Friday, May 11, 2012

Could a pact for growth actually avert world depression?

Could a pact for growth actually avert world depression? How?
It was a great relief for me this past week or two to see that Europe is finally displaying some higher-level consciousness of its real urgent needs. The new President of France, Hollande, and the Financial Times (FT) have both talked about the need for a new "pact for growth" to prevent and even reverse the rise of unemployment in Europe, which otherwise seriously threatens a 1930's style depression spreading to the entire world.

The key question: do they have any hope of actually pulling it off? With a very complex systems issue like this, ordinary reactive thinking just won't work. NO ONE can write about all the key issues here while being explicit about ALL the important details, but
I can begin to see more of the glimmerings of how they COULD cut the Gordian knot, if they chose to do so. But there is a whole lot of tunnel vision among the official great experts working on this, and I don;t know what their chances of finding these glimmering for themselves.

There are two especially interesting core principles which could provide a way out:

(1) As FT notes, the EU could start to try to think about the problem of growth in Europe AS IF they already had a United States of Europe, and could use all the best techniques we have used here (which are in need of improvement but have been working out a whole lot better than Greece, Spain, Italy, France, UK and eurozone as a whole...). We have a lot of very substantive prior thought that could be transferred.
I am not proposing starting by actually creating a United States of Europe (though my PhD thesis advisor, Karl Deutsch, would have been delighted about that); rather I am proposing that we/they analyze what could be done, and then try to work out the smoothest way to get the same effect.

(2) Given that EU, the US and the provinces of China all have similar levels of debt problem, we are all limited in how fast we can return to growth, because we need to protect ourselves from the world financial community (us!). It's a classic prisoner's dilemma situation. To get to a Pareto optimum (growth as fast as we could get if we were all one nation, without the bad politics that would mean in practice)... we need something like a "G4 pact," a kind of economic nonaggression treaty, built on a foundation of very close intense and deep discussions of at least US, EU, China and Brazil. Brazil is not in the same debt position, and makes the discusison more complex -- and that's precisely why they need to be there, just as new web pages needed to be tested against different kinds of browsers before going public.


I don't have this nailed even at the intellectual level, but some themes seem to emerge...

BOTH for the new G4 pact, AND for the EU, there is a kind of "Greece problem."

Common sense suggests -- the pact should be to cut each other some slack, ESPECIALLY
on interest rates for sovereign debt, BUT ALL TO AN EQUAL EXTENT. The idea is to tune up world demand, not to subsidize governments which do not live beyond their means.
Of course, it is interesting to compare states of the US versus provinces of China in this regard... but let me stay with the big picture for now.

To balance this out, things like the Greek problem (and potential imbalances within the G4, where Brazil acts to some extent as a surrogate or leader for more nations)..
would be dealt with by raising demand, to prevent waste, IN THE AFFECTED region BUT NOT BY THE GOVERNMENT of that region. I think a little of things like the Appalachian
Commission and the Epscor program in the US. These things may be public or private or a mix of both, but they must be transnational kinds of activity which channel demand to areas where there is a certain kind of imbalance, a kind of waste of human or economic resources. Of course, people have talked about development funds for many decades at least, but it seems that maybe a new context could let us re-examine such issues with fresh eyes.

Of course, the idea that such transnational programs might build giant solar farms
in Southern Europe using the new 7 cents per kwh solar thermal technology I happen to know about (thanks to excellent sources of information on technology and on what to believe) still makes sense... if a transnational fund could be set up which is capable
of occasional flashes of competence that way. (The US and China themselves have not reached that stage of competence yet itself... but it's important that we keep trying; a lot is at stake.)

That can apply, in fact, at national, regional, and provincial levels...

and the challenge is how to do it more by reliable types of formulas rather than corrupt stakeholder stuff (the bane of many development funds). Even with NSF's Epscor program, I have often thought about how the present information channels are useful, but actual funding decisions by automatic immediate 50% matching without side criteria
could result in much greater efficiency overall, whatever the apparent levels of overall funding.

But there is still more to be said about risk management and representation systems (or "plays") to better factor risk in this kind of complex world. The discussion above
needs to be integrated somehow with more of that.


As for what we have learned WITHIN the US....

1. In a Nash equilibrium, maybe the Tea Party solution would be best, even though it would help us join Europe in approaching a rerun of the 1930's. With a G4 pact, we can avoid that rerun, if we have the will to do so. and are rational enough to make full use of the breathing space and slack that buys us. (But as we waste the slack we get from fracking, and use it just to dig ourselves into a deeper hole, there is reason to worry.)

One of the European commentators recently said: "Hey, we agreed with Hollande that we will do as much as we can for growth, within the limits of the austerity agreemnet which even he says he will uphold. Hey, OK, he will get all the empty sound bites he needs, but let's be real. How can you get growth in the face of austerity?"

But in fact, we got very deep into that here a year or two ago. Obama may have only a 50% grade or so on that kind of sophisticated juggling act... but 50% is ever so much more than anyone else. (I suppose China is also running at about 50% efficiency, not because they understand this juggling act, but because of the inertia of a highly efficient starting point.) ONE PART of Japan's economic recovery plan in 2009 was
much more efficient... but there were other parts, and there has been an earthquake...

One key point... which the old school idiots need to really understand... it is simply not true that X dollars in government deficit in one sector yields the same stimulus as X dollars in another sector. Simply by shifting commitments from one sector to another, one can substantially increase stimulus without increasing government dollar commitment. Merkel's own cash for clunkers program is a great example of this, yielding
about three times the stimulus per dollar as normal government spending, which in turn does about twice what the more dubious tax breaks would provide, which the "job creators" (i.e. PAC fat cats) have been pushing for. Japan's "three pillars of eco..."
are like Merkel's cash for clunkers that way. An EU-wide program based on those three pillars (e.g. the stimulative parts of the 18-page bill posted at could go a very long way that way, as would relative incentives
for utility solar farms. And of course to talk about growth without supporting education would be a gross nonsequitur.

But... in a world of legal corruption... I often think about Syn Rand, where the DC (and Brussels) lobbyists who represent certain big companies may be very effectively digging their own graves, as well as ours.

Would Romney be any better than Obama in resisting those negative forces threatening to pull us apart, or would he a gleeful uninhibited gateway to expanded corporate welfare for the PACmen? Will he streamline the financial system, or will he just give the federal reserve as a kind of election spoils to a drunken arsonist from his base? His choice of VP will tell us a lot. If he picks any of the Washington insiders which the press has been talking about, he could be a threat to our very existence, at this delicate time. (Of course the woman they fired from HP would not be any better.) But
there is hope...


As I post this, two more thoughts come to mind:

1. For US or EU:

Why not "incentive pay for the top 1%?"

Obama has rightly argued that it would be better to sacrifice new optional tax breaks introduced by Bush, rather than sacrifice public education, which Thomas Jefferson rightly promoted as a sacred bedrock of our nation. The tax breaks for the rich do not help aggregate demand so much as most other ways of using the money. But if we DO
ever get out of high unemployment and deep debt, then we will be able to afford it again.

So instead of fighting over this stuff every year, to adapt to changing conditions..why not make it into a FORMULA? After all, we have CPI formulas in the law.
Why not have a formula which adjusts the tax rates for the rich, as function of the basic economic strength of the nation (rates of employment, growth and debt)?
We could use one more automatic stabilizer...

2. As part of this, of course, using housing as a kind of yoyo regulator ..
may not be the best stabilizer...


Byeond that,

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