Archive for February 15th, 2010
I had pointed to an article by Robert Fogel where he says why he is optimistic on China and pessimistic on Europe economy.
Here is a NBER paper (cannot find a free version) where he presents a more formal analysis of the above article.
This paper addresses three issues related to the relative rates of growth in the United States, the European Union, and China during the four decades between 2000 and 2040. The first concerns the source of the factors which make it likely that China will continue to grow at a high rate for another generation. The paper argues that this growth will be the result of both favorable economic and political conditions. The second concerns the source of declining GDP growth in the original fifteen nations of the European Union. For these countries, the underlying cause is due in large measure to low fertility rates and an increase in the dependency ratio. The third issue is the projection of long-term U.S. growth in GDP at a rate of 3.7 percent per annum.
How diverse the views are on China economy. Some say it is doomed (atleast over a short run) and some are so optimistic.
Though I had pointed to the lessons via this excellent paper from Jens Henriksson. But still there is always room for more.
He says fiscal consolidation matters for four reasons:
The current situation is not sustainable. As outlined above, debts are projected to increase dramatically over the next few years, reaching over 100% in some cases.
Benjamin Franklin once said that the only certainties in life are death and taxes. Well, I’d like to add a third certainty: future economic crises. We know from experience that there is always another downturn around the corner. And we need to be ready for it.
The demographic challenges facing much of the developed world make sustainable public finances a necessity, as has been illustrated by the Commission’s Ageing and Sustainability Reports, published in 2009.
The inability to maintain sustainable public finances would increase the risks of higher equilibrium unemployment and long-term unemployment, with drastic and lasting consequences for economic stability and growth.
I liked the new addition to Benjamin Franklin’s famous quote. Repeat – the only certainties in life are death, taxes and economic crises. How times change. Till 2007 we were all looking at great moderation and how we have advanced in policymaking and crisis are both fewer and smaller in scale.
Lessons from Sweden:
- All means must be used
- Increase taxes
- Lower expenditure
- Improve baseline scenario
- Do not be disappointing: create a conservative baseline
- Frontload the consolidation
- Calculate the political cost: public choice
- Safeguard labour force participation
- Strengthen fiscal institutions
- Maintain social cohesion
Quite similar to Henrisksson’s list except that Borg points to the need to understand political economy as well. The costs of taking on strong interest groups who would defend loudly should be calculated well.
A good speech on fiscal basics.
Apart from this, Sweden has many other lessons as well