Monthly Archives: September 2009

Much ado about multipliers – Why do economists disagree so much on whether fiscal stimulus works?

IT IS the biggest peacetime fiscal expansion in history. Across the globe countries have countered the recession by cutting taxes and by boosting government spending. The G20 group of economies, whose leaders meet this week in Pittsburgh, have introduced stimulus packages worth an average of 2% of GDP this year and 1.6% of GDP in 2010. Co-ordinated action on this scale might suggest a consensus about the effects of fiscal stimulus. But economists are in fact deeply divided about how well, or indeed whether, such stimulus works.

The debate hinges on the scale of the “fiscal multiplier”. This measure, first formalised in 1931 by Richard Kahn, a student of John Maynard Keynes, captures how effectively tax cuts or increases in government spending stimulate output. A multiplier of one means that a $1 billion increase in government spending will increase a country’s GDP by $1 billion. Continue reading

A new chapter for the global political economy??

G20THE last time the leaders of the Group of Twenty (G20) met, in London in April, their unenviable task was to steer the world economy away from a 1930s-style depression. They succeeded, thanks to an unprecedented fiscal and monetary gusher and a raft of measures to prop up teetering financial giants. But while stability has returned, much more needs to be done to put economies, and particularly their banking sectors, on a sounder footing. The group’s aim this week in Pittsburgh was to “turn a page on the era of irresponsibility” by adopting reforms to “meet the needs of the 21st century economy.” But writing a new chapter will require agreement on precisely what those needs are, and the final communiqué gave sceptics plenty to chew on.

There was, at least, a consensus on what should not be done. The leaders pledged not to withdraw stimulus measures until a durable recovery is in place. They agreed to co-ordinate their exit strategies, while also acknowledging that timing will vary from country to country depending on the forcefulness of measures in place. Continue reading

G20 in Pittsburgh, Promising Bank Reforms

Brown360_619498aFrom The Times Online, September 26 –

Banks will be required, under rules agreed at the G20 summit, to set aside much larger capital reserves by 2012 to minimise the need for future bailouts, but it will be left to individual national regulators to set their own capital requirements.

While thin on detail, the agreement announced at the end of the G20 meeting in Pittsburgh last night cements a global compact of international co-operation and marks the emergence of a new, and still fragile, economic order.

The G20 leaders pointed to their considerable successes in setting the world on the path to recovery since their previous meeting, in London in April, when the world was reeling from a worldwide credit crisis.

“It worked,” they said simply.

This ebullience was underscored in the meeting’s confirmation that the G20 would become the permanent forum for international economic co-operation, with the G8 continuing to meet on matters of common importance, such as national security.

The G20 will next meet in Canada in June 2010 and then in Korea in November 2010, meeting annually thereafter, starting in France in 2011.

President Obama said that the G20 had “brought the global economy back from the brink”, and Gordon Brown said that the new economic regime would help to restore long-term balanced growth around the world.

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Doing Doha Down – do regional trade agreements undermine the WTO?

Just thought this article was particularly relevant in light of today’s lecture on trade and the WTO.

From the Economist, September 3 –

noodle bowlRegional trade deals are no substitute for a Doha agreement. Indeed, they are its enemy.


SOMETHING is usually better than nothing. Shorn of all of the economic jargon and legal niceties, that is the logic behind the booming business in bilateral trade deals that is sweeping Asia. As the Doha round of world trade talks languishes, Asia’s trading nations say that they cannot afford to sit on their hands and wait for Doha to revive. Better, they argue, to loosen up trade with simpler deals between a couple of countries or, if you are truly ambitious, a handful.

Some regional trade deals in the right circumstances have indeed added to economic well-being. But the sorts of deals that are now being signed in Asia, just when multilateral trade desperately needs supporting, are likely to do less for their countries’ economies than for the egos of the politicians who sponsor them. Taken as a trend, they amount to a dangerous erosion of the system of multilateral trade on which global prosperity depends. Continue reading

Bye bye Free Trade – Obama’s Protectionist Policies

From the Economist, September 17

A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?

Obama Free Trade TyreYou can be fairly sure that when a government slips an announcement out at nine o’clock on a Friday night, it is not proud of what it is doing. That is one of the only things that makes sense about Barack Obama’s decision to break a commitment he, along with other G20 leaders, reaffirmed last April: to avoid protectionist measures at a time of great economic peril. In every other way the president’s decision to slap a 35% tariff on imported Chinese tyres looks like a colossal blunder, confirming his critics’ worst fears about the president’s inability to stand up to his party’s special interests and stick to the centre ground he promised to occupy in office.

This newspaper endorsed Mr Obama at last year’s election (see article) in part because he had surrounded himself with enough intelligent centrists. We also said that the eventual success of his presidency would be based on two things: resuscitating the world economy; and bringing the new emerging powers into the Western order. He has now hurt both objectives. Continue reading

SRI LANKA: Women Want Better Pay, Out of Free Trade Zones

Sri LankaKATUNAYAKE, Sri Lanka, Sep 10 (IPS) – The room is dingy and cramped. The walls are unplastered and its rough cement edges can scrape the skin easily. Furniture is strewn all over the place, plastic chairs stacked one on top of the other, boxes on top of them, handbags hanging from the wall and clothes on a rack. A small kerosene cooker is kept on the side of the room while a bicycle is parked next to the only bed in the 10-by-10-feet room.

This is home to 26-year-old Anoma Piyaselee and her husband, who works as a welder that entitles him to a salary less than hers. Piyaselee is one of some 52,000 migrant women workers scraping by on their meagre salaries in Sri Lanka’s industrial hubs, formally known as Free Trade Zones (FTZs), where factories are set up under various tax benefits and other incentives that sometimes undermine labour rights.

According to Stand-up, a civil society group made up of former and current FTZ workers, more than 90 percent of the workforce at Katunayake FTZ consists of women whose ages range from 18 to 30. Jobs, mostly garments-related, are intended primarily for them. The few males employed are either machine operators or in higher-paying positions. Continue reading

G.D.P. Seen as Inadequate Measure of Economic Health

New York Times                     DAVID JOLLY                    Published: September 14, 2009

PARIS — President Nicolas Sarkozy told the French national statistics agency Monday to take greater account of factors like quality of life and the environment when measuring the country’s economic health.

Mr. Sarkozy made the request after accepting a report from a panel of top economists he had charged with reviewing the adequacy of the current standard of fiscal well-being: gross domestic product.

The panel, chaired by two Nobel economists, Joseph E. Stiglitz of Columbia University and Amartya Sen of Harvard University, concluded that G.D.P. was insufficient and that measures of sustainability and human well-being should be included.

An “excessive focus on G.D.P. metrics” also contributed to the onset of the current financial crisis, according to the report. Policy makers cheered rising economic growth while other data, like those that showed the increasing and unsustainable indebtedness of households and businesses, were overlooked, the report found. Continue reading

Is there moral bankruptcy in our business schools?

A really interesting programme (part of the BBC’s “Aftershock” series) can be found here: It’s only 25 minutes long and very interesting.

The blurb for the video: What role did the business schools play in last year’s financial crisis? In this week’s edition of Assignment, Ed Butler investigates whether, as the chair of Harvard’s MBA programme insists, the schools were guilty only of teaching a deficient assessment of risk in the business world, or whether there had been a more fundamental fault. Some inside the system tell Assignment that there had been a growing disconnect between the schools and society, with insufficient attention being paid to the ethics of the business world, and the sole focus of the programmes being on maximising shareholder value and personal enrichment. Continue reading

How much more a graduate earns over a lifetime

Education and wealth

Learning and earning

UNIVERSITY offers more than the chance to indulge in a few years of debauchery. A new report from the OECD, a rich country think-tank, attempts to measure how much more graduates can expect to earn compared with those who seek jobs without having a degree. In America the lifetime gross earnings of male graduates are, on average, nearly $370,000 higher than those of non-graduates, comfortably repaying the pricey investment in a university education (female graduates earn an extra $229,000). In South Korea and Spain female graduates pull in a lot more than their male counterparts. In Turkey, although the additional wages are more modest, the difference between men and women is far less pronounced.Graduates_main

Sep 8th 2009

How Did Economists Get It So Wrong?

The introduction and conclusion to an article in the New York Times, written by Nobel prize winner, Paul Krugman.
For the full article, see

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Last year, everything came apart.

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