THE OUTLOOK FOR 2004 NEITHER THE BEST OF YEARS NOR THE WORST

1. THE OUTLOOK FOR 2004NEITHER THE BEST OF YEARS NOR THE WORST Joseph E. Stiglitz January 2004

2. NEITHER THE BEST OF YEARS NOR THE WORST • MILD, JOBLESS RECOVERY IN U.S. • CONTINUING POLITICAL UNCERTAINTY • CONTINUING MALAISE IN EUROPE • STRONG GROWTH IN CHINA, ASIA

3. MILD, JOBLESS RECOVERY IN U.S. • EVERY RECESSION/DOWNTURN COMES TO AN END • TIME FOR THAT TO HAPPEN IN U.S. • Has already been longer than typical downturn • If correctly measured, has been a relatively deep one • 6 million job gap—3 million job loss, 3 million jobs should have been created • Investment overhang from 90s bubble has largely been corrected

4. BUT CERTAIN ELEMENTS OF NASCENT RECOVERY ARE PECULIAR NORMALLY, HOURS WORKED INCREASE WITH RECOVERY, JOB RECOVERY FOLLOWS • BUT THIS TIME, HOURS WORKED CONTINUES TO BE WEAK NORMALLY PRODUCTIVITY SLACKENS IN RECESSION THIS TIME PRODUCTIVITY HAS BEEN ROBUST

5. POSSIBLE EXPLANATIONS • BOTTOM LINE ECONOMICS: MORE RUTHLESS IN FIRING WORKERS • COSTS SHIFTED TO FUTURE • CURRENT PROFITS LOOK HIGH—BUT WHAT ABOUT FUTURE • OUTSOURCING: • COSTS REDUCED AT HOME • BUT SO ARE JOBS • THOUGH PROFITS LOOK HIGH

6. LIMITATIONS ON ROBUST RECOVERY • HOUSEHOLD DEBT • LARGE TRADE DEFICIT • LARGE FISCAL DEFICIT • LARGE UNCERTAINTIES

7. HOUSEHOLD DEBT ECONOMY SUSTAINED FOR LAST THREE YEARS BY HOUSEHOLDS TAKING ON MORE DEBT • Potential problem if interest rates increase • As they typically do in recovery • Even if Fed keeps T bill rates low

8. LARGE TRADE DEFICIT • For how long will other countries be willing to hold so much American debt • Especially with weakening confidence in America’s economic and political leadership

9. LARGE FISCAL DEFICIT • Perhaps largest fiscal turnaround in such a short period • From 2% surplus to 5% deficit—and worsening • And yet Administration plans more tax cuts • Will “starve” needed public investments in education, technology, infrastructure • Hurting long term economic growth • No basis for claim that it will not adversely affect growth of incomes (GNP)

10. CONTINUING POLITICAL UNCERTAINTY • WAR IN IRAQ CAST PALLOW OVER EARLY 2003 • UNCERTAINTY ABOUT OIL PRICES • WAR IS OVER • OIL PRICES REMAIN HIGH • PEACE HAS NOT BEEN RESTORED TO MIDDLE EAST, AFGHANISTAN • INCREASED WARRINESS ABOUT AMERICAN UNILATERISM • ESPECIALLY AS BASIS FOR GOING TO WAR (WMD, LINK TO AL-QAEDA) LOOK INCREASINGLY WEAK

11. GLOBALIZATION • CONTINUING UNCERTAINTY ABOUT THE DIRECTION OF GLOBALIZATION AFTER FAILURE OF CANCUN

12. ELECTIONS • AMERICAN WILL CHOOSE A NEW PRESIDENT THAT WILL AFFECT DIRECTION OF WORLD—OTHERS WILL HAVE LITTLE VOICE • America highly divided • Typically low voter turnout • Outcome will depend on money, media, voter turnout • Administration “buying votes” with pork, worsening fiscal position • “Leave no lobbyist behind” energy bill

13. CONTINUING MALAISE IN EUROPE • WEAK DOLLAR/STRONG EURO LIKELY TO WEAKEN ECONOMY • EVEN IF CENTRAL BANK LOWERS INTEREST RATE, WILL TAKE MONTHS BEFORE EFFECTS ARE FULLY FELT

14. INSTITUTIONAL UNCERTAINTY IN EUROPE • Stability pact—a doomed economic frameworkAddressed problems of past, without adequate flexibilityBut what will replace it? • Governance after integration

15. IF U.S. RECOVERS, EUROPE REMAINS WEAK INCREASING PRESSURE FOR EUROPE TO TAKE ACTION ON OUTSTANDING TRADE ISSUES

16. STRONG GROWTH IN CHINA, ASIA • CHINA LIKELY TO CONTINUE IMPRESSIVE GROWTH • WORRIES ABOUT OVERHEATING EXAGERRATED • AND GOVERNMENT RESPONDING • OTHER SUCCESSFUL COUNTRIES, LIKE KOREA, MOVING TOWARDS CLOSER ECONOMIC LINKS • STILL TOO SMALL TO HAVE MAJOR IMPACT ON GLOBAL GROWTH

17. SOME POSSIBLE IMPLICATIONS • STRONGER STOCK MARKET RECOVERY THAN ECONOMIC RECOVERY • WEAK JOB RECOVERY IN U.S. WILL ENCOURAGE RETRENCHMENT FROM GLOBALIZATION • WTO WILL PLAY AN IMPORTANT ROLE IN LIMITING PROTECTIONISM • WILL NOT RETURN TO BOOM OF 90S