Ascent After Decline Opening Comments

1. Ascent After DeclineOpening Comments D. Leipziger Prof. of Int’l Business George Washington University

2. The Current Growth Outlook • Euro-chances are lower as imbalances will persist, dampening growth outlook within the union, especially when all efforts aim towards fiscal retrenchment and debt purchases by ECB to deal with binding fixed ER constraint • US continues to push on a string with QE2, while demand is weak and top one percent has 25% of income, mortgages at risk, and unemployment persistently close to 10% • Talk of currency wars despite the G20 niceties and no sign of any brakes to imbalances and output gaps in the major economies

3. Outlook Continues • China’s employment policies have become costlier as the dollar declines since for every one percent drop in dollar value, China loses $3billion in value of reserves. • Worldwide, anti-poverty efforts are pressed as fiscal costs rise due to lower tax takes from low growth and interest rates rise in EMDEs due to sterilization campaigns to offset appreciating currencies ( affecting exports) • Regional growth continues, but for how long if the OECD is mired in low growth

4. Three Fears: Fear of Inflation • With high Unemployment, wage inflation unlikely but commodity prices could recreate stagflation concerns of the 1980s • For capital importers (EMDEs), it shouldn’t be a problem unless domestic stimulus plans go awry • Concerns are on the downside as well with the Fed acting to avoid deflationary trap a la Japan. But some see the looming fiscal deficit in the US in inflationary terms—certainly a classic way to deal with excessive debt. • Not the greatest risk in my view

5. Second: Fear of Unsustainable Debt • Debt levels have risen dramatically. but worsening deficits are due 50% to poor tax revenues, creating a potentially low growth spiral and poor equilibrium • A recovery in which interest rates lag and are below trend could reduce some long-run interest costs and help debt servicing • Some trade-offs do emerge between current and future consumption, forcing recalibration ( ex. German labor contracts more prevalent at wage premium but w/o tenure; health costs will drive health to 401K model of lifetime packages perhaps). • A world of demographically- challenged who don’t spend and young unemployed who cant spend hurts global prospects and debt servicing capacity

6. Third: Biggest Fear Should be Low Growth traps • Fiscal policy that needs to be rebalanced can lead to contractionary impulses on aggregate demand • Confidence depends partly on government’s fiscal stance and partly on business and household b/s • Chancellor Merkel was right to speak of overall competitiveness rather than only focus on the ER ahead of the G20, but Germany is part of the problem with persistent surpluses that will keep So. Europe in decline • Excessive unemployment in the US and Europe will stifle demand and hurt globalization momentum • The new economic powers need stronger global growth in the OECD to continue export-led growth, to avoid protectionism, and to reach all the Goldman-Sach predictions!

7. Low Growth is Everyone’s Enemy • It brings out the worst in political economy terms and is anti-globalizing • It widens disparities of distribution in countries since incomes stagnate and the rich stay rich and the poor stay poor • It retards new entrants—the world is not simply the OECD and the BRICs • It makes the global agenda—environment, migration, poverty aspects—harder to tackle • It slows potential gains in economic welfare

8. What Drives This Economic Inquiry? • Have we covered all the bases in terms of the analytic underpinnings of the low growth outlook? Once we get over the hump in 2011-2012, what will we face? • Can we make some improvements in policies that promote growth, innovation and avoid a low level equilibrium? What does this imply for government policy? What does it mean for policy coordination? • The medium term growth outlook has a lot of political and social implications: (i) will the EU expand, decline or cease to function? (ii) will the US income disparity lead to an internal rebalancing or a further widening of incomes and can the infrastructure decline be reversed? (iii) how will surplus countries balance exports and future consumption and can capital inflows be controlled while trade is kept open? • Can international growth convergence continue while internal disparities rise since both trends require job creation and labor markets seem to be the least well functioning markets right now? • We have a lot to discuss. We need to break out of old paradigms. If RBZ can advocate a return to a modified gold std., then all ideas are worth considering and we have an open enough forum to do just that.