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April
20, 2006
Speaker:
Servaas Deroose, Director, Economic Forecasting
Affiliation:
European Commission, Brussels
Title:
"The Economic Outlook in the Euro Area: Good News from the
Other Side of the Pond"
Review
of Remarks by Servaas Deroose,
The Economic Outlook in the Euro Area:
Good News from the Other Side of the Pond
April
20, 2006
Rapporteur:
Diana Gehlhaus
Servaas
Deroose’s talk focused on the past, present and future state of
the euro area economy. The data he presented was the basis for his
conclusion that the euro area economy is headed in a positive
direction, with a favorable GDP growth forecast. The presentation
was broken down into four main components including a ten-year
snapshot of the euro area economy, the current recovery and recent
developments, risks and challenges associated with the world market,
and his conclusions for the future. He noted that when referring to
the “euro area”, he was referring to 12 European Union member
countries (out of 25) that have already adopted the euro (i.e.,
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain).
In
the first section, the snapshot of the euro area economy, Deroose
started by comparing the euro area economy to that of the United
States. It was shown that although GDP growth in the US has exceeded
that of the euro area for the past decade (by an average of 3/4 of a
point per year), substantial US population growth can partially
explain the gap. Euro area population growth was not nearly as fast
as in the US. In his discussion of the current situation, Deroose
said that US productivity growth was higher but that the euro area
experienced stronger employment gains.
In
discussing the latest recovery relative to previous economic
recoveries, Deroose showed that though this last recession was much
shallower than previous downturns, the recovery has been slower than
in the past, specifically by 2.6 percent of euro area GDP. Of the
measured GDP components, domestic demand and exports have been
lagging the most. Additionally, the recovery has been slightly held
back by the appreciation of the euro. Referring to individual
countries, Germany, Italy and the Netherlands have been the slowest
to recover in comparison to the past.
Deroose
then moved on to talk about the recent trends and growth-supportive
forces of the strengthening recovery. He has a very upbeat outlook
for GDP growth in 2006 despite weak growth in the last quarter of
2005. Deroose thinks that data discrepancies, specifically in
adjusting working days and in Germany’s retail sales, were
responsible for the low growth in Q4'05. He pointed out that upturns
in the survey data, which are being seen currently, are normally
followed by improvement in the data on the real economy. He is also
optimistic about the recent gain in momentum of domestic demand
within the euro area, even though individual household consumption
numbers are still disappointing. Finally, Deroose said that loans to
non-financial corporations over the past few years have
significantly increased, which is typically indicative of strong
investment.
Deroose
also discussed the divergence of hard data (GDP, investment, etc.)
and soft data (consumer confidence, economic sentiment surveys,
etc.), saying that it was nothing to take too seriously. The
discrepancy is usually not a big issue and works itself out over
time. In reference to projected GDP, the data show no more than a ¼
point difference whether or not soft data surveys are included.
In
support of his conjecture for euro area growth in 2006, Deroose
showed many graphs visualizing the positive situation in the euro
area. There has been and continues to be solid growth in world
trade. Companies in the euro area have repaired their balance
sheets, bringing down previously high levels of debt, which leaves
them with more money to invest. Long-run interest rates, which are
much more important in the euro area economy than short-term rates,
are close to historical lows. This all bodes well for a boost in
investment. The European stock market (Stoxx 50) has grown by 20
percent over the past year and continues to do well, especially in
comparison to the slower growing market in the US. Euro area
monetary policy, as well as the exchange rate, have also remained
accommodative for growth. Finally, inflationary pressures have
remained low despite the surge in oil prices. In fact, Deroose
believes that euro area inflation will be under the EU target this
year. Concluding this section, Deroose stated that the official EU
estimate of 1.9 percent GDP growth for this year is simply too low.
The next estimate will be released on May 8th.
In
addressing risks and challenges, Deroose discussed the negative
risks to the growth outlook, including surging oil prices. Though he
was originally of the opinion that the latest rise in prices was
only temporary, he now believes prices will remain at their current
levels, or go higher in the foreseeable future. Currently, Deroose
estimated gasoline to cost around $5/gallon in Europe. However, he
said that this has not affected consumers as much as it may seem,
since energy consumption is half as much in Europe as it is in the
US. Additionally, Deroose pointed out that energy has been expensive
in Europe for many years, so people have already adjusted their
lifestyles accordingly by reducing consumption, unlike in the US
where sudden high prices have decreased purchasing power, causing a
market shock. However, subsequent increases will have a greater
marginal effect on the euro area economies than in the past, since
prices are reaching their saturation point, meaning people and
governments have adjusted as much as they can without being
negatively affected by higher prices.
The
euro area has had, and continues to have, a relatively balanced
savings-investment ratio between the public and private sector,
leaving a minimally positive, flat account balance. Global spending
imbalances can be partially explained by the rather large negative
account balance of the United States. Global account imbalances pose
a risk to the euro area growth because they could cause abrupt
changes in the euro exchange rate.
Another
risk factor in discussing euro area growth is the housing (real
estate) market. Real house prices have surged in some member states
while remaining constant in others, causing debt to be particularly
high in some member states. For example, the Netherlands has a very
high debt-to-disposable-income ratio. However, Deroose pointed out
that although there have been some surges in euro area housing
markets, they are still comparatively less than the surges recently
experienced in US states like California and New Jersey. The same
can be said for the average euro area level of household
indebtedness relative to GDP.
Although
employment growth continues to be strong for the euro area (more
than two times as many jobs were created than in the US over the
last six to eight years), average unemployment levels for the region
are still around 8.5 percent (according to the EU measurement
methodology). Reforms to improve this rate (getting rid of rigid
labor laws to give more flexibility to employers) are hard to pass
because societies are not supportive. Some euro area countries have
more problems in this regard than others. Deroose predicts that any
time GDP growth is more than two percent there will be job growth,
which he is hopeful for in this year’s projections. He noted that
countries such as Italy and Germany, which have positive job growth
but weak and lagging economies, are hard to explain. A big problem
the European Monetary Union (EMU) has to deal with is what to do
with monetary policy when some economies are growing strongly and
others are slower or stagnating.
Deroose
believes that globalization is a very positive thing for world
economies. Already, China has helped decrease euro area prices, and
low inflation yields more spending. The euro area is in a good place
competitively with other world markets, and Deroose sees no reason
why it will not stay that way. Strong growth in one major world
economy, such as China, should not be worrying. What would help cure
global imbalances is if China would decrease its growing savings and
invest money in foreign markets, while continuing to open its own.
This would help to correct global current account imbalances.
Deroose
pointed out the internal and external factors that continue to pose
a risk to the euro area economy, many of which should be taken
seriously. Surging oil prices and housing markets within euro area
member states are two things to keep a close eye on in the short
term. Additionally, the various policies and economies among the
euro area member states can make analysis and forecasting difficult.
However, given the above evidence, Deroose is confident that the
euro area will experience solid GDP growth in 2006. Similarly,
investment levels and employment growth also appear to be headed in
a positive direction, and hopefully household consumption levels
will be soon to follow. The euro area is the right track to
continued and strengthening recovery from the last recession.
March 15, 2006
Speaker:
L. Josh Bivens
Affiliation:
Economic Policy Institute
Title:
"Did the 2001 and 2003 Tax Cuts Work? Defining ‘Boom’ Down"
Review
of Remarks by Dr. L. Josh Bivens,
Did
the 2001 and 2003 Tax Cuts Work? Defining ‘Boom’ Down
March
15, 2006
Rapporteur:
Ben Wright
In
his presentation, Dr. L. Josh Bivens discussed how
the U.S. economy has performed during the recent
recovery and whether the federal tax cuts of 2001
through 2003 can explain this performance. The
tax cuts, which have had a direct cost of $860 billion,
have added $930 billion to the deficit after accounting
for interest costs.
The
rebate checks of 2001 were aimed at boosting the
economy in the short term through Keynesian stimulus.
The remainder of that year's cuts, which were
spread out over a number of years in the future, the
2002 cuts, which allowed businesses to write-off
30 percent of their depreciation costs, and the
2003 cuts, which reduced taxes on dividends and
capital gains, were intended to generate growth over
the long term through supply-side incentives. Sufficient
time has passed that the effectiveness of these
latter cuts can now be evaluated.
The
fact that the economy is stronger now than it was
in the summer of 2001 does not necessarily mean
that the tax cuts have been effective. Because the
US economy has shown that it will always recover from
periods of recession, the recent recovery, which
is now 19 quarters removed from the last business
cycle peak, should be evaluated against past
recoveries of the same duration. There have been
four previous business cycles that lasted 19 quarters.
After a peak-to-peak comparison of the recent
recovery to these previous recoveries, Dr. Bivens
concluded that, on average, the recent recovery has
under-performed the other recoveries. This is
evidence that the tax cuts have not been effective.
Two
broad indicators of economic health, gross domestic
product and gross domestic income, increased more
slowly during the recent recovery than
during the average 19 quarter recovery of the past.
GDP during the recent recovery increased at an
annual rate of 2.8 percent, well below the 3.4 percent
average of the
previous four. GDI increased at an
annual rate of 2.3 percent, which is much slower than
the 3.6 percent average, and the slowest of the five
recoveries under consideration.
Payroll
jobs, income, and the employment rate also
increased more slowly during the recent recovery than
during the previous four. Total payroll jobs
increased at an average annual rate of two percent during
the previous recoveries, but increased only
0.3 percent per year during the recent one, the slowest
of the five recoveries under consideration. In
addition, payroll jobs did not return to the March,
2001, level for 48 months. By contrast, the average
time frame for returning to peak-level payroll employment
among the previous four recoveries was
27 months, and the slowest time frame was 32
months.
Private
sector payroll jobs, which were supposed to
benefit from 2001-2003 tax breaks, also increased very
slowly compared to previous recoveries. They did
not return to the March, 2001, level for 53 months,
compared to an historical average of 27 months
and a low of 35 months in the past. Wage and
salary income, which returned to the peak level after
an average of seven quarters in past recoveries, didn’t
return to the March, 2001, level for 11 quarters during
the recent recovery, matching the previous low.
Personal income also lagged all of the previous recoveries.
In addition, the employment rate of
the recent recovery lagged the rates of all of the four
previous recoveries, and after 58 months was still
2.2 percentage points below the March, 2001 level.
Despite
the tax cuts of 2002 and 2003, which were meant
to provide investment incentives, investment during
the recent recovery lagged all of the previous four.
Non-residential investment and equipment and
software investment increased far more slowly
in the recent recovery than in the past, including the
recovery of 1990 to 1994 that included two
tax increases.
When
temporary investment tax cuts are enacted, it
is expected that firms will front load investment in
order to receive the tax break, and then decrease investment
after the break expires. Such was the case
in 1986 and 1987, when an increase investment took
place in the quarter before an investment tax cut
expired, and decreased the following quarter.
When
the recent tax breaks expired on December 31,
2004, the annualized rate of change of investment not
related to information technology decreased, fitting
the expected pattern. But the annualized rate
of change of investment in information technology
actually increased, suggesting that the tax
incentives did not help in the first place. The only
form of investment that outperformed the past recoveries
was residential investment. It increased at
a faster rate than the average of the past recoveries,
despite tax
incentives that decreased as the interest rate
rose. In fact, in the fourth quarter of 2005, residential
investment as a percentage of after-tax income
stood at 8.5 percent, which is 2.3 percentage points
higher than during the first quarter of 2001, before
the recession.
After
considering all of these points, Dr. Bivens concluded
than the tax cuts have not been effective in
stimulating the economy because the current recovery lags
all past recoveries of the same duration in
almost every measure.
February 15, 2006
Speaker:
John Irons
Affiliation:
Director of Tax and Budget Policy, Center for American
Progress,
Title:
"The long-term budget outlook"
Most
economic experts agree that the current path
of fiscal policy--with substantial deficits,
growing spending obligations, and
shrinking revenue--is unsustainable. But
what will the adjustment look like? Any
reasonable solution will require adjustments on
both the spending and the tax
side, and significant revenue increases will
likely be necessary. The link between the
need for more revenue and the need for
sweeping tax reform will likely drive a national
debate on fiscal policy for years to
come. Dr. Irons’ talk will focus on the long-term
health of our nation's finances and
explore the implications for fiscal policy and
tax reform both now and in the future.
January
18, 2006
Speaker:
Jack Galvin
Affiliation:
Associate Commissioner for
the
Office of Employment and
Unemployment Statistics
Bureau
of Labor Statistics
Title:
"New
Quarterly Data on Business Employment
Dynamics
by Size of Firm from BLS"
The
Business Employment Dynamics (BED) data
from the Bureau of Labor Statistics measure
the gross job flows that underlie the much
smaller net change in employment for any
quarter. The new BED data have captured the
attention of economists and policymakers across
the country, and these data are becoming
a major contributor to our understanding of
employment growth and business cycles
in the U.S. economy. Following the
initial release of BED data in September 2003,
the BED series expanded in May 2004 with
the release of industry statistics. In December 2005,
the BED data series will expand again
to include data by firm size. These data
can be used to study which classes of firms
are creating the most jobs in the U.S. economy.
Review
of remarks by Jack Galvin
New
Quarterly Data on Business Employment
Dynamics
by Size of Firm from BLS
January
18, 2006
Rapporteur:
Gregory Niemesh
John
Galvin addressed the following questions: What are
the business employment dynamics (BED) data? What
is the appropriate unit of analysis for the new BED
data by employer size class: firm or establishment? How
should businesses be classified into size classes?
What does the BED data show about the underlying dynamics
of net job change?
The
Bureau of Labor Statistics (BLS) began publishing BED
data in September 2003; the data series are quarterly
and run from the third quarter in 1992 to the first
quarter 2005. The BED data includes gross job gains,
gross job losses, and employment and establishment
counts,
levels and rates. It becomes available about
seven months after the end of the quarter. In addition
to the national time series, the Bureau of Labor Statistics
(BLS) started publishing BED data categorized by
major sector industry in May 2004, and by firm
size class in December 2005.
The
original BED data track changes in employment at
the establishment level and provide a picture of the dynamics
underlying aggregate net employment growth
statistics. The change in the number of jobs over
time is the net result of gross job gains and losses that
occur at all firms in the economy. Gross job gains are
the sum of all jobs added at firms that have expanded their
payroll, plus the payroll of new firms that
have opened. Gross job losses are the sum of all jobs
lost at either firms that have closed or firms that contracted
their payroll.
Looking
at the underlying gross flows of a net change
in employment adds important information that
can be used to assess the business cycle, the level of
labor market volatility, and the effect of establishment
employment
changes on aggregate employment. For
example, over the period Q3 1992 to Q1 2005, the new
BED data by employer size class show that firms with
less than 500 employees accounted for 65 percent of
net job growth, although their share of total employment
in March 2005 was
55.8 percent.
Firm
size class data can also be used to analyze patterns of
employment changes across firms of varying sizes
during the business cycle. The federal government does
not officially define a small business. However, the
Small Business Administration classifies firms
with less than 500 employees as small, and the BLS
uses this definition in its analysis.
Job
loss associated with the 2001 recession was driven
mainly by large firms: Firms with 500 or more employees
accounted for 60 percent of job losses and only
35 percent of net gains over the new job decline that
took place between March 2001 and June 2003. Since
the beginning of the recovery, firms with less than
500 employees have accounted for 64.1 percent of new
jobs, while firms with greater than 500 employees have
accounted for 35.9 percent.
The
BLS uses the firm, defined as a legal business, instead
of the establishment as the unit of analysis for the
new BED data. An establishment is defined as an economic
unit that produces goods or services, usually at
a single physical location, and engages in one or primarily
one activity. A firm may consist of several establishments.
While establishment data make use of applicable
single industry codes, firm data is most consistent
with similar data from other national and international
sources.
Firms
are grouped into size classes from Office of Management
and Budget based on the level of employment.
The
BLS uses dynamic sizing of firms to allocate
gross job gains and losses. Dynamic sizing initially
classifies the firm based on the previous quarter’s employment.
If gross job losses or gains cause a firm
to cross a size class threshold, then the remaining gross
job losses or gains are allocated to the new size class.
An important reason for choosing dynamic sizing, rather
than the other three sizing alternatives evaluated,
is its symmetric treatment of seasonal gains and
losses.
The
BED data is based on data from the BLS’s own Quarterly
Census of Employment and Wages program, and
does not increase the burden on respondents. The
data cover 97 percent of private wage and salary
jobs and come from quarterly unemployment insurance
microdata, to which BLS adds industry and geographical
coding. Longitudinal linking of microdata across
quarters allows the BLS to follow the gross job
losses and gains posted by individual firms. For
more detailed information, Galvin referred researchers
to the following
websites:
•
BED website www.bls.gov/bdm/home.htm
•
April 2004 Monthly Labor Review
www.bls.gov/opub/mlr/2004/04/art3full.pdf
•
Forthcoming Feb. 2006 Monthly Labor Review
www.bls.gov/ore/pdf/ec050110.pdf
December 14, 2005
Speaker:
Jon Sargent
Affiliation:
Office of Occupational Statistics and
Employment Projections at the Bureau of Labor Statistics
Title:
"New
Economic Projections from the Bureau of Labor Statistics
2004-2014"
Changing
technology and business practices, shifts
in the demand for goods and services,
and global competition will reshape tomorrow's
economy and the jobs it provides.
Every two years the Bureau of Labor
Statistics develops new ten-year projections of
the aggregate economy, industry output
and employment, occupation employment,
and
the size and composition of the
labor force. Jon Sargent will present the highlights
of the new 2004-14 projections scheduled
for release on December 7th, 2005.
This presentation will give the new BLS
view of the changes in the decade ahead.
Review
of Remarks by Jon Sargent
“New
Economic Projections from the Bureau of Labor Statistics
2004-2014”
Rapporteur:
Antonio J. Lombardozzi
Jon
Sargent addressed the following questions: What time frame
does Bureau of Labor Statistics (BLS) use to make projections
and why? How will the U.S. labor force change in this upcoming
period, and how many jobs will be created?
The
BLS projections program originated in the aftermath of World
War II to help veterans reenter the work force. What started
as simple descriptive material about available occupations is
now a model-based assessment of the future U.S. economy.
BLS produces ten-year projections on four closely integrated phases
of the economy: the labor force, economic growth, occupational
employment, and industrial employment, output, and labor
productivity. These projections are designed to provide individuals
with a useful glimpse of the future and assist them in making
important decisions about education, training and careers. In making
projections, BLS assumes a long-term economy with strong output
growth, labor productivity and a low unemployment rates.
The
labor force is perhaps the most important factor in determining the
future of the economy. Labor force projections are determined by the
supply of workers for jobs generated by economic activity. Over the
next ten years, BLS projects a one-percent growth rate for the
civilian population and the labor force. This is somewhat slower
than past ten-year aggregations and is due to the retirement of the
baby boom generation and a decline in the overall participation rate
in the labor force. (Women’s labor force participation rate has
reached a plateau, and men’s labor force participation rate has
declined). This growth of the labor force has been stimulated by
immigration, which has increased every decade since WWII, and the
“baby boom echo” births to the baby boom generation. By 2014,
BLS projects that the U.S. will have an older population and a
higher labor force participation rate among older workers in its
labor force.
BLS
projects a 3.1 percent annual growth rate for the economy in the
2004-2014 period. This growth estimate is similar to the actual
rates experienced over the past four decades. Recent growth of the
economy has been driven by strong increases in productivity. BLS
projects a 2.7 percent increase in the rate of productivity in the
2001-2014 period; this is better than that exhibited in recent
business cycle expansions.
BLS
estimates that the economy will generate more than 18.9 million jobs
in the 2004-2014 period. This 13 percent increase is slightly higher
than the 12.7 percent gain over the prior ten-year period. Nonfarm
service-providing industries are expected to provide the majority of
these new jobs: The professional and business services and the
health care and social services sectors are expected to account for
almost half of the projected employment growth.
The
number of nonfarm, goods-producing jobs is estimated to remain
constant from 2004 to 2014: eight out of the ten industries with the
largest expected numerical declines in employment are in
manufacturing. Seven of the ten fastest growing occupations are
health care related; the other three are computer related. The ten
fastest growing occupations will account for eight percent of total
employment growth. Home health aides top the list, followed closely
by network systems and data communication analysts.
The
BLS projects employment for over 754 detailed occupations. For more
detailed information, Sargent referred researchers to the following
websites:
November 16, 2005
Speaker:
Sylvain Leduc
Affiliation:
Federal Reserve Board, Division of International Finance
"Financial
Market Developments and Economic Activity during Current Account
Adjustments in Industrial Economies."
Much
has been written about prospects for U.S. current account
adjustment, including the possibility of a “disorderly
correction”: a sharp fall in the exchange rate that boosts
interest rates, depresses stock prices, and weakens economic
activity. This talk will assess some of the empirical evidence
bearing on the likelihood of the disorderly correction scenario,
drawing on the experience of previous current account adjustments in
industrial economies. The paths of key economic performance
indicators before, during, and after the onset of adjustment, will
be discussed.
Review
of Remarks by Dr. Sylvain Leduc
“Financial
Market Developments and Economic Activity During Current
Account
Adjustments in Industrial Economies”
Rapporteur:
Charles Carson
During
the past quarter century, noted Dr. Sylvain Leduc,
Senior Economist in the International Finance Division
of the Federal Reserve Board, the U.S.
current account deficit has gone through three
large swings,. The deficit grew during the 1980s,
leveled off during the early 90s, and has been
growing ever since. Today the current account deficit
has hit a new high of more than six percent
of GDP. Such a growing deficit is most likely
unsustainable and will eventually lead to an adjustment
where there is either an increase in GDP
or a decrease in borrowing.
There
has been much hand-wringing in the financial communities
about the possibility of a “disorderly
correction.” On May 29, 2002, Robert Samuelson
wrote in The Washington Post:
“If
you want to scare yourself,
contemplate
the following: The dollar begins
to fall. That is, its value slips
relative to other currencies. Foreigners
with massive investments in
U. S. stocks
and bonds begin to
sell their holdings. The fear currency
losses on their American investments
because a depreciated dollar
would fetch less of their own money.
The selling then feeds on itself.
The stock market swoons. American
consumer confidence withers.
The recession resumes and spreads
to the rest of the world through
lower U. S. Imports. Wham!
Is
this horror story likely? Probably not.
Is
it possible? Well, yes.”
Dr.
Leduc’s November 16 lecture attempted to answer
the question, “How likely is the ‘disorderly
correction’ scenario?”
In
general, industrial economies seem to be less vulnerable
to disorderly corrections than emerging market
economies. They have stronger financial institutions
greater monetary policy credibility. Finally,
they have less foreign currency debt. Particularly
in this country, most U. S. debt is denominated in
dollars. In contrast, most emerging market economies
have a large portion of their debt
denominated in foreign currencies. As a result, when
their currencies depreciate, the value of that
debt rises.
Dr.
Leduc defined a “disorderly correction” scenario as:
First, there should be a sharp decline in the
dollar. Then there should be a run on bond and
stock markets. Finally, there should be a contraction of
GDP. Without the contraction in GDP, just
having a rise in interest rates and a fall in stock
market prices does not necessarily imply a disorderly
correction, since these could be the result of
a strong economy operating above potential because
of an increase in net exports. With
that definition in mind, Dr. Leduc began a theoretical
examination of the likelihood of a disorderly correction.
Specifically, would a reduction
in
asset prices induce a recession? While higher
interest rates
and lower stock prices would reduce
domestic demand and hurt domestic confidence, U.S.
net exports would rise. Depending on how
big the rise in exports was, the end result could
be either positive or negative for growth. Either
way, this examination does not provide much
support for or against a disorderly correction scenario.
A more thorough
approach was required. Dr. Leduc
used a macroeconomic simulation model and
used it to study a couple of scenarios. In the first
adjustment scenario, a shock was imposed to the
dollar risk premium so the dollar would fall by
25 percent. This resulted in a benign correction
in which real GDP
rose, due to a rise in net exports. The
second adjustment scenario added a shock
to the risk premium on long-term bonds and
equities, which rose by 250 basis points. This second
scenario resulted in a disorderly correction in
which interest rates rose and real GDP fell. However,
in this disorderly correction, the exchange rate
and the trade balance were both very similar
to the results of the first benign scenario. These
two models demonstrated that a disorderly correction
is possible, but they do not give much insight
into the likelihood of such a correction.
Finally,
Dr. Leduc asked, “Can we tease something out
of the [historical] data?” What did current account
adjustments in other advanced countries look
like, and
do they resemble the disorderly correction
scenario defined earlier? For this historical
analysis, 23 adjustment episodes were identified
in industrial countries. Among others, these
episodes had to meet the following qualifications: The
current account deficit exceeded 2% of
GDP before being reversed, and the deficit was reduced
by at least two percent of GDP over three years.
Across all the
selected episodes, average GDP growth
fell during the adjustment process. Although consistent
with the view that a current account adjustment
could entail lower economic growth,
the fall in GDP growth remained modest. Moreover,
this average result could be masking some divergence of specific
results. To
explore this
possibility, the episodes were divided into “expansion”
episodes and “contraction” episodes. This
division was made by calculating the change in
average GDP growth from before to after the onset
of current account adjustment. The episodes were
then ranked from highest to lowest. The
seven largest increases in growth rates were defined
as expansion episodes; the seven largest declines
in growth rates were defined as contraction episodes.
In general, there
were statistically significant differences
in economic indicators between expansion episodes
and contraction episodes. For example, in
the expansion episodes, the mean output gap
appeared to be below potential before adjusting back
upward; however, in the contraction episodes,
economies appeared to be operating above
capacity prior to the current account correction. Mean
effective exchange rates were relatively stable
during contraction episodes, but fell during
expansion episodes. Mean import indexes rose
during expansion episodes, indicating a growing
economy and increasing import demand.
Overall,
Dr. Leduc
found little evidence of a disorderly correction
scenario for industrial economies. In
episodes where GDP growth fell, there was
no change in the real exchange rate; in these episodes,
the slowing seemed to be the result of an
overheated economy that was cooling. In contrast, countries
in which real GDP grew the most also
experienced significant real currency depreciation. These
findings do not disprove the disorderly correction
hypothesis, but they do weaken the
historical support for such a scenario.
Dr.
Leduc said that it is difficult to take these findings
and apply them
to the situation in the U.S.
today. Many of the episodes studied were in European
countries that are much smaller than the
U. S. economy. Indeed, the U. S. economy is
he largest in the world and has the capacity to affect
foreign currencies.
The
U. S. issues the world’s major reserve currency, and
most U. S. debt is denominated in dollars. U.
S. product, labor, and financial markets are
considered exceptionally flexible and can respond well
to disruptions. The impact of all of these
factors is unclear, and these differences could
make the U. S. more or less vulnerable than the
countries studied.
Finally,
Dr. Leduc stressed that this analysis does
not identify what could cause a disorderly adjustment.
These findings only study the correlation of
certain indicators during adjustments and
cannot determine if the trigger is a policy action or
some other economic shock.
October
19, 2005
Speaker:
Dr. Marc Miles, Director
Affiliation: Heritage Foundation's Center for International Trade
and Economics
"Washington's Common Misperceptions (Fallacies) of Monetary Policy"
Dr.
Marc Miles, the Director of the Heritage Foundation's Center for
International Trade and Economics, will discuss a couple of
fallacies he perceives in
Washington
:
-
That
the Fed stabilizes the economy through ups and downs in interest
rates.
-
That
a falling currency has positive effects, i.e. trade balance
shifts towards surplus and GDP growth rises.
Then
he will describe that the best monetary policy is one that pursues
stable money, i.e constant interest rates (perhaps within a small
band), stable exchange rates, and hence stable commodity prices.
Review
of remarks by Dr. Mark Miles
"Washington's Common Misperceptions (Fallacies) of Monetary Policy"
By
Nick Terrell
In
the same week in which the Economist led off
with
speculation into Alan Greenspan’s successor
in
“the most important economic policy job
in
America,” Dr. Marc A. Miles, Director of the
Center
for International Trade and Economics
at
the Heritage Foundation, presented a nonstandard
perspective
on the power and impact
of
monetary policy. To illustrate this, he provided
two
examples: “the modern sport of Fedwatching”
and
exchange rates.
Fed-watching
is an interesting endeavor –
much
like weather forecasting – which is both
weighty
and little understood. Traditional economic
theory
indicates an inverse relationship
between
changes in the interest rate and growth
rate.
While this makes a good deal of sense, the
data
displays a vexing lag between interest rate
hikes
and slower growth.
Dr.
Miles argued that an intertemporal substitution
effect
drives the eventual slowdowns
caused
by rate hikes, based upon investor and
consumer
behavior and expectations regarding
the
Federal Reserve’s future actions. When the
Fed
hikes rates, in the short term investors and
consumers
increase spending and investment
as
they substitute current for future activity on
the
expectation that interest rates will rise even
further.
This has the counterproductive effect
of
fueling short-term economic growth and simultaneously
dampening
future growth when
interest
rates reach higher levels.
This
dynamic exacerbates the cyclical swings
that
occasioned the initial rate hike. As a practical
matter
of policy, this interpretation of the
data
would argue for less variance in the interest
rate
in order to smooth GDP growth as
much
as possible – a far cry from conventional
wisdom.
As an example of such a period of stable
interest
rates, the years 1996 through 1999
were
offered.
The
impact of exchange rates on trade served
as
a second example of the importance of unconventional
analysis
in monetary policy. Received
wisdom
indicates that movements in the
exchange
rate are inversely related to movements
in
the trade balance. However, the data
fail
to bear much of a relationship except in the
famous
case of the British pound devaluation of
1967,
for which the “J-curve” fits.
Dr.
Miles argued that while shifts in the real
terms
of trade impel changes in the
trade balance,
shifts
in the relative values of numeraires
will
not. Instead, they will primarily affect relative
inflation
rates. In support of his point, he
presented
data on the recent dollar price of oil,
the
euro price of oil, and the dollar/euro exchange
rate.
From these data it can be seen that
as
the dollar fell in value, the dollar price of oil
rose,
but the euro price did not.
As
in the previous example, this dynamic has
significant
policy implications. Foremost, the
devaluation
of the dollar is not likely to alleviate
the
trade deficit, but it may well stir inflation.
In
order to improve the efficiency of
trade,
the surest course is to stabilize the numeraire
because
“stable money simplifies
choices.”
Finally, the unpegging of the renminbi
is
no panacea for America’s trade ills.
In
conclusion, Dr. Miles presented arguments
and
examples in an attempt to foster a greater
appreciation
for non-standard economic
thought
on monetary policy. The goal was at
once
epic and modest: causing the audience to
break
free of its Pavlovian responses to reexamine
the
impact of monetary policy on the economy.
September
15, 2005
Speaker: Jeffrey Schott, Senior Fellow
Affiliation: International Institute for Economics
“The
Doha
Development Dilemma: Good Results Do Not Come in Small Packages”
Jeffrey
J. Schott, a senior fellow at IIE and former trade negotiator during
the Tokyo Round of the GATT, takes a measured look at the prognosis
for the current Doha Round of multilateral trade negotiations in the
World Trade Organization (WTO). Schott will gauge whether WTO
members can advance their ambitious agenda by the key
Hong Kong
ministerial meeting in December 2005 and conclude talks by late
2006/early 2007. He will argue that the trade talks need to
produce a large package of trade reforms covering agriculture,
industrial products, and services to address the diverse priorities
of the large WTO membership. This will require the effective
engagement of both developed and major developing countries like
Brazil
,
China
, and
India
. Without a big deal, it will be difficult to generate
political support for reform of longstanding trade barriers that
would yield substantive benefits for developing countries.
Whether this can be done as planned before the expiry of
US
trade promotion authority is increasingly uncertain.
Review
of remarks by Jeffrey Shott
"The
Doha
Development Dilemma: Good Results Do Not Come in Small Packages"
By
Sadie Blanchard
Jeffrey
Schott, Senior Fellow at the Institute for International Economics,
spoke about the prognosis for the “
Doha
round” of multilateral trade negotiations underway in the World
Trade Organization (WTO). To achieve the WTO’s ambitious
development goals for this round, developed and developing countries
alike will have to agree to significant policy reforms that open new
opportunities for trade in goods and services. Two years since the
trade talks almost collapsed at the Cancun ministerial meeting, and
three months before the crucial meeting of WTO ministers in
Hong Kong
, the conventional wisdom is that the Doha Round will produce a
modest package of agreements that will do little to advance economic
growth in rich or poor countries. Why haven’t the negotiations
progressed further since
Cancun
? Differences over agricultural reforms continue to plague the
talks, but the problems run much deeper. Schott cited strong
protectionist lobbies guarding the few big remaining barriers in the
major industrial markets (US, EU,
Japan
) and globalization pressures constraining political commitment to
reform in both developed and developing countries.
What
needs to be done? Schott argued that negotiators need to conclude a
big package of agreements that provide concrete results in all major
areas of the Doha Round agenda: agriculture, non-agricultural market
access (NAMA), rules, and special and differential (S&D)
treatment. On agriculture, export subsidies should be
eliminated—that’s the easy part. Cutting back on domestic
supports is more difficult because countries need to restrict
loopholes in the current rules that shield significant payments from
the overall cuts (including US counter-cyclical payments). Amber box
subsidies (trade distorting) need to be cut substantially in real
terms; blue box subsidies (production-limiting but somewhat trade
distorting) should be capped both overall and on a product- specific
basis. The hardest task is to agree on large cuts in tariffs plus a
tariff cap for peak tariffs, expansion of tariff-rate quotas, and
strict limitations on exceptions for sensitive products.
On
NAMA, the best result would be what the
United States
originally proposed: the elimination of all industrial tariffs by
2015—which would be a good result even if the developing countries
don’t fully take on this commitment. If this is not achieved,
eliminating tariffs on a sector-by-sector basis should be pursued
for key industrial products. On services, the talks started two
years before the
Doha
round and have fallen further behind ever since. One third of WTO
members have not even submitted offers. The current process of
request-offer negotiations doesn’t work well for services, and
needs to be supplemented with sectoral negotiations among a core
group of countries. On rules, most attention has focused on
anti-dumping, where some countries want to codify the substance of
recent panel rulings that have limited the reach of US and other
national laws. The most positive results will likely emerge in
discussions of the new group on trade facilitation. On S&D,
proposals to address exceptions for the poorest countries have been
plagued by demands for a “round for free”—which is no bargain
for these countries if it allows policymakers to defer action on
domestic economic reforms.
WTO
members face an extremely difficult task in meeting their avowed
deadline to conclude the Doha round by the end of 2006, for several
reasons: problems with sequencing domestic farm reforms in the
United States and Europe within the Doha round timetable; electoral
politics in the US, France, Brazil, and Korea, among others;
inadequate progress on services; inadequate “capacity building”
among the poorest nations; and tepid business support. Schott noted
the importance of the “aid for trade” issue, but noted that the
debate has not been fully vetted and certainly not imbedded in
national policies.
To
have a chance to conclude a meaningful negotiation (i.e., one which
has a significant development payoff), WTO members will need to make
major progress at the
Hong Kong
ministerial in December 2005. New activity in
Geneva
, as well as among the new “Quad” (the
US
, EU,
Brazil
, and
India
), indicate that the situation is improving, but the prognosis is
still not good. Schott suggested that the key trading nations target
an early harvest of trade reforms on agriculture and NAMA, plus
capacity-building investments, which would be credited in the final
package of agreements at the end of the
Doha
round. If the talks can conclude on schedule, so much the better,
but more likely they will carry over into 2008 or 2009. That would
mean extending | 
