Ken Rogoff's economic forecast

“Prior to the 1950's, output drops of 15-20% in a single year were routine (admittedly, national income accounting was more primitive.) A number of academic
economists say we should simply tough it out as we did back then. Recessions have important cleansing effects, helping to facilitate painful restructuring.

But today's social, economic, and political systems – at least in developed countries – are unable to withstand a peacetime decline in output of 15-20%
within a short period. Massive stimulus and intervention – the US Federal Reserve's current stance – is unavoidable. One can only hope that the state can get out of the economy half as fast as it is getting in. Nevertheless, the distinct possibility that stimulus and restructuring may work is further cause to hope that the deepening recession will not morph into a full-blown depression.
...
2009 will be a tough year. Yet, absent a large-scale conflagration, there is a fair chance that 2010 will see a restoration of weak growth in the US, Europe,
and Japan, and probably robust growth in most emerging markets. The US economy may have lost a fair chunk of its mojo, but it will require a lot more bad luck and
policy blunders to get to a second worldwide Great Depression.”

Kenneth Rogoff, "Has America Lost its Mojo?", Project Syndicate (January 2009).

http://www.project-syndicate.org/commentary/rogoff52/English

[DOW: Harvard economist Kenneth Rogoff was formerly chief economist at the International Monetary Fund.

The degree to which modern macroeconomics has “tamed” the business cycle in the post-World War II period can be seen in the chart below, which shows the annual percentage change in real GDP over the course of almost half a century:


Source of chart: Bureau of Economic Analysis of the Department of Commerce.

Rogoff is right that even the worst decline in GDP forecast for this year does not compare with the deep downturns and sharp upturns recorded in the past. But let me quickly add that the combination of problems now before the economy are in some sense unprecedented in the post-war period, so a return to much more volatile growth of the past cannot be ruled out.

I, for one, unfortunately, am less hopeful than Professor Rogoff that the state will reduce its role once the current recession is over.]

Policy blunders in World War I and today

“Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out.

1. Both of them are keen on re-working mortgages. Neither of them mentions non-owner-occupied housing or any of the other issues that make re-working mortgages extremely difficult. At one point, Stiglitz says that banks may be postponing writing down loans because they are waiting to see what sort of bailout they might get from the government. But he doesn't draw the obvious conclusion that government interference is the problem, not the solution.

2. Both of them are keen on trying a big stimulus. Stiglitz says that everything done so far has been a failure, but again he doesn't draw the obvious conclusion. Instead, he says we have to try something bigger and different.

I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies [in WWI] decided that what they needed to try was....a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields.

My guess is that in 1916, anyone who doubted his own ability to direct an enormous offensive involving hundreds of thousands of soldiers would never have made it to general. Similarly, today, anyone who doubts the ability of a handful of technocrats to sensibly allocate $800 billion would never make it into government or the mainstream media.

How many people will have meaningful input in determining the overall allocation of the $800 billion stimulus? 10? 20? It won't be more than 1000. These people--let's say that in the end 500 technocrats will play a meaningful role in writing the bill--will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.
…
Once again, I am very happy that we are not fighting World War I. The Paulson/Obama offensives may be squandering resources, sowing confusion in households and businesses, and creating large financial imbalances. But they are not sending young men charging into machine guns.”

Arnold Kling, “The Stimulus and the Somme”, EconLog (8 January 2009).

http://econlog.econlib.org/


Arnold Kling is a noted economist who has worked for the Federal government for many years in different capacities and as a professor at several universities. He is a founder and co-editor of EconLog, a popular economics blog that reflects Libertarian thinking.

Joseph Stiglitz is a professor of economics of a liberal persuasion at Columbia University and Martin Feldstein is a professor of economics of a conservative persuasion at Harvard. Both are well known in the profession and have held high policy positions in government and international agencies. Both have advocated focusing on stabilizing the housing sector as a key to any recovery of the U.S. economy.

Kling is right to point out that everything done to date by the government has failed to improve the overall economic situation. So far, the government has tried to revive the economy by the early and continuing use of monetary policy beginning in 2007 to improve credit conditions, the first stimulus package of early 2008, the various Paulson/Bernanke TARP measures, the bailouts of Wall Street and the banks, the injections of huge amounts of capital into various and sundry financial institutions, the “loans” to The Big Three of Auto, the money given to foreign countries to help stabilize their financial systems, and an increase of several trillion dollars to the national debt. All this is less than a year and a half. Trillions upon trillions of dollars. Spending, tax cuts, grants, subsidies, guarantees, purchases of stock, injections of capital, special appropriations, changes in ownership to the public sector, you name it, every conceivable kind of policy action, all with the same result: Nothing in the way of progress.

But fear not!, the now government tells us. We’re gonna save you! We’re going to double down! Not simply more and more of the same, but a lot more. After all, Stiglitz and Feldstein recommend more. So what if the fiscal deficit exceeds 8 per cent of the GDP? So what if the dollar collapses? So what if we add trillions and trillions to the debt our children have to pay? That’s their problem, and we’ll just take credit for any progress we see.

Then again, maybe all this spending and faux tax relief isn’t such a good idea. Maybe Kling is right. Maybe the banks, the mortgage firms, the auto firms, Fannie and Freddie, and everybody else who expects to be “saved” by the government are simply waiting for the government to act before they do anything, so the situation continues to deteriorate? Maybe our current policies are crippling the economy rather than helping it? Maybe the banks and everyone else would solve their own problems and the economy would perk up, maybe even recover, if we just left it alone? Maybe the best thing that could be done is to have the government tell everyone to deal with your own problems your own way? It would certainly be cheaper.

Unfortuntely, politicians are like World War I generals. They want to be seen doing something, even if doing something is the same old thing that yields nothing and continues to stall a recovery.

How much do the rich pay in taxes?

“The CBO [Congressional Budget Office] has released a new report on effective tax rates (total taxes divided by total income). Compared with previous reports, it includes more information about thin slices at the top of the income distribution. Here are the total effective federal tax rates for 2005, the most recent year available:

Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent

Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent

Top 0.01 Percentile: 31.5 percent

N.B.: These figures include all federal taxes, not just income taxes”

N. Gregory Mankiw, “The Progressivity of the Tax System”, Greg Mankiw's Blog: Random Observations for Students of Economics (4 January 2009).

http://gregmankiw.blogspot.com/


N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is used in Regent’s Principles of Economics course. He is also a Republican policy advisor.

A note on the data: The Congressional Budget Office has derived the effective Federal tax rates on the basis of IRS data, supplemented by information from the Census Bureau’s Current Population Survey. The income of a household is measured as the sum of wages and salaries, proprietors’ and other business income, interest and dividends, profits from capital gains and pension income, and any monetary or in-kind transfer payments such as Social Security and Unemployment benefits and food stamps, school lunches, housing assistance, and the value of Medicare and Medicaid received. Federal taxes paid by the household encompass the total of individual income taxes, Social Security contributions and corporate income taxes, as directly paid or imputed. Essentially, the income and corresponding tax data of millions of households are ranked from highest (probably Bill Gates’) to lowest (probably that of some poor Regent grad student sinking under the weight of his growing debt) and then is divided into cohorts such as quintiles and percentiles, from which the above data have been computed.

Contrary to prevailing opinion, the data compiled by the CBO on taxes paid by different income groups show the United States has a highly progressive tax system. It collects in Federal taxes alone over 30 per cent of the income of the top one-half of one per cent of country’s income earners. In contrast, the poorest one-fifth of the population pays only 4.3 per cent of their income in Federal taxes.

The burden of taxes on the population is higher than the effective Federal tax rate indicates. First, it does not include state and local taxes. Second, it does not include the cost of compliance with the tax code, which is expensive and has generated a major industry of baffled accountants and confused lawyers. Third, the cost of government is not only appropriated through taxation. It is also the output that would have been produced had the tax burden been lower. High taxes reduce incentives for work, saving and investment. Economic growth slows and unemployment rises. The loss is difficult to measure but it must be substantial. Lastly, the burden of taxes is becoming increasingly centered in a smaller and smaller proportion of the population, a trend that is not healthy for the polity at large.

The burden of taxes today is now heavy and mounting everywhere, the complexity of tax systems beyond comprehension and compliance, their effect on economic performance negative and corrupting. Yet we seem headed for a substantial increase in the tax burden on Americans.

Cheerleaders for the welfare state believe higher taxes (particularly, higher taxes on those already paying high taxes) is the solution for all funding shortfalls as they press to expand the scope of government. But governments should be increasingly apprehensive about The Iron Law of Taxation B high and rising taxes inevitably bring strong and growing resistance followed by evasion and rebellion. Wise governments fear the economic effects and political consequences of raising taxes, and rightly so.

The economic stimulus package now under consideration will place an extraordinary burden on government finances in coming years, whether it comes in the form of spending or tax cuts. Any money borrowed must be paid back, either by higher taxes or by printing money. As noted in yesterday’s Tdj, it is not just that it is difficult when crafting a stimulus package to spend huge amounts of money efficiently and effectively or to distribute the benefits of tax reductions fairly. One also runs up against The Iron Law of Deficit Financing -- at some point investors become unwilling to finance the deficits and the credit worthiness of the government becomes so compromised it cannot function.

We are entering a very, very difficult moment for economic policy. If the stimulus is successful it will lead to higher incomes and an enhanced capacity to pay the increased debt associated with the larger deficits incurred by the higher spending and lower taxes comprising the package. But if it fails, or even if it in the end it proves to have been unnecessary as the economy recovers by itself, the stimulus package will leave in its wake a huge intergenerational transfer from our children to ourselves imposed by higher future taxes that must be paid on the higher debt. Let us pray that any package passed by Congress is successful and the current downturn in the economy is reversed.

But let me in closing note that the idea of allowing politicians to increase public spending or lower taxes for purposes of a temporary stimulus to the economy, even in as bad a situation as we are now in, is a dangerous one. It is not just that whatever is done is subject to the shifting and changing political tides of the moment. That is mere inefficiency, lamentable but passing. No, it is that the spurious rationales for reckless deficit spending and huge national debts become part of a permanent political culture where politicians find it impossible to control their appetites for spending, and the size and power of government ratchets up and up, never to be reduced. Let us also pray that stimulus package truly comprises temporary spending.

Lessons from Keynes for the current crisis

“The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us. ....

Keynes's genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

.... Contemporary "liquidationists" insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.

Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care. …

The urgent task is to return the world economy to health.

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak. Given the correction of household spending under way in the deficit countries, this period of high government spending is, alas, likely to last for years. …

The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.
…
As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us. The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible. We have done a disturbingly poor job of this in recent years. We must do better. …

As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.”

Martin Wolf, "Keynes offers us the best way to think about the financial crisis", Financial Times (24 December 2008).


Martin Wolf is associate editor and chief economics commentator at the Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 for services to financial journalism. He is a visiting fellow of Nuffield College, Oxford University, and a special professor at the University of Nottingham. Mr. Wolf is a former World Bank economist.

The return of Lord Keynes as the major intellectual force on the current policy making stage marks a completely unexpected comeback by a great thinker whose ideas had -- or so I and others thought -- been superseded by Friedman, Buchanan, Lucas and Barro. While the ideas of Keynes were thought to be foundational and it was granted that much of our understanding of a modern economy derives largely from his work, uses his concepts, and tests his conjectures and assertions, it was nonetheless felt that at its core Keynesianism was much too simplistic in its short-term focus and its failure to incorporate adequately microeconomic incentives and rationality and it ignored the complexities of policy implementation. Keynes’ emphasis on government spending was seen as ignoring the difficulties of spending large amounts of money expeditiously and efficiently and in a timely manner. It also appeared that the impact of extra government spending that Keynes proposed was less than his theory predicted and that the increases in spending worsened the long-term budgetary outlook. While never completely displaced, Keynesian thinking was gradually supplemented by other streams of thought and eventually much greater emphasis was given to monetary policy as the main tool of macroeconomic management.

But now a Keynesian government spending stimulus and tax cuts are all the rage in Washington. President-Elect Obama has yet to put forward his “stimulus package” but it is said it might be as much as a trillion dollars, and amount equal to well over $3000 for every man, woman and child in the country. That’s a lot of money and there is not an interest group in the country that does not have its hand out. Granted the present economic situation is unprecedented (well, not really unprecedented, as current unemployment is about a percentage point below that of the downturn of the early 1990s and 2½ percentage points below that of the downturn of the early 1980s), and I suppose the government should do something. And there is nothing that a politician loves to do more than spend, so Keynes and his theories are now in vogue.

I wonder how long it will be before we once again conclude that pure Keynesian economics is an inadequate basis for policy formulation?

Thanks to Larry Willmore for the Tdj.

Thomas Jefferson on the national debt and a balanced budget article

"We believe--or we act as if we believed--that although an individual father cannot alienate the labor of his son, the aggregate body of fathers may alienate the labor of all their sons, of their posterity, in the aggregate, and oblige them to pay for all the enterprises, just or unjust, profitable or ruinous, into which our vices, our passions or our personal interests may lead us. But I trust that this proposition needs only to be looked at by an American to be seen in its true point of view, and that we shall all consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves; and consequently within what may be deemed the period of a generation, or the life of the majority." ME 13:357
…
"Ought not then the right of each successive generation to be guaranteed against the dissipations and corruptions of those preceding, by a fundamental provision in our Constitution? And if that has not been made, does it exist the less, there being between generation and generation as between nation and nation no other law than that of nature? And is it the less dishonest to do what is wrong because not expressly prohibited by written law? Let us hope our moral principles are not yet in that stage of degeneracy, and that in instituting the system of finance to be hereafter pursued we shall adopt the only safe, the only lawful and honest one, of borrowing on such short terms of reimbursement of interest and principal as will fall within the accomplishment of our own lives." ME 13:360

Thomas Jefferson, “Letter: Thomas Jefferson to John Wayles Eppes”, Thomas Jefferson on Politics & Government (1813).

http://etext.virginia.edu/jefferson/quotations/jeffcont.htm


Of course, Mr. Jefferson is right. We should not saddle our children with our debts and we are morally bound not to do so.

Economic theory, and common sense, says there are times when government must borrow and intervene in the economy, and there is wisdom in doing so. Certainly this is true in times of national crises such as wars or extraordinary disorder in the economy such as we now face.

Equally, prudence, and common sense, says that any borrowing and intervention should be carefully considered and tailored to the problem to be addressed. Now it is true that it isn’t likely, certainly not in extraordinary times, that those who propose action and measures to deal with problems and those who must approve the funds to support whatever steps are to be taken can foresee and calculate accurately what is necessary to overcome the difficulties before us. But in the present situation one can readily see the ongoing confusion and it is not comforting. After all, in the short space of a few months, several sets of alternative policies have been implemented and abandoned. Given this record, one has to wonder if the fiscal and monetary authorities of this country have any idea as to what their strategy for stabilizing the financial system and reviving the economy might be.

The latest “idea” might be called “Spectacularly Big Money”, the suggestion that the Federal government spend as much as a trillion dollars on infrastructure and other government handouts to “put people back to work”. It is further suggested that this spending be financed by borrowing and not taxation.

We all hope this aggressive increase in spending will in fact help the present situation and we will finally be able to declare victory over the forces of economic stagnation and decline. At the same time, we can say with certainty the proposed stimulus package will increase the deficit greatly and add to the burden of the next generation. Hope I am wrong, but for reasons I cannot quite explain, somehow I feel this is not going to be one of the times that a stimulus package is going to work its wonder.

At times like this I wish the Founders had not trusted to moral principles and instead added a balanced budget article to the Constitution.

Documentation for Historical Estimates of World Trends

HISTORICAL ESTIMATES OF WORLD ECONOMIC ACTIVITY, POPULATION AND LABOR FORCE, 1950-2007

A Data Book of annual historical estimates of long-term trends in the world economy is now available. Data in the Data Book include GDP, total population, and total labor force by main world region from 1950 to 2007 and estimates per capita and per economically active person. It may be obtained by sending an e-mail to Douglas O. Walker at dougwal@regent.edu.

The individual country estimates upon which the region and world totals are based may also be obtained upon request.

Documentation on the data are provided below.

General Note on the Data

This Data Book presents tables relating to long-term trends in the world economic activity, population and labor force and its major economic regions and individual countries. It is based on an update of individual country national accounts estimates and demographic data assembled from United Nations agencies and other national and international sources. Estimates presented here are part of a larger data base now under preparation intended to cover the main demographic, economic, and social trends in the world economy from 1950 to the present.

The historical data on gross product by major expenditure component, population and labor force, upon which the statistical tables are based, have been drawn from original data reported by national and international statistical and research units. The national accounts data conform in general with the United Nations System of National Accounts as presented in the publication System of National Accounts 1993, as collected on a United Nations Statistics Division questionnaire and published in its annual National Accounts Statistics publication. Data collected by the Statistics Division on its questionnaire have been supplemented by the Statistics Division, where possible, to cover the period 1970-2006 for those years and countries for which official data are not available. Where available and necessary, the Statistics Division estimates have been further supplemented by estimates reported by United Nations regional commissions, the World Bank, the International Monetary Fund, and other sources so as to arrive at a more complete set of data for the period 1950-2006. Selected series for main world regions have been extended to 2007 on the basis of preliminary estimates and forecasts.

The population and labor force data are based on those reported by the Population Division of the United Nations and the International Labour Organization, as further supplemented and adjusted to cover the period 1950-2007.

It must be emphasized that the present set of the national accounts data base is preliminary in three ways. First, it draws mainly upon readily available statistical material obtained from international agencies in machine-readable form. Statistical data in country publications and agency reports have been used only the to extent they were needed to fill gaps in detail or check on broad trends. Where gaps could not be filled, interpolations were used in some cases. Second, estimates for some countries are based on proxy indicators such as known historical shares, available price series, interpolations and extrapolations of similar series, or other approximations. Third, assumptions were made in the case of some countries about trends in individual components of the GDP, and/or individual components in some countries were estimated by residual. For all of these reasons, and others, the present national accounts data based should be regarded as a first draft, presented here to gain a idea of broad trends in the world economy and elicit comment and suggestions for revision and improvement.

Data presented in this data book are the responsibility of the compiler of the data, Douglas O. Walker, and should not be attributed to the basic sources from which they have been derived or to Regent University. The data have been prepared for use in analytical studies undertaken the compiler of the data bas, his students, and colleagues involved in academic research endeavors. They are not intended for commercial sale and may not be disseminated for any purpose beyond academic research and teaching.


Gross Domestic Product Data

The Data Book presents estimates of total gross domestic product in billions of constant 1990 U.S. dollars for the world and its major economic regions and main geographic areas for the period 1950-2007. The estimates of total GDP are taken from a set of individual country time-series for GDP by expenditure and GDP by main producing sector in current and constant 1990 national currency prepared by the United Nations as part of its National Accounts Main Aggregates Database.

The original country data relating to gross domestic product and its detail in this database have been drawn, wherever possible, from replies by governments to the annual Statistics Division questionnaire on the national accounts. The form and concepts of the data collected on this questionnaire generally agree with the recommendations of the 1993 United Nations System of National Accounts (System of National Accounts, Studies in Methods, Series F, No. 2, Rev. 4) or its predecessor SNAs.

In the first instance, for the period 1970-2006, estimates on the questionnaire have been supplemented by the Statistics Division, where necessary, by estimates prepared by the Statistics Division for missing countries, items, and years on the basis of information from other international agencies, particularly the United Nations regional commissions, the International Monetary Fund, and the World Bank. Further information on the methodology of data estimation used by the Statistics Division may be found on its web site.

In the second instance, the Statistics Division estimates have been further adjusted or complemented, as needed, by the author of the data book, using generally accepted statistical techniques so as to arrive at comprehensive sets of internationally standardized national accounts statistics for the period 1950-2006 (data for some countries and regions are only available beginning in later years). When unavailable from national and international sources, the series for GDP were backdated to 1950 on the basis of data from "The Conference Board and Groningen Growth and Development Centre, Total Economy Database (January 2008)”. This database and information on its sources and methods can be found at http://www.conference-board.org/economics"

In the third instance, key data series have been extended to 2007 on the basis of preliminary estimates and forecasts available from international agencies in August 2008.

Method of preparation of the GDP data. Although in general the basic set of original data reported by countries on the Statistics Division questionnaire conform to international recommendations, in some instances they have gaps in coverage or are in other respects unsuitable for immediate analytical use. In these cases, it was necessary to bring together data from alternative sources and further edit and supplement the questionnaire data. Estimates in other Statistical Division files and from the United Nations regional commissions and agencies and national publications have been used by the Statistics Division and the author to complete the basic set of data obtained from the questionnaire. To ensure comparability, where required and possible, supplementary estimates for each country have been adjusted where possible to conform with the United Nations' SNA.

In some cases, reported data from various sources are in current prices and constant prices in national currency. In others, basic source data are available only in current prices in national currency. For some countries, basic source data are available only for certain years and/or major expenditure components. Supplementary data to the basic set from the questionnaire are available from the other reporting agencies mentioned above in current prices and constant prices in national currency and as price indices for individual expenditure components.

Where data from a supplementary source conformed to that reported by the Statistical Division and was available for a longer period or in greater detail, it was used to complete or extend the primary set of data obtained from the questionnaire. Where available supplementary data did not conform to the primary set of data, adjustments were made in an attempt to prepare a comparable time-series. In addition, in some cases, separate time-series at current and constant prices have been adjusted to insure temporal comparability, and where necessary constant price data have been shifted to a 1990 base in order that data for different countries may be presented at the prices of some common reference year. Further information on sources and methods of preparation of the Statistical Division national accounts data is given on the Statistics Division web site.

In order to prepare the data in the present file, a review was made of the Statistics Division data. These estimates were compared with those available from other international agencies, national sources, and academic research units. In the case of some countries, IMF or World Bank data were substituted for Statistics Division estimates and used as the basic set of data. When identified, miscoding and errors of data entry were corrected. In addition, the resulting set of data were backdated to 1950 or 1960 on the basis of data from other international agencies. In some cases, when data were missing from all reporting sources for some years or some components, they were interpolated by the author on the basis of selected production and trade indicators reported by various international and national sources. In other instances, individual components were estimated on the basis of movements in relevant economic indicators, and in still other instances were determined by residual.


Exchange rate for conversion into United States dollars. Official and market exchange rates as reported by the Statistics Division for the period 1970-2006 were used as the basic set of exchange rates. In general, the Statistics Division used rates reported by the International Monetary Fund, and these series were backdated by the compiler to 1950. For countries with multiple exchange rates, an effective exchange rate was derived from trade data in national currency and United States dollars published in International Financial Statistics of the International Monetary Fund. In several countries in early years a free market rate was used. In a few countries in a few years national exchange rates based on United Nations operational rates were used because foreign trade exchange rates were not available. Because of fluctuations and distortions in estimates of GDP converted to U.S. dollars in some countries, the Statistics Division developed its price-adjusted rates of exchange (PARE), and these have been used.

Reported exchange rates for economies in transition and a few developing countries in a few years have been adjusted to translate gross domestic product levels expressed in domestic prices to levels consistent with estimates and ratios of GDP per capita expressed in U.S. dollars. These rates should be regarded as adjustment coefficients rather than foreign trade exchange rates.

Current price data expressed in U.S. dollars were computed from the current price national currency data by applying a separate exchange rate for each year to the current price national currency data. Constant price data expressed in 1990 U.S. dollars were computed from the constant price national currency data by applying the exchange rate for 1990 to the constant price national currency data for all years.

Aggregation of country data. Estimates for regions of analytical interest have been established by the compiler by aggregation of country data expressed in U.S. dollars. In forming region totals for the national accounts the following modifications were made: National currency data were translated into U.S. dollars on the basis of the exchange rates discussed above; when years covered by data for a country entering a region total did not encompass the entire period desired for the region total, an estimate for the contribution of the country to the region in the missing years was imputed to the region total on the basis of the growth rate for the region during those years excluding that country; and statistical discrepancies were re-computed as the difference between the sum of the separate components of GDP and the estimated total for gross domestic product, or they were allocated on a percentage contribution basis over the components of the grouping table, or a component was derived as a residual. In some countries, the estimate for total GDP was re-computed as the sum of the expenditure components.

Quality of data. A number of reservations must be made about the accuracy and reliability of the data under preparation.

Since the GDP is the most comprehensive estimate of a country's domestic economic activity, achievement of a high degree of accuracy requires a highly developed national statistical organization, a requirement which is beyond the financial and physical resources capacity of many countries. In the case of commodity trade statistics used as supplementary material, although based mainly on more reliable customs declarations made at the frontier, reported data nonetheless suffer from practical difficulties and administrative weaknesses in the statistical collection apparatus of many reporting countries, and in non-reporting countries are often based upon less reliable partner country statistics.

In general, when preparing estimates of economic activity and international trade for many low income countries, consumption, investment, and output originating on the farm, especially in the subsistence sector, tend to be underestimated, and because of sharp disparities in the price and wage structure between the subsistence and market sectors, they probably also tend to be relatively undervalued.

Similar under-estimation and under-valuation occur in the traditional handicraft sector which is rarely integrated fully into the market. Given the magnitude of the farm and handicraft sectors in many low income countries, this under-estimation and under-valuation also affect the GDP total and per capita estimates. In general, the effect of these factors will tend to be greater in countries with low per capita GDP and may be more pronounced in early years than later years, leading to an upward bias in implicit rates of economic growth. In some low-income developing countries the non-monetary component of GDP can exceed 40 per cent.

Conversion of values in current prices to values in constant prices is especially difficult in many developing countries, owing to the paucity of price data, the frequently small scale of the market, and the incidence of high rates of inflation. The revised SNA recommends valuing both exports and imports of goods at the customs frontier at their point of exit, that is, free on board (f.o.b., i.e, exclusive of shipping charges and other costs of transport, insurance and similar charges to their final destination but including costs of distribution to the dock of the exporting country). In fact, many countries value imports of goods at point of entry, that is, including payments made for transport, insurance and similar changes incurred in their onward transportation to the importing country (i.e., c.i.f.). Because of a lack of information, prices used in the estimation of trade volumes are unit values derived from official statistics. In the first instance, price declarations made at the frontier at the time of export or import may differ from actual prices at the time of sale, and are therefore not prices actually obtained in the market. Secondly, basic information from which unit values are derived may be limited to broad categories of products of differing assortments and changing qualities over time, and the average unit values derived from this information are affected by the non-homogeneous nature of the changing mix of items exported and imported. Finally, frequently prices used to compile economic statistics are understated because they do not consider credit conditions surrounding the transactions being measured. For these reasons, unit value indices used in commodity trade statistics and as substitutes for transactions prices when compiling national accounts statistics, especially in the case of exports and imports of manufactured goods and non-standardized production in general, cannot be expected to provide reliable measures of average price changes over time.

In this regard, the problem of quality change in the compilation of economic statistics is a particularly important one. Separate prices for products of different characteristics and qualities should be used to construct an average price index for some given class of goods and services. In practice, however, a limited number of prices are often used to deflate commodity classifications of many different kinds of related products, and frequently changes in commodity composition are not taken into account when constructing the average prices index. When unit values are calculated, the opposite problem may occur when changes in commodity composition in categories which are not strictly homogeneous. In this case, a change in the proportions of different qualities, quantities, grades and sizes of the articles being exported and imported may have taken place, with no adjustment for these changes. In the case of specialized machinery and equipment and other unique products serious distortions of true price relationships can take place. While substitution of price quotations for unit values may be used in the case of some products, it is impossible to adjust the full range of products. Consequently, prices and unit values used to convert values to volumes may contain serious sources of error.

Cross-country comparisons, as well as aggregates and averages for economy groups, suffer further from the failure of the exchange rate -- even in countries with uniform and stable rates -- to reflect with adequate accuracy the relative purchasing power over domestic goods between countries. Studies have shown that in low per capita GDP countries, the exchange rate may understate purchasing power parity by a factor of three. In this respect, likewise, the GDP in countries with lower per capita GDP. The problems entailed in exchange rate conversions are compounded under a regime of managed and variable rates. As a result of large changes in exchange rates, exchange rate conversions for adjacent years sometimes show substantial changes in relative gross domestic products between pairs of countries when no such real change has actually occurred.

Given the changes to which exchange rates may be subject in various countries, cross-country comparisons and region aggregates and averages will also be affected by the particular year selected as the base year for conversion of values in local currencies into values in a common currency.

In summary, although considerable effort has been made to standardize these data both in terms of their temporal comparability and in their conformity with accepted statistical definitions, full comparability is not possible due to weaknesses in the original data and deficiencies inherent in the method used to convert them to a common currency. Estimates for many countries tend to be based on incomplete or unreliable information and are subject to discontinuities and frequent revision, and for this reason should be used with due regard for the approximate nature of much of the underlying basic data as well as the preliminary nature of the estimates for the last two years. No significance should be attached to comparisons involving small statistical differences.

Significance of GDP for measuring material welfare. Though the GDP is intended to measure the market value of all goods and services produced domestically, in fact it measures the value of general government services at cost rather than market price and, except for subsistence farming noted above, it includes the value of household production for the household itself, whether for consumption (e.g., household care and maintenance) or for investment (e.g., in housing) only to the extent that it is provided for payment. On the other hand, it measures the market value of all marketed goods and services, including military expenditure and socially harmful consumption, together with investment for these purposes, as well as expenditures to overcome social disutilities such as increased transportation costs, pollution, or crime, that may be generated by the production process itself or by concomitant social processes such as urbanization. Since household production on own account is larger in countries with lower per capita GDP, while expenditures to overcome social disutilities generated by production or social change is larger in countries with higher per capita GDP, large differences in GDP may be associated with much smaller differences in material welfare.

Among other factors, the composition of output in different countries reflects the small and great differences that consumers place on different kinds of goods and services for reasons of tastes and preferences. The level and composition of output among countries also reflects differences in the distribution of income and other factors bearing upon the state of material welfare. No adjustment has been made for these differences and the effect they many have on inter-temporal and inter-country comparisons.

For all the reasons mentioned above, the GDP can not be used as an index of material welfare, even for measuring the change over time within a country, but especially for measuring differences between countries. It is a reasonably adequate -- although far from perfect -- index only for what it is intended to measure, namely, the output of marketed goods and services, as partially adjusted to include a limited amount of imputed output on the farm and in the household.


Population and Labor Force Data

Population estimates and projections. Population estimates and projections are those prepared by the Population Division of the United Nations under the medium variant assumption as assessed in 2006. Estimates for the years 1950-2005 are those made by the Population Division while projections for the years 2006-2025 correspond to the medium variant projection. In the case of a few countries, estimates from national sources have been substituted for those of the Population Division.

Annual estimates for the total, male and female population and the urban and rural population of individual countries, not shown in the data book but carried in the larger data base of which the estimates of total population have been drawn, are also those of the United Nations Population Division. Interpolations of five-year estimates and projections of the age-structure of the population carried in the larger data base were performed by the compiler for the period 1950-2025 to arrive at estimates (1950-2005) and projections (2006-2025) for individual years.

The medium variant assumption represents an assessment of future demographic trends, expected social and economic progress, ongoing government policies, and prevailing public attitudes towards population questions.

Labor force estimates and projections. Estimates and projections of labor force participation rates for the total labor force correspond to those of the 5th edition of its estimates and projections of the economically active population.

Reported labor force participation rates in the 5th edition provide estimates of labor force participation rates for the total, male and female labor force for the period 1980 to 2000 and projection rates to the year 2020. These rates were applied to the population series to obtain estimates and projections of the total, male, and female labor force.

The labor force estimates for the year 1980 were backdated to 1950 on the basis of trends in the ILO presented in the 4th edition of its estimates and projections of the economially active population.

In making these estimates, the female labor force was derived as the difference between the estimated total labor force and the male labor force.

The labor force comprises the economically active population, including the armed forces and unemployed, but excluding housewives, students and other not economically active groups such as the completely disabled.


Country Coverage

Region and world totals in the Data Book are based on individual country estimates aggregated in accordance with the classifications shown in the annex table:

What is the value of a seat in the Senate?

“Illinois Governor Rod Blagojevich was arrested this morning on federal corruption charges. One of the charges was that he tried to sell the Senate seat vacated by President-elect Obama. As governor, Blagojevich is responsible for filling it through appointment.

According to the Chicago Sun-Times, some of the ideas that he floated in exchange for the seat were a substantial salary for himself at a non-profit group or a labor union, a corporate board seat for his wife, campaign contributions, and/or a cabinet post or ambassadorship for himself.

Those are some hefty demands. So you have to wonder how much a Senate seat costs. Well, I did some quick back-of-the-envelope calculations.

First, Senators make a base salary of $167,100. Assuming a person joined the Senate at age 44 and stayed for two terms, and adjusted for 2% inflation with a 2.7% discount rate (10-year treasury), the net present value would be ~$1.9 million.

But membership in the Senate carries more than just a salary. After two terms in the upper chamber, a retiring Senator can become a well-paid lobbyist. Assuming a very conservative base salary (in today's numbers) of $318,362, a Senator-turned-lobbyist could make ~$4.5 million over another 12 years.

But that's not all, Senators are given a lifetime pension starting at age 62. The average annual pension is currently $60,972. If payments started in 18 years and continued until death at 84, the total amount received would be ~$1.8 million.

If you discount everything back to today, the net present value of the Senate seat would be ~$6.2 million.

Not bad for a public sector gig.”

Andrew Roth , “How Much Does a Senate Seat Cost?”, The Club for Growth Blog (9 December 2008).

http://www.clubforgrowth.org/2008/12/how_much_does_a_senate_seat_co.php


Andrew Roth Director of Government Affairs at the Club for Growth, a non-profit political organization whose members help elect candidates to Congress who support the Reagan vision of lower taxes and limited government.

My understanding is that the politicians attempting to buy this seat were not just criminals but also cheap, for they were not willing to pay more than a million dollars for it. Thus, they weren’t willing to pay as a bribe anything near what the seat was really worth.

Or maybe there is another reason. Maybe because, valuable as it is, the $6.2 million a Senate seat is worth must be matched against its opportunity cost, to use an economist’s phrase, that is, against the amount a corrupt politician could earn in his present position. At an implied opportunity cost of over five million dollars, politicians must be well paid in their present posts. That’s a lot more than I thought politicians would be paid. Or, maybe, the pay of a politician is somehow “supplemented” in ways they don’t want us to know about. Just guessing.

Is the financial crisis the fault of finance professors?

“Fifteen years ago, I argued that banks’ increasing involvement in securities activities worldwide could eventually lead to a repetition of the 1929/33 banking meltdown. My analysis rested on the observation that if banks were permitted to diversify away from non-core banking activities the moral hazard that is known to promote excessive risk-taking in traditional banking would be extended to these other activities, in particular securities markets. The question then was whether ‘the mixing of banking and securities business can be regulated in such a way as to avoid the danger of a catastrophic destabilisation of financial markets’. After considering all the regulatory options, I concluded that there was no solution: “Allowing banks to engage in risky non-bank activities could either destabilise the financial system by triggering a wave of contagious bank failures – or alternatively impose potentially enormous costs on tax payers by obliging governments or their agencies to undertake open-ended support operations.”

The prevailing view amongst finance academics at the time … was that financial structure was largely irrelevant to the question of systemic stability. According to the conventional wisdom we had learned from the 1929/33 crash, a monetary contraction such as occurred then could be neutralised by injecting reserves into the banking system and a flight to quality, because it merely redistributes bank reserves, “is unlikely to be a source of systemic risk”. This widely held view of the behaviour of financial markets turns out to have been entirely misguided. As we have witnessed in recent months, a major shock arising from publicised losses on banks’ securities holdings can have a domino effect on financial institutions, leading ultimately to a seizure in credit markets which central bankers, on their own, are powerless to unblock. Only drastic government intervention – guarantees for money market funds, guarantees for interbank lending, emergency deposit insurance cover, lending directly to the commercial paper market, and partly nationalising the banking industry – has prevented a full repetition of the 1929/33 financial meltdown.
…
What we have witnessed in recent months is not only the fracturing of the world’s financial system but the discrediting of an academic discipline. There are some 4000 university finance professors worldwide, thousands of finance research papers are published each year, and yet there have been few if any warnings from the academic community of the incendiary potential of global financial markets. Is it too harsh to conclude that despite the considerable academic resources that go into finance research our understanding of the behaviour of financial markets is no greater than it was in 1929/33 or indeed 1720?”

Richard Dale, “The financial meltdown is an academic crisis, too”, Vox: Research-based policy analysis and commentary from leading economists (27 November 2008).

http://voxeu.com/index.php?q=node/2618


Richard Dale is Emeritus Professor of International Banking, Southampton University, United Kingdom.

There is supposed to be a difference between practitioners of finance and professors of finance. Practitioners of finance are for the most part cheerleaders for innovation, entrepreneurship and the importance of saving and credit in the building of a prosperous economy. One expects them to exaggerate the possibilities of a successful investment and to be bullish about the prospects for the future, if only their advice were to be followed. They are almost always dressed impeccably in tailor-made suits, of good cheer, polished manner, energetic in their demeanor, and often of mischievous wit. Wonderful people, those who know them well love them but nonetheless always discount what they say about the market and their investment suggestions by half.

Professors of finance, on the other hand, live in a troubled world of risk and uncertainty. They are usually full of anxieties and anxious about the future, filled with an uneasiness that comes from the fear that they might say something that lead someone to do something that would cause the hearer to lose a fortune in the market on their bad advice. They speak more of financial institutions, regulatory reform and mathematical equations than of good investments, bond returns and dividend performance. Slovenly dressed in cheap suits, silent and lost in thought in the classroom, pessimistic of mind and lacking the grace of their soon to be well-paid students, they are slow and unexciting scholars of an urgent discipline that rewards the quick and imaginative. Beloved by all, especially their students, their every word is at once treasured and forgotten, treasured when its serene wisdom is helpful in the pursuit of market gain and forgotten when its nervous insight warns of the risks inherent in all investment strategies.

The events that that have unfolded this past year have been difficult for the practitioner of finance. He has gambled with the fickle future of financial success and he has lost, at least for the moment. The loss is deep and unsettling. But his spirit is not dejected because he also knows, however bad the immediate portents, the economy will recover and when it does his advice will be welcome again. Setbacks are, after all, mere setbacks, events to be overcome and providing challenges to be met once the economy inevitably recovers. So what if people believe only half of what the financial advisor says: At least he can say they believe, and more importantly that they trust and act on the advice he gives, which is more than can be said for most professions.

For the professor of finance (and of economics) the events of this past year have been devastating. It is not simply that no one foresaw the scale and scope and complexity of the disaster that has descended upon us. That would be bad enough. But by his teaching and his research he set the stage for the disaster. Unlike the market professional, the detached and objective financial scholar or economist is expected to identify and warn about the growing bubbles that have been wreaking havoc in financial markets, and he failed to do so. Unlike the financial executive dependent on his advice, the academic carries the burden of ensuring that the financial innovations and techniques he introduces to the firm are safe to use and reduce market volatility and the danger of financial collapse, and again he failed to do so. Unlike the government bureaucrat seeking counsel on regulatory matters, he is supposed to recommend changes that strengthen the financial system, not weaken it, and once again he failed to do so.

But it is even worse than this. None of the ideas offered by professors of economics and finance to rein in the crisis have worked. At each and every step on the rocky road to the present disaster their advice has failed to stem the decline. A year ago financial problems developed and the Fed was unable to prevent problems in one area, housing, from spreading throughout the entire financial system. Soon, production and employment across the real economy began to decline and decline steeply. The effects of the faulting U.S. economy were then transmitted to other countries, and the global economy began to weaken and may well be in freefall. At each step not only were the measures put in place inadequate and their implementation confused, they proved to be completely ineffective in reversing the downturn. This points to an intellectual failure to understand how a modern economy works and what can be done to manage its performance, the very responsibility of the academic, and yet another area of failure.

In short, unlike practitioners of finance and government officials, professors of finance (and economics) are expected to provide the ideas policymakers need to explain what is happening in the financial sector and the economy and to guide policy toward financial stability and the effective management of prosperity. Instead, they have made things worse than they might have been and still cannot seem to provide the intellectual leadership necessary to overcome the crisis. To that extent the financial crisis must be said to be their fault.

Origins of the financial crisis

“The financial crisis that has been wreaking havoc in
markets in the U.S. and across the world since August
2007 had its origins in an asset price bubble that
interacted with new kinds of financial innovations that
masked risk; with companies that failed to follow their
own risk management procedures; and with regulators and
supervisors that failed to restrain excessive taking. ....

Over the past decade, private sector commercial and
investment banks developed new ways of securitizing
subprime mortgages: by packaging them into
"Collateralized Debt Obligations" (sometimes with other
asset-backed securities), and then dividing the cash
flows into different "tranches" to appeal to different
classes of investors with different tolerances for risk.
By ordering the rights to the cash flows, the developers
of CDOs ... were able to convince the credit rating
agencies to assign their highest ratings to the
securities in the highest tranche, or risk class. ....

These new innovations ... facilitated the boom in
subprime lending that occurred after 2000. ...
[H]ouseholds previously unable to qualify for mortgage
credit became eligible for loans. This new group of
eligible borrowers increased housing demand and helped
inflate home prices.

These new financial innovations thrived in an environment
of easy monetary policy by the Federal Reserve and poor
regulatory oversight. .... [P]anic hit in 2007, however,
as sudden uncertainty over asset prices caused lenders to
abruptly refuse to rollover their debts, and over-
leveraged banks found themselves exposed to falling asset
prices with very little capital.

While ex post we can certainly say that the system-wide
increase in borrowed money was irresponsible and bound
for catastrophe, it is not shocking that consumers,
would-be homeowners, and profit-maximizing banks will
borrow more money when asset prices are rising; indeed,
it is quite intuitive. What is especially shocking,
though, is how institutions along each link of the
securitization chain failed so grossly to perform
adequate risk assessment on the mortgage-related assets
they held and traded. ... [A]t no point did any
institution stop the party or question the little-
understood computer risk models, or the blatantly
unsustainable deterioration of the loan terms of the
underlying mortgages.”

Martin Neil Baily, Robert E. Litan, and Matthew S.
Johnson, The Origins of the Financial Crisis (Brookings
Institution, Initiative on Business and Public Policy,
Washington, DC, November 2008).

http://www.brookings.edu/papers/2008/11_orgins_crisis_baily_litan.aspx

Martin Neil Baily, Robert E. Litan, and Matthew S. Johnson are all with the Brookings Institution.

The authors find that the financial crisis has its origins in a housing price bubble where too many people thought that housing prices could only go up, this led to an increased demand for housing, which in turn spurred new kinds of financial innovations that masked the risk inherent in these loans, and that all involved in marketing, packaging and managing these mortgages failed to prudently originate and process the mortgages. They also recommend reforms of financial institutions, government regulators, and credit rating agencies.

Thanks to Larry Willmore for the Tdj. Larry says this is a superb 47 page analysis of the financial mess, and wishes to thank Michael Littlewood for bringing it to his attention.

Krugman on what to do about the global economic crisis

“What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.

The first task is the harder of the two, but it must be done, and soon. Hardly a day goes by without news of some further disaster wreaked by the freezing up of credit. ...

Even if the rescue of the financial system starts to bring credit markets back to life, we'll still face a global slump that's gathering momentum. What should be done about that? The answer, almost surely, is good old Keynesian fiscal stimulus. ...

I believe not only that we're living in a new era of depression economics, but also that John Maynard Keynes—the economist who made sense of the Great Depression—is now more relevant than ever. Keynes concluded his masterwork, The General Theory of Employment, Interest and Money, with a famous disquisition on the importance of economic ideas: "Soon or late, it is ideas, not vested interests, which are dangerous for good or evil."

We can argue about whether that's always true, but in times like these, it definitely is. The quintessential economic sentence is supposed to be "There is no free lunch"; it says that there are limited resources, that to have more of one thing you must accept less of another, that there is no gain without pain. Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work. The true scarcity in Keynes's world—and ours—was therefore not of resources, or even of virtue, but of understanding.

We will not achieve the understanding we need, however, unless we are willing to think clearly about our problems and to follow those thoughts wherever they lead. Some people say that our economic problems are structural, with no quick cure available; but I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.”

Paul Krugman, “What to do”, The New York Review of Books (Yet to be formally published, 18 December 2008).


Paul Krugman (1953-) is a professor of economics and international affairs at Princeton University, and a columnist for The New York Times. Earlier this year he won the Nobel Memorial Prize in Economic Sciences "for his analysis of trade patterns and location of economic activity".

Paul Krugman is at once one of the best and one of the most controversial economists commenting on economic affairs today. There is no doubt that his academic accomplishments in the areas of trade theory, economic geography, and international finance are worthy of a Nobel Prize. And there is no doubt that he is more than outspoken in his opposition to ideas he does not like, often in a "shrill" rhetorical style, wins him few friends among the many he attacks. In this regard, he has been among the harshest critics of the Bush Administration.

As is reflected in this except, Krugman is a strong Keynesian and calls, in typical Keynesian fashion, for government measures to boost aggregate demand. He would no doubt approve of a coordinated fiscal stimulus from many countries to boost the global economy. In yesterday’s Tdj, I expressed reservations about this approach. I add here that increased spending takes time to approve, more time to implement (especially, when the new spending takes the form of public works projects, such as those now being advocated), and even more time yet to have an impact on the economy. Fiscal policy is not a short-term measure.

The world economy is now sinking and sinking rapidly. World manufacturing production is tumbling, with reports much weaker than expected. New car sales are down across the world. Exports are shrinking. Consumer and business confidence is falling everywhere. Exchange rates are increasingly volatile. And of course the financial crisis, which is world-wide in scope, continues unabated. No one knows when the bottom will be reached and a recovery might begin. Some people think it will be some time.

From the discussions now taking place at the national and international level, governments and international agencies think the downturn will be steep and prolonged. It would appear the strategy now being formulated for dealing with a global recession consists of measures and actions to be taken over three time horizons: In the short-term, immediate attention focuses on restoring confidence in the financial system by recapitalizing financial institutions and attempting to overcome the problems created by a liquidity trap, nationally by guaranteeing loans and mortgages and internationally by bilateral currency swaps to ensure foreign currency liquidity; Over the medium-term, measures to sustain demand, such as a very loose monetary policy and a fiscal policy that includes cutting taxes and increasing spending, are being advocated; Looking to the longer-term, attention will be directed at reforming the regulatory and supervisory frameworks of financial markets to reduce systemic risks, improve financial intermediation and allow for better coordination among countries.

In my view, Krugman will get his wish. There will be a lot of government spending in our future and the future of other countries. But it will take time to put spending measures into effect and one has to wonder if in the end they will be any more effective than the efforts to get credit flowing again have been. My suspicion is all the spending will not help; indeed, I think it might even further unbalance the economy. In my view, we would be better off just stabilizing the policy environment by setting sensible rules for taxes, business activity and government spending and telling the public the rules are not going to change for the foreseeable future.