You just aren't looking hard enough like ...
Posted on 06/16/2008 9:32:10 AM PDT by JerseyHighlander
U.S. FINANCIAL CRISIS HAS GIVEN CAPITALISM BLACK EYE
Every year the Milken Global Conference hosts a roundtable of Nobel laureates in economics, chaired by the financier Michael Milken. This year's discussion, held in Los Angeles April 29, includes Gary Becker (1992), Myron Scholes (1997), Michael Spence (2001) and Ed Phelps (2006). In this excerpt, the Nobel laureates discuss the depth of the U.S. financial crisis, its effect on the rest of the world and the commodity price rises for oil and food.
By Gary Becker, Myron Scholes, Michael Spence and Ed Phelps Michael Milken: Almost 50 percent of the world's growth in the period 1981-1995 came from the United States and Japan. Japan and Germany together in those years accounted for about 25 percent of growth. In the last decade, however, while U.S. growth has remained about one quarter of the world growth, Japan's growth has contributed less than 1 percent of world growth and Germany 3 percent. The growth in China, India and Brazil have taken up that slack.
This raises the question of whether the new phenomenon of "decoupling" is taking hold -- the notion that world growth is less and less dependent on the Western economies. In particular, one wonders what effect, if any, the current U.S. financial turmoil will have on these new, strongly growing countries.
Michael Spence: Decoupling is too strong of a word for now. What is different is that the countries that grew quickly 10 or 20 years ago had small mass in terms of GDP or trade. Now, to take the case of China, its 10 percent annual growth, at current exchange rates, equals a 2 percent increment of growth in the United States. So we are indeed in a transition period. But I'm sure my grandchildren will live in world where economic distribution is different. We are seeing a snapshot of that in process.
It is true there are more growth poles that are important in the world now than ever before, but at the same time the rapid growth in developing countries, especially the poorer ones, is export-led. So those countries are not going to decouple from the major Western economies
Myron Scholes: Because of comparative advantage, countries are idiosyncratic. Policy trajectories and investments sometimes turn out to be profitable, in which case they have a larger share of global GDP, and sometimes not. Japan, for example, was a major competitor with the U.S. in patents and innovation until after the 1990 crisis when their real estate and securities bubble burst. Since then, they have had to retrench and recapitalize, contributing little to growth.
Milken: Confidence in Japanese financial institutions has fallen dramatically around the world and at home. You can see the consequences today: Sixty-six percent of all assets in Japan today are in government securities or bank deposits. In short, they have elected not to invest.
Gary Becker: There are two aspects of decoupling. One is the effect of the U.S. on others. How will our financial turmoil affect others in terms of being more cautious about deregulation in their own markets? I do think current U.S. problems will lead to less attractiveness abroad to the low-regulated aspect of American financial markets. The U.S. will also see more regulation. Others countries will say, "See, the U.S. is not so great; now it has slipped badly." That would be a mistake, but I do think that is one consequence.
The other aspect is the effect of the rest of the world on the U.S. China, India and Brazil will continue with rapid growth, and that will be beneficial for the U.S. because we can still sell to them.
Ed Phelps: Our friends in the financial sector have given capitalism a black eye. Suddenly capitalism is held in less awe around the world. That is a very serious impact.
Coupling and decoupling works through two channels, and it works differently in each. When the U.S. goes into a slump, that is tough for exporters in the rest of the world. So, production of goods for export tends to fall. At the same time, when the U.S. goes into a slump, that tends to reduce real interest rates in the United States -- which to some extent pushed down real rates around the world. That can send up asset prices globally and actually stimulate investment because investors are looking for higher returns.
So there are these two opposite effects, one through trade and one through asset prices.
Up until the 1980s, my conviction was that the asset prices were the dominant channel. Fiscal stimulus in the U.S. did more damage to the rest of the world by raising world interest rates and lowering overseas asset prices than it did good by raising the demand for exports. Because trade has become a much larger proportion of economic activity in the last 20 years, I now think it is a horse race between the two.
Milken: Another Nobel Laureate, Joseph Stiglitz, has said recently that the U.S. is facing one the worst downturns since the Great Depression. Does anyone agree with that?
Spence: That is very unlikely. It would take mistakes in policy in a number of areas to cause that outcome. The American economy is functioning remarkably well in view of the financial turmoil. The rest of the world has not been directly affected in financial terms by our problems. There is a lot of steam out there in the rest of the world.
China has an enormous set of fiscal resources they will use if there is a downturn in exports to stimulate their domestic economy. That is a good thing because they need to shift more focus to stimulating consumption at home.
China's debt/GDP ration is under 20 percent -- that is way low by global standards. Their savings rate is absurdly high, which has led to the controversial and ridiculous current surplus, which they need to get rid of. When you add that up, they have tremendous capacity.
We may be going through the bumpy process of returning to equilibrium in our economic relationship with China.
Becker: The unemployment rate in the U.S. now is 5.1 percent. Unemployment was 25 percent in the Great Depression. We are so far from that, it is ridiculous. We won't even get close. Things may get worse than at present. But at the outside, the only issue is whether unemployment might rise somewhere between 6 and 9 percent.
Phelps: I'm surprised at how slow unemployment has been rising. So far, this downturn barely qualifies as an official recession, let alone a Great Depression.
Scholes: It is erroneous to compare this to the Great Depression. But there is more unraveling to come. We have to worry about effects on the housing market and where it is going to end. Will the housing shock lead to consumption fallout, which leads to more unemployment and further consumption fallout?
There has to be new learning about the affordability of a home. Banks have already written off $250 billion in losses. Some say that could reach a trillion. Housing prices in some places like Southern California might have to fall 40 percent from their peak to clear markets. We have a ways to go in this adjustment.
Becker: In the end, we would do best to look back on how the U.S. had dealt with past crises. The U.S. has responded to so many shocks in recent times -- the bursting of the Internet bubble, 9/11, the Iraq war, the twin deficits (the current account deficit with China and the huge budget deficit) -- yet we've done well. As I read history, we have a flexible economy. Just like in the past, the U.S. has a great capacity to absorb shocks. Europe or Japan doesn’t have that kind of flexibility. From this perspective, it is hard to be pessimistic about America's economic prospects.
There is one other area of concern globally, and that is the price rises in oil and food. Oil price increases are driven by increased demand, including from China and India. Food price increases, though, are in large measure supply-driven; there has been a reduction in supply due to the shift of acreage from food crops to corn for biofuels. That means more corn is grown and less soybeans. As corn and soy prices increase, the consumer shifts to rice, which causes the price of rice to go up.
So, supply-and-demand-driven rises are merging. Oil supply can't be increased without sufficiently high prices, which will spur further exploration and investment. To get food prices down, you can increase acreage and improve productivity with technology. The food crisis will be solved by supply adjustments.
Spence: The poorest spend 60 percent of their income on food. For now, we need a rapid response to malnutrition whatever the long-term solutions. Over time, productivity can increase, as was the case with the Green Revolution. Yet, 50 percent of Chinese still work in rural agriculture and 70 percent of Indians. Capital-intensive agriculture and higher productivity would displace them from their living. It’s a double-edged sword.
Scholes: If you move too fast to improve productivity in food, you create a surplus population that is forced to move to the already over-urbanized cities. That is a huge cost. There are 1.25 billion people in agriculture in India and China. Where will they go?
(C) MILKEN GLOBAL CONFERENCE/GLOBAL ECONOMIC VIEWPOINT DISTRIBUTED BY TRIBUNE MEDIA SERVICES (JUNE 5, 2008)
Oh, now it’s a financial crisis? Am I the only one who thinks this sky-is-falling hysteria is just nonsense? I don’t know about anyone else, but in my day-to-day life, I am not seeing “financial crisis.” I pay quite a bit more to fill my gas tank, and a little more for some groceries (milk, mainly.) Other than that, I ‘hear’ about the crisis. I ‘read’ about the crisis. But I don’t see the crisis.
Let me embolden you. Al Gore is a Nobel laureate. Comment away.
Of course it’s a crisis to anyone opposed to Capitalism.
Definition of Crisis: A highly volatile dangerous situation requiring immediate remedial action.
Which that remedial action would be either Socialism or Marxism.
I think the crisis news services we get should look up a thesaurus, crisis is getting so old.
Plenty of other terms to describe desperation to sell news such as;
apoplexy, catastrophe, climacteric, climax, conjecture, conjuncture, convulsion, criticality, crossroads, cruciality, crux, dilemma, emergency, exigency, impasse, juncture, panic, paroxysm, pass, peril, pinch, predicament, seizure, trauma, trial, trouble.
unemployment at around 5%, steady growth,....i have to agree with you, the only crisis is media hype
As is Jimmah Cahtah, Yassir Arafat, Kofi Annan, Nelson Mandela, etc., etc.
If you do not understand the difference between the Nobel prize for economics and the Nobel Prize for whatever it was that Gore received, there isn’t much to say.
The Nobel Prize for Economics is one of the top five most prestigious Economics awards in the world.
And you and I agree on the worthlessness of which ever Nobel prize Al Gore won. (Peace prize?)
Funny not one word on how the DEMOCRATS and their Marxist views and regulations is responsible for the current downturn. Oil is high, because DEMOCRATS refuse to allow us to drill. The reason always given is the ENVIRONMENT. Not even the communist countries believe this. Right now RED CHINA is drilling 50 miles off the coast of FLORIDA, in an area given to Cuba by Jimmy “Afraid of rabbits and everything else” Carter.
How does what is happening in the US “give capitalism a bad name”? As far as I can tell, the problems currently plaguing the US (mortgage crisis and high fuel costs) are due to government INTERFERENCE with capitalism. High fuel costs are due to failure to drill for oil wherever it can be found, and failure to construct new refineries.
I absolutely agree.
In fact, a few months ago I was called at work by a writer for a paper here (she had my contact info thanks to writing an article about my coalition group years ago when I was president) asking my opinion about the economy.
She reeled off the standard wisdom that we’re in a recession and things are bad. She wanted my take on that opinion.
I said it was nonsense, and asked her to think herself and ask others if they REALLY even know any 2nd-hand people who have lost jobs (any kind) or had to demote their living quarters or their “lifestyles” to get by in this allegedly horrible recession.
I said I knew of no-one who had such circumstances, and neither have I seen any changes just passing by local towns and such. Nothing that would indicate to me anything is really “bad”.
The title doesn’t seem to match the article. The second half of the article is composed of comments by econoimists that refute the statement that we’re in a financial crisis.
(Peace) It’s worthless for sure, but even more devalued by the fact I have no idea how pushing “green” crap ties in with “peace”.
Give me a one armed economist, at least he won’t be able to say “on the other hand”.
They are talking through their hats.
I ‘hear’ about the crisis. I ‘read’ about the crisis. But I don’t see the crisis.
You won’t hear about a financial crisis after they put in Obamma in office. The MSM will declare a sudden recovery as if by a miracle and declare our economy is better than it has been in years, thanks to Obama and the brilliant Democratic leftist party.
China is not drilling off the coast of Cuba. Dick Cheney’s office has corrected his statement Friday, and it’s easily found on google or yahoo.
Oh yeah. Remember how all the homeless vanished from the news the day Clinton took oath? It was like homes just sprang out of the earth the minute he put his hand on the Bible.
I also notice that, for some reason, starvation, slaughter, and chaos all over Africa never manages to give neo-marxism a bad name. Genocide and the common slide-into-fascism tendency never gives socialism a bad name, at least, not among Nobel Laureates.
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