982 14.15
07/1982 12.59
08/1982 10.12
09/1982 10.31
10/1982 9.71
11/1982 9.20
12/1982 8.95

Posted by: snsterling on September 30, 2002 12:59 AM

One big problem all over the western world is the growing inequality. USA and Britain has always had a different view on equality than the european social welfare states, but the development in USA the last 20-25 years really should imply that economists and politicians starts to deeply about this issue. The real wage for the poorest workers in USA (as for many other western countries) has decreased heavily the last 20-25 years and this probably has a quite a negative impact on growth too (see research by Stiglitz, Persson, Tabellini etc.).

Concerning the developing world itīs time to stop the "poverty reduction agenda" set from Washington, since it obviously hasn't done the job supposed too. It's time to stop the deregulation and economic liberalization of the world economy. The last 20 years has seen a boom in these kind of policies, matched with lower growth for every western country compared too the "keynesian era" between 1960-1980.

Mikael, Milano, Italy.

Posted by: on September 30, 2002 01:48 AM

It is very difficult to alleviate poverty when people are willing to create five children without regard to their ability to support them. It is possible that the unfortunate women in the story is a widow; it is far more likely that she had had these children by more than one man, without obtaining any commitment by the men to support those children. Certainly it is possible to increase food stamp support or other subsidies, but of course subsidies inevitably have the effect of encouraging the behavior. There is often a behavioral aspect to poverty which is extremely resistant to efforts by political bodies to change via subsidy.

Posted by: Will Allen on September 30, 2002 11:52 AM

It is very difficult to alleviate poverty when people are willing to create five children without regard to their ability to support them. It is possible that the unfortunate women in the story is a widow; it is far more likely that she had had these children by more than one man, without obtaining any commitment by the men to support those children. Certainly it is possible to increase food stamp support or other subsidies, but of course subsidies inevitably have the effect of encouraging the behavior. There is often a behavioral aspect to poverty which is extremely resistant to efforts by political bodies to change via subsidy.

Posted by: Will Allen on September 30, 2002 11:52 AM

'It is very difficult to alleviate poverty when people are willing to create five children without regard to their ability to support them. It is possible that the unfortunate women in the story is a widow; it is far more likely that she had had these children by more than one man, without obtaining any commitment by the men to support those children. Certainly it is possible to increase food stamp support or other subsidies, but of course subsidies inevitably have the effect of encouraging the behavior. There is often a behavioral aspect to poverty which is extremely resistant to efforts by political bodies to change via subsidy.'

There's also structural aspects where there's no damn jobs to be had for someone like this. Should we work towards long-term disincentives for stuff like this? Of course. However, good intentions, blathering about morality, and reducing benefits today in favor of long-term policy sure as hell doesn't feed those kids.

Posted by: Jason McCullough on September 30, 2002 04:21 PM

As awful as it may sound, the best help the first two children could have obtained would have been if mom had received a large enough cash payment to induce her to refrain from having, via medical procedure, siblings three, four, and five. Of course, such an action also carries with it unintended effects. Look, if we are going to engage in actions as immoral as the latest farm bill, we sure as hell ought to try to provide enough food for these kids so they don't go hungry. What is overlooked, however, is that any parent who behaves in the manner described in the article is likely going to subject the children involved to much misery, regardless of any efforts by the state. If this ugly little fact is to be categorized as moral blathering, so be it, but it doesn't change it's factual nature, or what implications such a fact has on public policy.

Posted by: Will Allen on September 30, 2002 06:13 PM

>>What is overlooked, however, is that any parent who behaves in the manner described in the article is likely going to subject the children involved to much misery, regardless of any efforts by the state. If this ugly little fact is to be categorized as moral blathering, so be it, but it doesn't change it's factual nature, or what implications such a fact has on public policy. <<

Was there anything in the article to suggest that these children regarded their lives as being literally not worth living? Since the answer is no, then "Moral Blathering" would strike me as an entirely accurate way to describe any attempt to make this decision for them.

Posted by: Daniel Davies on September 30, 2002 11:50 PM

It is a unremarkable proposition that it is preferable, from a moral and utilitarian view, to only create those children that one has the ability to support, and that one has a responsibility to refrain from creating children until that time that one has developed the skills needed to support them. Unfortunately, it is a proposition that is widely ignored, and the result is that many defenseless children are subjected to material and emotional misery. There are limits to what the state can accomplish in helping children who have parents that hold them in such low regard that they will not do what they can to support them, and yes, being cautious with whom one procreates with is an essential part of providing support for children. It was not my point that siblings three, four, and five would prefer to have never lived, only that some people would respond to incentives designed to convince them to not have children that they had no intention of supporting, and that the net result would be to have fewer children living in misery.

Posted by: Will Allen on October 1, 2002 07:08 AM

>>It is a unremarkable proposition that it is preferable, from a moral and utilitarian view, to only create those children that one has the ability to support, and that one has a responsibility to refrain from creating children until that time that one has developed the skills needed to support them<<

No it isn't, it's an extremely controversial point of utilitarian philosophy (the question of "how many lives should there be?") and Derek Parfit wrote the entire 500-odd pages of "Reasons and Persons" just to prove it.

>>Unfortunately, it is a proposition that is widely ignored, and the result is that many defenseless children are subjected to material and emotional misery<<

If you offered to kill them tomorrow, would they say "yes" or "no"? If they say "no", then their lives contain more good than bad, and from a utilitarian point of view, it is better that they have lived than not, unless their existence causes suffering to others, which again I doubt. This is a far less simple question than you think it is, and you'd do better to admit that your blatherings are based on a view (that children are exclusively the responsibility of their parents, or that there is some standard of life which is not worth living, whatever the people living it might think) which cannot be supported on utilitarian grounds, and is a moral intuition all your own.

Posted by: Daniel Davies on October 1, 2002 09:07 AM

If it is your proposition that those who procreate have the moral right to violently compel others to support their children, without regard to their own efforts, go ahead and clearly state so. I make no assertions regarding any standard of life, below which it is not worth living, I merely contest the moral right of others to create lives that they are not prepared to support, and therefore violently compel others to do so. You are correct that my moral intuition is to reduce violent coercion to the lowest level possible, without threatening still greater forms of violence. Providing incentives (through violent coercion) to people to refrain from producing children which will require greater levels of violent coercion to support is a net reduction in coercion, therefore I support it. If it is accepted that parents do not have the moral right to violently compel others to support their children, without regard to their own efforts, and the birth of siblings three, four, and five means that siblings one and two face starvation or severe malnutrition, then siblings one and two would have been better off without more siblings. In your eagerness to attack me, you seem to have mis-read what I wrote, which made no representation as to what would be best for siblings three, four , or five. Before you reply that siblings one or two may prefer malnutrition to fewer siblings; if siblings one and two are old enough to make such a judgement, they should be offered the choice of starvation or fewer siblings BEFORE those siblings are born.
There are some, of course, who would contest the moral basis of any coercion required to support children of unwillling or unable parents, but I am not among them, since a society which tolerated children being raised unsocialized in a state of nature is one in which tyranny or anarchy could eventually very well threaten. Of course, if you do not wish to accept my moral imperative of reducing coercion via violence, or the threat therof, the utilitarian reasoning that follows does not apply. Also, I could envision a situation where an extreme lack of births could threaten a society's very existence, and again raise the prospect of tyranny or anarchy, and therefore justify coercive measures to encourage procreation, but I certainly don't believe such a situation exists at this time.

Posted by: Will Allen on October 1, 2002 11:22 AM
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