Effective Measures Against the Recession

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Conferencia de Edward C. Prescott, premio Noberl de Economa, dentro del programa "Madrid, Comunidad del Conocimiento". 6 de julio de 2009.

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  • 1. EffectiveMeasuresAgainstthe Recession EdwardC.Prescott July6,2009 1
  • 2. U.S.LongRunPicture Relativelysteadygrowthoverthelast150 years Somefluctuationsabouttrend(HPfiltered) SourceoffollowingpicturesisRobertE.Lucas,Jr. 2
  • 3. 3
  • 4. DeviationsFromTrend Relativetotrend,GDPlost40%between1929 and1933 Recentlythelosshasbeenabout5%,andmost ofthisisin2008IVand2009I 4
  • 5. 5
  • 6. HowBadAreThings? Notthatbad,sofar 6
  • 7. Contractions(Recessions) Recessionisnotaneconomicconcept Aneconomycantbeinoneornotinone Priortodevelopmentofmodernmacro,itwas notawelldefinedempiricalconcept ItwastotallydiscreditedbyNobelLaureate T.J.Koopmansinhisdevastatingcritiqueof BurnsandMitchell(theNBERdefinitions)as measurementwithouttheory 7
  • 8. SensibleDefinitionofaContraction Anysensibledefinitioncorrectsfor populationandtrendgrowth Aflatlineisneitherlosingnorgaining groundrelativetotheindustrialleaders Aflatlinemeanslivingstandardsdouble everygeneration 8
  • 9. DetrendedGDPperPerson16641959Ito 2009I 110 Period Average = 100 105 100 95 * Quarterly trend growth: 0.45% 90 1959-I 1965-I 1971-I 1977-I 1983-I 1989-I 1995-I 2001-I 2007-I 9
  • 10. NowThereIsHardTheory Givenproductivity,population,andtaxes: Predictedandactualpathsoftheaggregate variablescoincide Allusingdynamiceconomictheoryto constructmodelsconsistentwithnational accountandotherdatafindsame thing Wefindmonetarypolicyhadlittle consequence 10
  • 11. Contractions:DetrendedGDP perPerson16641959Ito2009I 110 Period Average = 100 105 100 95 * Quarterly trend growth: 0.45% 90 1959-I 1965-I 1971-I 1977-I 1983-I 1989-I 1995-I 2001-I 2007-I 11
  • 12. Contractions Biggestcontractionwas11.2%from1978IVto 1982IV Firsttwoyearsofit,moneywasloose low realinterestrate Lasttwoyearsandbeyond,moneywastight Thecontractionbeginningin1999IVwas biggerthanfigureindicatesbecause Therewasahugeamountofunmeasured investmentinthesecondhalfofthe1990s 12
  • 13. Expansions Bigexpansionofearly1960swastechnology driven The19952000expansionwastechnologydriven Andinfactwassignificantlybiggerand longer thanstandardstatisticsindicate Reason:Hugeunmeasuredintangible investment(R&D,launchingnewproducts) Thesecondbiggestandthelongestexpansion wasinthe1980sandwasduetocutsin marginaltaxrates 13
  • 14. Expansions:DetrendedGDP perPerson16641959Ito2009I 110 Period Average = 100 105 100 95 * Quarterly trend growth: 0.45% 90 1959-I 1965-I 1971-I 1977-I 1983-I 1989-I 1995-I 2001-I 2007-I 14
  • 15. WhatDepressedtheU.S.Economyin 2008IVand2009I? Feddidwhatitshouldgiventhesituation Bigincreaseinreserves Fedisnotthecauseoftherecentdropin U.S.GDP(4.0%trendcorrectedandprobably another1.0%thisquarter) Notthefinancialcrisis Notlackofborrowing 15
  • 16. LiabilitiesofHouseholdsandof theirNonfinancialBusinesses End2007 End2008 TotalLiabilities (billions$) 31,875 32,341 CompositionShare Mortgages 44.9% 44.4% OtherLoans 18.0% 18.5% CorporateBonds 11.2% 12.0% Securitycredit 1.0% 0.5% Tradepayable 8.2% 8.5% Other 16.8% 16.1% 16
  • 17. ThenWhatDepressedtheU.S.Economyin 2008IVand2009III? Fact:Investmentbecamedepressed Thereare25millionsmallbusinessesinthe U.S. 5millionofthemhaveemployees Theirownersfeared highertaxrates Rationallycutinvestment Rationallycutemployment Tookmorecashoutofbusiness Workersfearingjoblossrationallycutauto buying 17
  • 18. FearsAreBeingRealized Taxratesarebeingincreased Theseincreasesloweramountofcapitala firmschoosestohave Reasonforlowinvestmentisnotproblemof gettingloans itisexpectedhightaxrates 18
  • 19. WhatHappenedafterFinancialCrises? Sometimesbadthings and Sometimesgoodthings Numbersaretrendcorrectedsoflatlineis growingattrend 19
  • 20. ExperiencesVeryDifferent GDP per Capita Detrended at 2% 1992 = 100 140 Finland 120 100 80 Japan Source: GGDC (PPP-EKS) 60 1990 1994 1998 2002 2006 20
  • 21. GDP per Capita Detrended at 2% 1980 = 100 140 Chile 120 100 Mexico 80 Source: GGDC (GK-PPP) 60 1980 1984 1988 1992 1996 2000 2004 21
  • 22. CostofCurrentCrisis Hugebailoutoflenderstofinancial intermediariesbytaxpayers Thismeanshighertaxratesinfutureand depressestheeconomynow Thesocalledstimulusplanisadepressant plan 22
  • 23. EvidencethatHighMarginalTaxRates DepressanEconomy Thisusesthesimplemethodologydevelopedin myAmericanEconomicAssociation2002Ely Lecture Factorsotherthanthemarginaltaxrate matter Alsoerrorsinmeasuringhoursworked 23
  • 24. Predicted vs. Actual Weekly Hours predicted 30.0 Japan 28.0 Australia New Zeland Iceland 26.0 Ireland Portugal Romania Spain 24.0 U.S. U.K. 22.0 Canada 20.0 France Germany Denmark Italy 18.0 16.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 30.0 actual 24
  • 25. EffectiveMeasuresAgainstthe DepressioninU.S.Economy Cutmarginaltaxrates Becomemoreopen Followproproductivitypolicies 25