Sunday, April 27, 2014

Beyond GDP: a new measure of growth

Since the 40s, GDP  measures output from the 'use' side , that is the  value of all 'final' goods and services used by consumers, businesses and government. It gives a biased view of the economy as it neglects the role of intermediate goods. 

The US Bureau of Economic Analysis has launched the 'gross output" measure to measure the total value of sales in all phases of economic activity, from raw materials, intermediate goods to final products. This measure was introduced by Wassily Leontieff in the 30s at the level of individual industries , but not as an aggregate measure. One of his disciples, Mark Skousen, presidential fellow at Chapman University and author of the book "Structure of Production" (New York University Press 2007) argues that this is a more reliable measure of total economic activity. In his view, the traditional measure of GDP has contributed to the idea that consumption is the real motor of the economy, as it represents more than two-thirds of it and that savings are unproductive. In fact, economic activity in the intermediate stages of  production - including capital formation, technology and business spending - is largely underestimated. The new measure  also provides a better understanding of business cycles. Nominal US GDP fell by 2% while gross output declined by 8%; conversely, it has risen faster than actual GDP . 

The question is what could be the consequences on the other economies in Europe and Japan, if gross output is generalized. Since gross output emphasizes the 'make' economy rather than the 'use' economy, it gives more weight to capital investment, innovation, entrepreneurship and productive savings. This indicator will  'reward' countries like Germany or Italy which have a tradition of manufacturing and a high propensity to savings (despite it has been hardly affected by the crisis). Therefore, economic policies will tend to focus more on production rather than purely on demand stimulation, which is not to be neglected, though.. 

It is certainly a decisive step forward to a better measure of growth. However, it is still not a radical reform like the measure proposed by Stiglitz, Sen and Fitoussi,  focusing on quality of life rather than on material components of wealth. 

Saturday, April 26, 2014

Fiscal Colonialism

Philippe Legrain (former head of analysis at BEPA, the Advisors Council of the European Commission's President)  has published a book explaining why the Eurozone is still in a mess. He developed these ideas in a recent article published in NYT  (April 21) where he denounces the 'eurozone fiscal colonialism". 

"The primary cause of the crisis was the reckless lending of German and French banks (both directly and through local banks) to Spanish and Irish homeowners, Portuguese consumers and the Greek government. But by insisting that Greek, Irish, Portuguese and Spanish taxpayers pay in full for those banks’ mistakes, Chancellor Angela Merkel’s government and its handmaidens in Brussels have systematically privileged the interests of German and French banks over those of euro zone citizens.”

How to get out of the mess?  Legrain proposes a change of policies and institutions for the eurozone.  

"Banks need to be restructured and unbearable debts written down. More investment is needed, along with bold reforms to boost productivity.The “no bailout” rule should also be restored. Elected national governments must have much greater flexibility to tax and spend as they please, constrained by markets’ willingness to lend to them and ultimately by the possibility of default. A mechanism for the orderly restructuring of sovereign debt should be established for that purpose.To avoid future panics, the European Central Bank’s role as a lender of last resort to solvent governments should be enshrined. The mechanism for restructuring failed banks also needs to be properly independent. In the long term, a euro zone treasury accountable to both European and national legislators should be created, with limited tax-raising and borrowing powers, including an accountable  eurozone treasury, an enhanced role of the ECB, restructuring of the banking sector"  

A blueprint for change. Just one question: why not a fiscal Union based on a much bigger EU budget with real fiscal powers and a system of permanent transfers like in any federation. But this would require a political Union? This should be the final aim, isn't it?

P.S: As Robert Frost said,  "The strongest and most effective force in guaranteeing the long-term maintenance of power is not violence in all the forms deployed by the dominant to control the dominated, but consent in all the forms in which the dominated acquiesce in their own domination" 

Saturday, April 19, 2014

A New Deal for Europe

Europe is at a crossroads. Its model of economic integration has become unsustainable since the 80s but the situation has worsened with the crisis.  Have we learned the lessons from the crisis?

In the past 25 years, the EU has accomplished significant progress in terms of economic integration with the institution of the internal market in 1993, the creation of the EMU in 1999 and the enlargement to 28 member States. However, despite macroeconomic stability, the economic performance of the EU has been poor with low growth and productivity.

Five years after the bust of the global financial crisis , the outlook is still negative:   low potential growth, high unemployment, loss of income, high levels of public debt, loss of competitiveness and slow reduction of unit labour costs (not helped by a strong euro), tight credit rationing due to bank's de-leveraging. Meanwhile progress toward the banking Union is slow and no steps are taken toward a genuine fiscal Union, despite austerity fatigue and growing risks in the eurozone periphery.

Europe is losing ground with the other parts of the world as shown by the graph below (2007= 100, in current USD ).

Since 2010, European governments have undertaken wrong economic policies which have aggravated the crisis in terms of growth and cohesion. Economic governance still needs to be fixed but this cannot be a means to an end. The only way forward is to combine a sound reform of European governance with a  true strategy for growth and employment based on long term investments.

Thursday, April 17, 2014

Bauman and the case for a social Europe

Zygmunt Bauman, the Polish sociologist who is Emeritus Professor at the University of  Leeds made his fortune with his original thinking on modern societies. His concept of 'liquid modernity" describes the shift from the rock solid industrial society - whose basic foundation is mass production and the social relations which it created-to the fragile and unstable societies of today.  

In a recent book, he develops the idea of "liquid fear" that is the fear of natural disasters, environmental catastrophes or indiscriminate terrorist attacks, all things that we cannot prevent. For Bauman, the main source of fear is the decline and decomposition of the social organisation which prevailed, sometimes called fordism as the industrial substratum which underpinned the entire edifice. That basis gave security and solidity to the entire society through redistribution of wealth and the ability of the State to cover a wide range of needs.  But the strength of the system was the "propelling and operating force of the society". 

The State and the western society of the Fordist era - which initiated their decline in the 70s and suffered the impact of globalization and deregulation - had a stabilizing role for the individuals and created a context of solidarity for the working class. The Fordist factory was the best example of the 'solid modernity" in which most individuals without capital stood out, the place of a conflict between capital and labour in a hostile but long term relationship. But this allowed those individuals to "think and make plans for the future". Conflict was a sort of investment into the future as well a sacrifice which would bear fruit  while the current condition of  global volatility makes it meaningless. This phase being exhausted, due to the pressure of global forces, and independent of the policies of individual States, has transformed our lives, created an  'open society', -not in the sense of Popper's free society-  but rather in the sense of society 'exposed to the blows of fate". 

The paradox is that the sense of insecurity is widespread in developed societies, which in fact are better off relative to the rest of the world. Insecurity is when individuals are dependent on strong protections," which become fragile and are afraid of losing them" . In recent decades, the whole phenomenology of fear has appeared again in the various segments of society : terrorism, urban crime,  environmental and health risks a and then the influx of the Others and the Diverse, which become the main target of  populist parties  which see in the immigrants the most profitable scapegoat. Even the political capital becomes liquid seeking profits (in terms of votes!) from increasing fear and insecurity. 

Z. Bauman summarized his thinking in this sentence : "Modernity was supposed to be the period in human history when the fears that pervaded social life in the past could be left behind and human beings could at last take control of their lives and tame the uncontrolled forces of the social and natural worlds. And yet, at the dawn of the twenty-first century, we live again in a time of fear. Whether its the fear of natural disasters, the fear of environmental catastrophes or the fear of indiscriminate terrorist attacks, we live today in a state of constant anxiety about the dangers that could strike" 

 As Europeans , we are trapped between the horrors of the past and the risks of a distant future. Fear undermines social cohesiveness and  creates tensions between social groups and individuals. To combat the insidious fear that pervades our continent , the solution is to be found outside the national confines in the reinforcement of supra-national institutions. A social Europe is our only hope.

Wednesday, April 2, 2014

Redistribution, inequality, and sustainable growth | vox

Redistribution, inequality, and sustainable growth | vox

For once, I can agree with IMF stance, though  these ideas are little reflected in their policies. The point is redistribution is actually necessary to pursue efficient growth policies. There is no evidence of trade off and we see the results when there is less redistribution because of the myopia of austerity policies. The widening of inequalities is a source of unsustainable development.

This is why we need a new deal for Europe.