SUMMARY OF ECONOMIC CONDITIONS: US AND EUROPE

Not long ago “World Economic Perspectives” Conference was held at Rafael del Pino’ Foundation. It wasn’t only instructive but also refreshing. Martin Feldstein was the speaker… and what an speaker! I may not agree with everything he says but I must acknowledge he knows how to captivate economist folks.

I assume you all got a solid background and you are up to date on what’s going on out there. So I can make a brief summary:

United States:

The US has slow-growth rates, weak employment and huge debt. This economic recovery is really different from the others, this one is twice long. Inequality is playing an important role because Real GDP per capita is lower today than twenty years ago, what means less opportunities to US citizens. Consumer confidence is also weak. 

But there are good news for US, they got lots of positive things: young generation, good culture, huge capital markets, great research universities, natural resources…

Taking into account all these things we can infer decent forecasts for the US future. The point is US government should use fiscal policies to promote demand (major infrastructure programs, stronger employment plans…) but it also has to be careful with the debt. Reduce corporate tax rates, as Martin Feldstein put it, is not a solution for me. I plead for increases in corporates taxes for biggest companies because we need to put the money in circulation and that all stuff (blah, blah, blah..). It’s gonna be hard to fix debt at the same time you promote demand but it’s possible!

Europe:

Even today it’s impossible to talk about economic conditions as a whole. There were doubts about the monetary union from the beginning. It was actually a mistake to impose a single currency when Optimum Currency Area theory tell us about the distress it may generate. 

The main problems still remain. Crisis, as history has shown so many times, should be solved by individual countries, not at european level. The internal devaluation process, happening across peripheral countries, is working quite bad because tax increases and budget cuts reduce GDP and demand.

There are solutions for Europe. Unbelievable but true. Reduce interest rates because of a super low inflation rate (now below 1%) it’s a solution. But interest rates are in the zero-lower bound. Keynes and his liquidity trap is back. Another, and more ambitious, choice is to raise inflation rate (till 3-4%) in core countries as Germany. It makes peripheral countries more competitive, and it represents advantages for everyone, germans too.

Unfortunately I can’t forget we’re dealing with the germans. And they’re still afraid of 1920s hyperinflation, what doesn’t make any sense. They should better be worried about that bugs who tried to rule the world under current conditions.. Just to name one: Hitler.

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