I’ve been watching a video of a couple of interesting presentations by Jim Wolfensohn and Nouriel Roubini at the US Zeitgeist Conference. Here are some of the key points they made –
Wolfensohn
- His main point was that global economic power is moving from the US towards Asia, notably China and India, to a much larger degree than most people recognize, and national leaders are doing nothing about it.
- The wealthy countries’ share of global GDP, historically around 75-80%, has dropped in the past decade by some 10%.
- A critical need in the US is for them to recognize that they are losing ground and to give more emphasis to creating a more well-educated workforce that can compete effectively with Asia. We must deal with the budget deficit.
- He noted that the countries with the greatest foreign reserves are: China – $1.5 trillion, Japan – $1 trillion, Russia – $440 billion, Taiwan – $348 billion, India – $287 billion, South Korea – $270 billion, Hong Kong – $256 billion, Brazil – $241 billion. The US budget in contrast is in bad shape, heading towards debt of 100% of GDP by 2020 to 2030.
Roubini
- His presentation (the main part of which starts at about 19:45) was on the outlook for the US and global economy. I thought his talk had more substance than Wolfensohn’s. Although mainly focused on the medium to long term, he also made some interesting remarks about the current situation and potential policy options. His overall message was that although there are significant positive opportunities for the long term, in the near term if we don’t address serious national and trans-national problems the potential benefits of those opportunities will be not be realized.
- The stimulus was necessary and successful in averting a more serious economic meltdown. However the economy is not out of the woods. De-leveraging has barely started, especially given the massive re-leveraging of the public sector (he suggests a debt of 120% of GDP in a few years). It is inevitable that recovery will be anemic for an extended period.
- There are several reason’s for optimism about prospects for the world economy in the medium to long term – notably (i) globalization (trade in goods and services, global supply chain, mobility of capital and labor, outsourcing, spreading on knowledge), (ii) emerging economies (higher growth, less leverage) and (iii) technological innovation.
- In the long run economic growth comes from improved productivity which depends critically on technological progress, even though we can’t know in advance which areas of technology will eventually yield the most important increases in productivity (alternative energy, life sciences, nanotechnology, telecom, media, IT).
- A shift of economic and political power is taking place from advanced economies to emerging market economies, leading to a multi-polar world.
- The rise of emerging economies will be positive for the world economy in the long run, but in the near term globalization also brings challenges – falling wages of unskilled workers and greater income inequality in advanced economies, higher commodity prices, a global savings glut and current account imbalances. Therefore globalization needs to be managed to make sure that it is good for all and to prevent trade and currency conflicts.
- The Anglo Saxon pure laissez-faire economic model has failed, as has the European social welfare model while the success of the Asian economic model is not yet clear.
- There has been an absolute decline in the performance of the advanced economies, not just relative to the emerging economies.
- Japan has never undertaken the structural reform it requires due to a blocked political system. It is in secular long term decline.
- Failure by the Eurozone to address their problems through coordinated action risks either a breakup of the Eurozone or sovereign default.
- In the last 30 years, the US has only had high growth in ways that have created bubbles – real estate in the 80’s leading to the Savings and Loan crisis; the technology bubble in the 90’s and the sub-prime bubble in the 2000’s. The outcome is that we have crumbling infrastructure, a low skilled workforce, a high fiscal deficit and current account deficit and unfunded liabilities due to aging of the population. Can the US grow in a way that is sustainable?
- We have a culture of instant consumption, a lack of savings, growing income inequality, political stalemate and an attitude of isolationism in immigration policies and attitudes towards Muslims.
- The problems in the global economy are global, but the policies are national. We need global coordination on issues such as trade, the environment, scarce resources, finance stability, current account imbalances, security and peace. However this coordination does not exist.
- We lack a superpower able to force these issues – the US is in decline, others are free-riding – China is free-riding on currency, climate change and political issues. India is free riding on trade
- If don’t resolve these problems in short term we won’t achieve the potential long term benefits of globalization.
- Regarding the current economic situation, the Fed has run out of bullets. Banks have a trillion dollars in reserves but still aren’t lending, so even more quantitative easing won’t help. Another 840 local banks are likely to fail resulting in a further credit crunch. Printing more money will not help much.
- We have to address the budget deficit in the medium term by cutting entitlement spending and raising taxes. If we do not, the ‘bond vigilantes’ will eventually wake up. He recommends a temporary (2 year) cut in payroll tax funded by increased taxes on the wealthy. He believes the current problem is not a lack of investment but the cost of labor.
- We must consume less, save more and de-leverage the public sector. It will be a hard slog. Spending now is only stealing demand from the future. Cutting spending will slow down growth, but it has to take place.