Ignored Economic Comment of the Year: “Invest Now”
The following is hoisted from the archives, a piece by Olivier Blanchard and Carlo Cottarelli, Ten Commandments for Fiscal Adjustment in Advanced Economies. I had been saving it to say “it worked!”, but instead today, it’s time to look back and realize that it’s just another missed opportunity.
When I first read their article, I thought it was the best piece of information summarizing what we should expect coming out of the recession. I especially liked #7, “Invest Now”, but it seems that, six months later, austerity prevailed. Here’s what they had to say in June, it tops my list of ignored economic comments of 2010:
Commandment VII: You shall implement wide reforms to boost potential growth.
Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years… In the current context of weak aggregate demand, reforms that increase investment are more desirable than reforms that increase saving. While both have positive long-run effects, investment friendly reforms increase demand and output in the short run, while saving friendly reforms do the opposite.
The bottom line is that the philosophy of spending the restart the economy wasn’t popular back then and now, we’re faced with below potential growth amidst an out of sorts economic system.
The Great Recession was a crucial point in time to target specific long term growth sectors, but advanced economies failed to do so.
The whole piece is here for the nostalgic or blindly hopeful.
I don’t believe that slope of the “potential growth” line is correct, if there was a bubble. Bubbles mean the economy was ABOVE its non-bubble full-employment level, and not just the little blip in 2006.
(from III: doldrums are due not only to the crisis, but also to how fiscal policy was mismanaged during the good times. )
My eyeballing guess would be a point in 2012 of 13,600, and in 2003 of 11,600. Then the long above the black red line would be Bubble (over) employment & non-sustainable bubble GDP.
Pretending that a bubble economy is the sustainable ideal is part of why there was so little interest in stopping the bubble earlier, (2003-2005) when it would have been so much cheaper.
The calculation for potential output takes into account labour: http://www.cbo.gov/doc.cfm?index=3020&type=0 meaning that there wouldn’t be a blip in the bubble years. However, I think what you are thinking about is the growth rate of the economy; you can see the economy overheating here when using percent change from a year ago: http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=GDPC96,GDPPOT&transformation=pc1,pc1&scale=Left,Left&range=Custom,Custom&cosd=2000-01-01,2000-01-01&coed=2010-07-01,2010-07-01&line_color=%230000FF,%23FF0000&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2011-01-11,2011-01-11&revision_date=2011-01-11,2011-01-11&mma=0,0&nd=,&ost=,&oet=,&fml=a,a&fq=Quarterly,Quarterly&fam=avg,avg&fgst=lin,lin
I completely agree with you when you say that “pretending that a bubble economy is the sustainable ideal is part of why there was so little interest in stopping the bubble earlier”. Also, I think point III was a crucial misstep in leading to the crisis, which is why the Great Recession was a golden opportunity for policymakers to “fix” many of the obvious flaws.
awesome blog, do you have twitter or facebook? i will bookmark this page thanks. jasmin holzbauer