Wednesday, January 6, 2010

The lost decade

In his last editorial (NYT 27 Dec. ), Paul Krugman has decided to call the last decade the Big Zero. Indeed, It has been a decade of zero economic gains for average families whose median income adjusted for inflation has decreased. It has been a negative decade for homeowners who contracted mortgages and now owe more than the actual price of their houses. It was also a decade with basically zero job creation, with significant decline of private sector employment . Also, for most Americans (and probably Europeans), it was also a decade of zero stock gains even without taking inflation into account.
In the Bush years, there was a sense of economic triumphalism, especially in America's business and political establishment based on the alledged superiority of the financial system. But the incredible thing, as Krugman points out, was our unwillingness to learn from past mistakes. After the dotcom bubble, investors and bankers started inflating a new bubble in housing; then, Worldcom and Enron revealed that there was no 'honest' corporate accounting; banks went on taking excessive risks and to make investments into highly speculative products. After triggering the global crisis, and having to be rescued by governments with tax payers money, banks continued with their old habits of excessive leverage and gigantic bonuses.
Nothing has happened in terms of economic progress nor in social terms. So we were wrong to call a period of boom what actually was artificial growth fuelled by speculative bubbles in the housing sector, a model which was replicated in a number of European countries, such as Spain, and Ireland.
Is Europe doing better? The Lisbon Strategy's aim to make the union "the most competitive knowledge-based economy in the world" by 2010 is widely acknowledged to have failed, while its two headline targets of 70 percent employment and research and development spending equivalent to 3 percent of GDP are both set to be missed. Yet the aims of the new economic plan called 'EU 2020' may not differ radically from aspirations in the outgoing decade, although there is likely to be a considerably stronger emphasis on 'green growth'. It will include three broad themes: 'Creating value by basing growth on knowledge', 'Empowering people in inclusive societies', and 'Creating a competitive, connected and greener economy'. Achieving greater growth and higher employment levels through improved education, tailored towards industry needs, and greater levels of research and innovation is unlikely to face major opposition from member states, although many stakeholders, including trade unions, NGOs and members of the European Parliament are keen to see real steps towards securing social inclusiveness.
The next few months will be decisive for the European Union's economic future, with the forthcoming agreement on a new 10-year economic plan to address the consequences of the global crisis , and set a new course towards sustainable growth and job creation. Rising inequalities, high unemployment together with increasing poverty, an ageing EU population and soaring budget deficits form the backdrop for policy makers involved in laying the foundations for future growth and development.


  1. Dear Mr. Mairate,

    I rarely agree with Mr. Krugman, the Big Zero decade is for me a false conclusion. On an economic point of view, many innovations came to create new markets and some markets rose a lot during the past decade. Talking about average families, i do agree that maybe some have lost purshase power during the last decade. But is it all economy's fault? I can only disagree with that idea. During the past decade, goverments (France reaches the highest) didn't stop creating taxes, so far so good today France and England continue even with a better will this crazyness.
    All governements explain that due to the crises (cause officialy by the banks), they needed a massive plan to save the economy. What everyone forget to say is that this crisis is partly due to the US state.
    A decade ago after the dotcom crash, FED offered such low rates (which was a mistake as said Alan Greenspan). On the other hand, there were two categories of states, ones which were loose on realestate laws and ones which were more administratives. During the past decade the loose states were having real estate prices quite close to the inflation rate (for example seattle) and the most administrative ones saw their real estate prices increase dreaticaly.
    The state created a will for investment with low rates (the FED is private but we all know it is in the power's hands), the ask increased a lot and the bid responded more or less rapidly depending the laws reagarding real estate in the different states. At the same time, the US government asked the Freddies to give access to the poorest people and the ones of which the credit ranking was too low to be offered a credit. These two entities gave credits to people who would never obtained one in normal times, but the economy had to rise up. Then comes the GREED of all the private sector, thinking it was always possible to sell the house with profit later, once the credit would be impossible to reimburse. In order to spread the risk they have created (Freddies and banks)some toxic financial products and then comes the chain reaction, the greed and incompetence of some economic actors made this bubble explode but basicaly they have just enjoyed what the state created for them. I have trend to think like Frederic Bastiat "il y a ce qui se voit et ce qui ne se voit pas". When there is an issue I try to see where is the state and very often it is here.

    Now regarding the fact that we did mistakes and that we didn't learn from them, I do agree with you Mr. Mairate, we didn't. When i see that it is still possible to leverage 200 times on some gold products and on the forex i am amazed, the margin call can be fatal.

    Regarding the European plan for the next 10 years, I am very dubitative. The planned economy has shown its limits a long time ago. During 10 years many things might change, many innovations and I hope inventions might change everything and in this such fast evolutive world Europe still thinks in terms of planned economy, that sound pretty sovietic to me if i may. Green economy, ok, but which one, the one to reduce CO2? The number of scientists believeing in this explanation of global warming are fewer every day, even Al Gore starts to be dubitative. If I may, I would suggest that you take a look to the conferences of the Pr. Courtillot on youtube. This Professor expresses what few dare to say, the GIEC 1000 pages results are not so extreme as the one of 10 pages proposed to governments. I may suggest this video followed by others parts. This scientist is the head of the observatoire scientifique de Paris and has been hired by Mr Delanoé the actual major of Paris:

    Equity is not, for me, a goal to reach, liberty is more a goal to reach and that we can all of us achieve if we are able to pay the price of it: accept responsability.


  2. Dear Jean Luc

    I do agree with your conclusion. As I explained in my note (7 Feb.), there is a trade off between efficiency, justice and liberty. But in current circumstances with rising inequality we have to compromise on the goal of economic efficiency without putting at risk our liberty. We certainly need no more taxes, but this would be the price to pay for the irresponsible behavior of the financial system. Obama has proposed a special levy on financial transactions to reduce public debt as soaring deficits will be unbearable in the medium term. This is for me an equitable measure: banks will pay for their mistakes but in the meantime millions of workers are losing their job. The real economy will have to prevail over the narrow interests of bankers. This is the only way out of the crisis.