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Economists guess again

Jan 10,2020
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Lee Jong-wha
The author is a professor of economics at Korea University.

The U.S. economy has been expanding for 10 years and seven months. Real income and employment continued to increase. The unemployment rate is at a 50-year low. Most institutions predict the U.S. growth for this year will be lower than last year, but it will nevertheless come in at around 2.0 percent.

But the mood was sullen at the 2020 annual meeting of American Economic Association (AEA) held over the weekend in San Diego with 13,000 economists in attendance. The session “The U.S. economy: Growth, Stagnation or New Financial Crisis” generated the best discussion and drew the biggest crowd. Although the U.S. economy is in a longest-ever expansion, the average growth rate over the last 10 years was 2.3 percent, the lowest during an expansion period. Moreover, the economy was expected to slow from now on. Janice Eberly, a professor at Northwestern University, pointed to a recent research on the U.S. economy which suggested a slowdown in U.S. productivity growth as well as demographic and fiscal imbalances due to the lack of investment in productivity-enhancing technologies, infrastructure and education.

Robert Shiller — a professor at Yale University and 2013 Noble Prize laureate for behavioral economics — reasoned that the longest U.S. expansion was fed by viral economic narratives. U.S. President Donald Trump’s popular slogan of making America great again and a strong economy as well as the mogul-turned-president’s lavish lifestyle and contempt for “losers” has subconsciously stimulated spending and risk-taking. He warned the economy could fizzle out if the confidence sags.

The scholars singled out the U.S.-China trade war, geopolitical risks and excessive global debt as negative factors for the 2020 U.S. economy. The deepening tension between the United States and Iran helped raise concerns about a new oil crisis in the region, a military clash and cyberterrorism. Kenneth Rogoff of Harvard University warned of record-high global public and private debt, extraordinary weak leadership and surging pension debt due to aging societies all could trigger another systematic financial crisis.

Some think the United States can maintain monetary and fiscal expansion to keep the economy rolling. Former Fed Reserve Chairs Ben Bernanke and Janet Yellen believe the U.S. central bank can fight another crisis through aggressive rate cuts and quantitative easing as it had done in the aftermath of the 2008 crisis. But former Treasury Secretary Lawrence Summers, a professor at Harvard University, disagreed. He warned that the United States could head towards lengthy Japan-like stagnation due to low investment and excess savings. More bubbles could form if rates are cut further.

Summers advises the government to capitalize on the low rates to issue public bonds for investment in productive areas. The fiscal debt against GDP does not increase if public bond yields remain below the GDP growth rate. Still, others are worried about already dangerously-high fiscal deficit. In 2019, U.S. fiscal deficit was 4.7 percent of GDP. Michael Boskin of Stanford University, thinks that government bond yield could outperform GDP growth rate to push the ratio of fiscal debt to GDP sharply higher. Since there is no guarantee that debt-financed funds could be spent wisely, some argued that tax cuts could be more effective in stimulating private investment.

The theme of inequalities in wealth — and inclusive growth — was also dealt with. Some called for higher taxes on the rich, while others countered that a tax hike could undermine efficiency in redistribution and corporate sentiment. More tax on the rich could only worsen distribution as low-income households suffer more during economic downturns. Prof. Rogoff asserted that only sustained growth can improve distribution.

Economists were united in warnings about the U.S. economy and discussed ways to improve growth and distribution. But theories and empirical reasoning are not usually reflected in public policy as policy makers tend to chase immediate results and political gains. Under Trump, economic policies came under greater sway of populism and nationalism to add uncertainties. The Iranian crisis only aggravated insecurity. Economists point to the Trump factor as the biggest risk to the U.S. economy.

Korea is also under the populist spell ahead of the April 15 parliamentary election and the presidential election in two years’ time. Summers claimed that advanced economies could weather crisis better even with larger debt because most people have faith in a government system.

In the 1997-98 currency crisis, Korea survived crisis through public support and confidence in the government. However, given a critical lack of confidence in the government today, it is uncertain whether the country can withstand another crisis.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Jan. 9, Page 31