4 thoughts on ““Fostering a Dynamic Global Economy””

1. Bruce Hall August 27, 2017 at 10:44 am

   Congratulations for your inclusion in such an noteworthy group of presenters.
   1. Menzie Chinn Post authorAugust 29, 2017 at 9:42 am

      Bruce Hall: Thank you for the kind words. It was quite the privilege to attend.
2. Steven Kopits August 28, 2017 at 7:41 am

   “Fostering a Dynamic Global Economy”

   What does that even mean? Does it mean fostering growth? Does it mean protecting open trade? Does it mean prudential regulation? I guess it means all those things, but I am not really interested in a ‘dynamic global economy’. If we get all those and sub-2% GDP growth in the AEs, then all is well in the world? Not for me. I am interested in ‘Promoting Global Growth’.

   From Yellen: “Substantial progress has been made toward the Federal Reserve’s economic objectives of maximum employment and price stability…” But not growth! Is stability and employment enough? Yellen has presided over the weakest recovery on the books, and that’s not an issue?

   “The events of the crisis demanded action, needed reforms were implemented, and these reforms have made the system safer.” From the perspective of the financial system, maybe. But with a 77% debt to GDP ratio, a top-of-the-business-cycle deficit of $700 bn, and to average $1 trn over the next decade for which the CBO has budgeted exactly zero recessions? Are we really safer? Does not the poor fiscal condition of the country merit not so much as a mention?

   And not a word about whether we have changed regime or not. Is the current period equivalent to the 1930s, with low interest rates, low population growth, and communists and fascists fighting it out on the street? That period ended with a stunning rebound in growth after 1941, with the US economy all but doubling in the next seven years. Should we expect that again (leaving aside that war part), more precisely, do we expect population and productivity growth to recover, say, the early 2000s level, maybe with a rebound? Is this long lull just the painful deleveraging after a balance sheet recession (depression)? (Carmen Reinhart was actually at the conference. Did she have nothing to add on the topic?)

   Or are we becoming Japan, with a rapidly increasing elderly cohort and a population overall not able to reproduce itself? Is an aging population consistent with strong productivity gains? Do old dogs really learn new tricks?

   Which is the right model? Forget that Yellen doesn’t choose. She doesn’t even seem to have identified it as an issue.

   But that’s nothing compared to Draghi:

   “At the centre of this debate is the question of how to raise potential output growth, which has slowed from around 2% in OECD countries in 2000 to around 1% today.”

   Absolutely. Would have nice for Yellen to mention it, too.

   “Slower growth will in turn make it harder to work through the debt and demographic challenges facing many advanced economies.” Forget ‘harder’. It will make it well nigh impossible in some countries. See my piece on Japan.
   http://www.prienga.com/blog/2017/7/20/japans-lost-century

   Then Draghi makes what may ultimately serve as an unintended pitch for the nationalist right:
   “With the population growth rate in those economies projected to slow, the burden of raising potential growth must fall on productivity.”

   Gosh. I don’t know. Maybe there’s a discipline somewhere which could tell us how we could get more of something we want. Oh, I recall. It’s called ‘economics’. If you want more children, you pay people to have more children. In terms of public policy, it doesn’t get much easier than this. You raise the reward and wait nine months to see if it works. Repeat until 2.1 fertility is reached. That implies further policy choices and trade-offs.

   That somehow this policy option does not even come into question for Draghi is simply stunning.

   He continues: “…the burden of raising potential growth must fall on productivity.” Well, ok, then. So that’s his central thesis, the very core of his focus and argument.

   What does he say?

   “There are a number of areas in which domestic policies can encourage an upward shift in productivity growth, such as competition, research and development, and insolvency regimes.

   “But when thinking about the global economy, one of the key ingredients for raising productivity is openness.”

   That’s it? That’s Draghi major revelation? The new policy that puts us on the track to greater productivity growth?

   He concludes this section:
   “Old-age dependency ratios are rising, putting more pressure on public finances. By 2025 there will be 35 people aged 65 and over for every 100 persons of working age in OECD countries, compared with 14 in 1950.

   “At the same time, public debt levels have surged in those countries from 56% of GDP in 2007 to around 87% today.”

   OK, Draghi has identified the same problem I have. But he’s got nothing. Absolutely nothing beyond: “Keep trade open.”

   He finishes: “Only higher potential growth can provide a lasting solution.” So here’s this big, unrelenting problem, and the sum total of high-powered research the ECB has put into the topics amounts to ‘keep trading’? I think we’re still trading — the world’s economies are still essentially open — and growth is less than 2% in the AEs! So what is Draghi saying? 2% is the best it gets, and by the way, if trade fails it will be worse than that?

   And you wonder that people vote for Trump, or Brexit or Marine Le Pen? Or Bernie, for that matter.

   I have to say, I was deeply disappointed by the presentations in this conference.

   There were some positives.

   Chart 2 of Chan is a keeper and worth its own post.

   Slide 2 of Kehoe is worth a mass, as the Hungarian saying goes. Does per capita GDP revert to trend or not? It did after the Great Depression. Makes a huge difference whether it does or not.

   Chinn is good, worth reading, as are the related remarks from Obtsfeld.

   Overall, though, I thought the conference — like it’s title — suggested intellectual and spiritual passivity. There is nothing here to draw commitment back to the center. If I were of an alt-right or hard left orientation, this conference would only have reinforced my belief that the establishment has no ideas and no grip on events. It leaves open the door to those outside the system or bringing a decisive thesis.
3. Bruce Hall August 28, 2017 at 12:11 pm

   Menzie,

   I read through your paper summarizing efforts to make sense of changes to current accounts and have to admit that it was a bit difficult because the data was fairly high level yet the model contained 15 or 16 variables (all of which I’m sure made sense in a fashion). I thought Figure 4 was telling because even with backcasting it was difficult to get close to actual changes, so I’d presume the value of forecasting is quite limited.

   I’ve worked econometric models which presumed certain time lags or leads among the variables and found improved predictive results (backcasting, of course), but as with most econometric models it is the prediction of the values for the 15 or 16 variables that are no doubt the difficult part of this exercise. When all is said and done, what sort of confidence (feeling of comfort, not statistical) that your latest effort provides a useful predictive tool beyond a general directional look (e.g. Figure 1)? Even there, the overall trend appears to be simply a continuation of 2012-17 with a presumption that there will not be another “oil shock” or some other “black swan” event such as North Korea going off the rails.

   Still, this was an interesting effort on your part. Perhaps, someday in the future, the raw data will be dumped into a supercomputer and an AI will deliver a definitive answer. Of course, that depends on selecting the correct raw data and accepting its accuracy.

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