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the Way Forward Alpert Hockett Roubini

the Way Forward Alpert Hockett Roubini

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Published by golddigger1989
a proposal on how to fix our broken economy, by identifying the major problems and offering solutions. 35 pages
a proposal on how to fix our broken economy, by identifying the major problems and offering solutions. 35 pages

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Published by: golddigger1989 on Oct 13, 2011
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10/13/2011

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The Way Forward
Moving From the Post-Bubble, Post-Bust Economy to RenewedGrowth and Competitiveness
Daniel Alpert, Managing Partner, Westwood CapitalRobert Hockett, Professor of Law, Cornell UniversityNouriel Roubini, Professor of Economics, New York University
October 2011
Notwithstanding repeated attempts at monetary and fiscal stimulus since 2009, the United Statesremains mired in what is by far its worst economic slump since that of the 1930s.
1
More than 25million working-age Americans remain unemployed or underemployed, the employment-to-population ratio lingers at a near-historic low of 58.3 percent,
2
business investment continues athistorically weak levels, and consumption expenditure remains weighed down by massive privatesector debt overhang left by the bursting of the housing and credit bubble a bit over three yearsago. Recovery from what already has been dubbed the “Great Recession” has been so weak thusfar that real GDP has yet to surpass its previous peak. And yet,
already there are signs of a possible renewed recession 
.
It is not only the U.S. economy that is in peril right now. Atthis writing, Europe is struggling to prevent the sovereigndebt problems of its peripheral Euro-zone economies fromspiraling into a full-fledged banking crisis – an ominousdevelopment that would present an already weakeningeconomy with yet another demand shock. Meanwhile,China and other large emerging economies – those bestpositioned to take up worsening slack in the globaleconomy – are beginning to experience slowdowns of theirown as earlier measures to contain domestic inflation andcredit-creation kick in, and as weak growth in Europe andthe United States dampens demand for their exports.Nor is renewed recession the only threat we now face. Evenif a return to negative growth rates is somehow avoided,there will remain a real and present danger that Europe andthe United States alike fall into an indefinitely lengthyperiod of negligible growth, high unemployment anddeflation, much as Japan has experienced over the past 20years following its own stock-and-real estate bubble andburst of the early 1990s.
3
Protracted stagnation on thisorder of magnitude would undermine the living standardsof an entire generation of Americans and Europeans, andwould of course jeopardize America’s position in the world.
New America Foundation
 
 new america foundation
page 2
 
Our economic straits are rendered all the more dire, andthe just mentioned scenario accordingly all the more likely,by political dysfunction and attendant paralysis in both theUnited States and Europe. The political stalemate is in partstructural, but also is attributable in significant measure tothe nature of the present economic crisis itself, which hasstood much familiar economic orthodoxy of the past 30years on its head. For despite the standoff over raising theU.S. debt ceiling this past August, the principal problem inthe United States has not been government
in 
action. It hasbeen
inadequate 
action, proceeding on inadequateunderstanding of what ails us.Since the onset of recession in December 2007, the federalgovernment, including the Federal Reserve, has undertakena broad array of both conventional and unconventionalpolicy measures. The most noteworthy of these include:slashing interest rates effectively to zero; two rounds of quantitative easing involving the purchase of Treasuriesand other assets, followed by Operation Twist to flatten theyield curve yet further; and three fiscal stimulus programs(including the 2008 Economic Stimulus Act, the 2009American Recovery and Reinvestment Act, and the 2010Tax Relief, Unemployment Insurance Reauthorization, andJob Creation Act) and the 2008Troubled Asset Relief Program torecapitalize the banks.These actions have undeniably helpedstabilize the economy—temporarily.But as evidenced by continuing highunemployment and the weak andnow worsening economic outlook,they have not produced a sustainablerecovery. And there is no reason tobelieve that further such measuresnow being proposed, including theadditional tax relief and modestspending found in theadministration’s proposed AmericanJobs Act – which look all too muchlike previous measures – will be any more successful.Indeed, there is good reason to worry that most of themeasures tried thus far, particularly those involvingmonetary reflation, have reached the limits of theireffectiveness.The questions now urgently before us, then, are these:First,
why 
have the policies attempted thus far fallen so farshort? And second,
what 
should we be doing
instead 
?Answering these questions correctly, we believe, requires amore thorough understanding of the present crisis itself –its causes, its character, and its full consequences.Regrettably, in our view, there seems to be a pronouncedtendency on the part of most policymakers worldwide toview the current situation as, substantially, no more than anextreme business cyclical decline. From such declines, of course, robust cyclical recoveries can reasonably beanticipated to follow in relatively short order, as previousexcesses are worked off and supply and demand find theirway back into balance. And such expectations, in turn, tendto be viewed as justifying merely modest policy measures.
 
 new america foundation
page 3
 
Yet as we shall show in what follows, this is
not 
an ordinarybusiness cycle downturn. Two features render the presentslump much more formidable than that – and much morerecalcitrant in the face of traditional policy measures.First, the present slump is a balance-sheet LesserDepression or Great Recession of nearly unprecedentedmagnitude, occasioned by our worst credit-fueled asset-price bubble and burst since the late 1920s.
4
Hence, likethe crisis that unfolded throughout the 1930s, the one weare now living through wreaks all the destruction typicallywrought by a Fisher-style debt-deflation. In this case, thatmeans that millions of Americans who took out mortgagesover the past 10 to 15 years, or who borrowed against theinflated values of their homes, are now left with a massivedebt overhang that will weigh down on consumption formany years to come. And this in turn means that the banksand financial institutions that hold this debt are exposed toindefinitely protracted concerns about capitalization in theface of rising default rates and falling asset values.But there is more. Our present crisis is more formidableeven than would be a debt-deflation alone, hard as the latterwould be. For the second key characteristic of our presentplight is that it is the culmination of troubling trends thathave been in the making for more than two decades. Ineffect, it is the upshot of two profoundly important butseemingly unnoticed structural developments in the worldeconomy.The first of those developments has been the steady entryinto the world economy of successive waves of new export-oriented economies, beginning with Japan and the Asiantigers in the 1980s and peaking with China in the early2000s, with more than two billion newly employableworkers. The integration of these high-savings, lower wageeconomies into the global economy, occurring as it didagainst the backdrop of dramatic productivity gains rootedin new information technologies and the globalization of corporate supply chains, decisively shifted the balance of global supply and demand. In consequence, the worldeconomy now is beset by excess supplies of labor, capital,and productive capacity relative to global demand. Thisprofoundly dims the prospects for business investment andgreater net exports in the developed world — the only othertwo drivers of recovery when debt-deflation slackensdomestic consumer demand. It also puts the entire globaleconomy at risk, owing to the central role that the U.S.economy still is relied on to play as the world’s consumerand borrower of last resort.The second long term development that renders the currentdebt-deflation, already worse than a mere cyclicaldownturn, worse even than other debt-deflations is this:The same integration of new rising economies with evermore competitive workforces into the world economy alsofurther shifted the balance of power between labor andcapital in the developed world. That has resulted not onlyin stagnant wages in the United States, but also in levels of income and wealth inequality not seen since the immediatepre-Great-Depression 1920s.For much of the past several decades, easy access toconsumer credit and credit-fueled rises in home values –themselves facilitated by recycled savings from emergingeconomies’ savings – worked to mask this wideninginequality and support heightening personal consumption.But the inevitable collapse of the consumer credit andhousing price bubbles of course brought an end to thispattern of economic growth and left us with the massivedebt overhang cited above. Government transfer paymentsand tax cuts since the crash have made up some of thedifference over the past two years; but these cannotcontinue indefinitely and in any event, as we argue below,in times like the present they tend to be saved rather thandevoted to employment-inducing consumer expenditure.Even current levels of consumption, therefore, willhenceforth depend on improvements in wages andincomes. Yet these have little potential to grow in a worldeconomy beset by a glut of both labor and capital.

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