Supporting an ageing population: the need for a new economic strategy

workersThe UK, in common with all rich nations and some poorer ones too, faces an ageing population. The health and social care needed to support this needs to be well-funded, which requires sufficient wealth creation across the country.

At the moment, the UK’s productivity lags significantly behind other rich countries and needs to be seriously addressed by whichever government takes office after the upcoming election. The growth of productivity, or how much output is produced from given inputs (land, labour, capital, entrepreneurship etc), is the key to a rising standard of living. It makes possible choices between, for example, more work for a higher income, or more leisure for the same income.

The Guardian’s economics editor Larry Elliott here discusses these issues and makes a strong case for an ambitious industrial and regional policy to boost productivity growth. As he says, the average productivity in the UK’s Greater South-East, including London, is higher than that in Germany. If the average productivity of the UK as a whole is well behind that in Germany, as well as France and the US, this means that there is a strong regional dimension to the problem. The rest of the UK lags well behind the Greater South-East, and this is a major reason for the country’s high level of regional income inequality. Continue reading

Richard Koo explains balance sheet recessions

Economist Richard Koo is well known for his concept of  a ‘balance sheet recession’. In this short video he explains how the recent Great Recession, the Great Depression of the 1930s, and Japan’s economic stagnation since the 1990s are all examples of this, and what can be done about it.

A number of somewhat iconoclastic economists have explored the nature and consequences of asset-price bubbles, fueled by the accumulation of private sector debt, and their subsequent collapse, followed by private sector deleveraging (paying down debt). They include Koo, Michael Pettis, Steve Keen and Michael Hudson, the latter three being influenced by the late Hyman Minsky and his Financial Instability Hypothesis. The four of them proffer somewhat different solutions to the long stagnation that can follow the collapse of a debt-fueled asset-price bubble, which we are arguably still living through.

Koo favours a fiscal stimulus in which government spending exceeds revenue at a rate sufficient to prevent the economy collapsing as a large number of firms use their cash flow to pay down debt, rather than invest. This is what has been done intermittently in Japan. Koo argues that without the stimulus the Japanese economy would have experienced its own Great Depression, rather than simply years of stagnation.

Keen and Hudson favour a Modern Debt Jubilee in which much private debt is simply forgiven and wiped out, allowing households and firms to raise their spending on consumption and investment and drive economic recovery.

Pettis focuses his analysis on the current account imbalances across the global economy which in his view caused the build-up of debt. The unwinding of these imbalances is required to secure a more sustainable global recovery.

There is something to be said for the ideas of all of the above. I am keen to compare them and integrate the most important aspects, as their thinking overlaps to a significant extent. That will be the subject of a future post! In the meantime, I can definitely recommend watching the video as an introduction to Koo’s thinking.

How austerity may reduce innovation

An interesting post from Simon Wren-Lewis on how sustained austerity can lower innovation and productivity growth. With the latter growing painfully slowly in the UK and other rich countries for a number of years, this is potentially important. As he notes, it may only explain part of the productivity slowdown, but it still highlights one of the negative impacts of austerity.

Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.

The Trump effect: is this time different?

LevyInstituteAn interesting recent paper here from the Levy Economics Institute of Bard College on the prospects for the US economy in the coming years. The authors use their model, which was developed with the late post-Keynesian economist Wynne Godley (one of the few to have predicted the Great Recession), to take stock of the current situation and to discuss alternative future scenarios.

Nikiforos and Zezza argue that the US economy has performed relatively poorly since the Great Recession, and growth outcomes continue to disappoint. Although headline unemployment is relatively low, there remains substantial labour underutilization in the form of ‘marginally attached workers’ and involuntary part-time workers, which when added to the headline rate is known as the U6 measure. The latter is nearly double the headline rate, and helps to explain the continued weakness in wage growth.

The US economy faces three headwinds which continue to constrain growth: income inequality, fiscal conservatism, and the weak performance of net exports (exports minus imports). Continue reading

Austerity and Germany’s Social Democrats – via econoblog101

Many of my European friends ask me about Martin Schulz and the success of social-democrats at the polls. Since they are progressive, they hope for reforms in the eurozone to curb mass unemployment, stellar youth unemployment and social problems that exist in many crisis countries. I always had my doubts if Martin Schulz was the […]

via … and austerity for all! (Martin Schulz reloaded) — econoblog101