«No hay nada que alguien gane, que otro no pierda» (Jean Bodin)

The Real Demographic Challenge

AUG 21, 2015

 

LONDON – The United Nations’ latest population projections suggest that Japan’s population could fall from 127 million today to 83 million by 2100, with 35% of the population then over 65 years old. Europe and other developed economies are aging as well, owing to low fertility rates and increasing longevity.

But those who warn that huge economic problems lie ahead for aging rich countries are focused on the wrong issue. Population aging in advanced economies is the manageable consequence of positive developments. By contrast, rapid population growth in many poorer countries still poses a severe threat to human welfare.

In 2008, the UN projected the world’s population reaching 9.1 billion by 2050 and peaking at about ten billion by 2100. It now anticipates a population of 9.7 billion in 2050, and 11.2 billion – and still rising – by 2100, because fertility rates in several countries have fallen more slowly than expected (in some, notably Egypt and Algeria, fertility has actually risen since 2005). While the combined population of East and Southeast Asia, the Americas, and Europe is projected to rise just 12% by 2050 and then start falling, sub-Saharan Africa’s population could rise from 960 million today to 2.1 billion by 2050 and almost four billion by 2100. North Africa’s population will likely double from today’s 220 million.

Such rapid population growth, on top of even faster increases over the last 50 years, is a major barrier to economic development. From 1950 to 2050, Uganda’s population will have increased 20-fold, and Niger’s 30-fold. Neither the industrializing countries of the nineteenth century nor the successful Asian catch-up economies of the late twentieth century ever experienced anything close to such rates of population growth.

Such rates make it impossible to increase per capita capital stock or workforce skills fast enough to achieve economic catch-up, or to create jobs fast enough to prevent chronic underemployment. East Asia has gained a huge demographic dividend from rapid fertility declines: in much of Africa and the Middle East, the dividend is still missing.

In some countries, sheer population density also impedes growth. India’s population may stabilize within 50 years; but, with the number of people per square kilometer 2.5 times that of Western Europe and 11 times that of the contiguous United States, disputes over land acquisition for industrial development create serious barriers to economic growth. In much of Africa, density is not a problem, but in Rwanda competition for land, driven by high and rising density, was among the root causes of the 1994 genocide. By 2100, Uganda’s population density could be more than twice India’s current level.

The demographic challenges facing advanced economies are slight in comparison. Greater longevity poses no threat to economic growth or pension-system sustainability as long as average retirement ages rise accordingly. Population stabilization reduces pressure on environmental assets such as unspoiled countryside, which people value more as their incomes increase.

To be sure, rapid population decline would create difficulties. But if writers like Erik Brynjolfsson and Andrew McAfee are right that information technology will create new opportunities to automate jobs, gradual population decline could help offset falling demand for labor, which otherwise would generate unemployment and/or rising inequality.

On the other hand, increased automation could be a huge barrier to economic development for countries still facing rapid population growth. By making it possible to manufacture in almost workerless factories in advanced economies, automation could cut off the path of export-led growth that all of the successful East Asian economies pursued. The resulting high unemployment, particularly of young men, could foster political instability. The radical violence of ISIS has many roots, but the tripling of the population of North Africa and the Middle East over the last 50 years certainly is one of them.

Continued high unemployment throughout Africa and the Middle East, and political instability in many countries, may in turn make unrealistic the UN’s projection that Europe’s population will fall from 730 million today to 640 million by 2100. With Africa’s population likely to increase by more than three billion over the next 85 years, the European Union could be facing a wave of migration that makes current debates about accepting hundreds of thousands of asylum seekers seem irrelevant. The UN assumes net migration from Africa of just 34 million over the century – only 1% of the population increase. The actual figure could be many times that.

As a result, Europe’s population – unlike, say, that of East Asia or even the Americas – may well continue to rise throughout the century. This, some will say, will help “solve Europe’s aging problem.” But, given that the aging “problem” is overstated and solvable by other means, mass migration may instead undermine Europe’s ability to reap the benefits of a stable or gently falling population.

Both increased longevity and falling fertility rates are hugely positive developments for human welfare. Even in the highest-fertility countries, rates have fallen – from six or more children per woman in the 1960s to 3-4 today. The sooner fertility rates reach two or below, the better for humanity.

Achieving this goal does not require the unacceptable coerciveness of China’s one-child policy. It merely requires high levels of female education, the uninhibited supply of contraceptives, and freedom for women to make their own reproductive choices, unconstrained by the moral pressure of conservative religious authorities or of politicians operating under the delusion that rapid population growth will drive national economic success. Wherever these conditions prevail, and regardless of supposedly deep cultural differences – in Iran and Brazil as much as in Korea – fertility is now at or below replacement levels. 

Sadly, this is not true in many other places. Ensuring that women are educated and free is by far the most important demographic challenge facing the world today. Worrying about the coming population decline in advanced countries is a meaningless diversion.

Adair Turner, a former chairman of the United Kingdom's Financial Services Authority and former member of the UK's Financial Policy Committee, is Chairman of the Institute for New Economic Thinking.

Alemania inventa las normas y a ella no se las aplica... (excesivo superavit)

The Eurozone’s German Problem

 

JUL 23, 2015

LONDON – The eurozone has a German problem. Germany’s beggar-thy-neighbor policies and the broader crisis response that the country has led have proved disastrous. Seven years after the start of the crisis, the eurozone economy is faring worse than Europe did during the Great Depression of the 1930s. The German government’s efforts to crush Greece and force it to abandon the single currency have destabilized the monetary union. As long as German Chancellor Angela Merkel’s administration continues to abuse its dominant position as creditor-in-chief to advance its narrow interests, the eurozone cannot thrive – and may not survive.

Germany’s immense current-account surplus – the excess savings generated by suppressing wages to subsidize exports – has been both a cause of the eurozone crisis and an obstacle to resolving it. Before the crisis, it fueled German banks’ bad lending to southern Europe and Ireland. Now that Germany’s annual surplus – which has grown to €233 billion ($255 billion), approaching 8% of GDP – is no longer being recycled in southern Europe, the country’s depressed domestic demand is exporting deflation, deepening the eurozone’s debt woes.

Germany’s external surplus clearly falls afoul of eurozone rules on dangerous imbalances. But, by leaning on the European Commission, Merkel’s government has obtained a free pass. This makes a mockery of its claim to champion the eurozone as a rules-based club. In fact, Germany breaks rules with impunity, changes them to suit its needs, or even invents them at will.

Indeed, even as it pushes others to reform, Germany has ignored the Commission’s recommendations. As a condition of the new eurozone loan program, Germany is forcing Greece to raise its pension age – while it lowers its own. It is insisting that Greek shops open on Sundays, even though German ones do not. Corporatism, it seems, is to be stamped out elsewhere, but protected at home.

Beyond refusing to adjust its economy, Germany has pushed the costs of the crisis onto others. In order to rescue the country’s banks from their bad lending decisions, Merkel breached the Maastricht Treaty’s “no-bailout” rule, which bans member governments from financing their peers, and forced European taxpayers to lend to an insolvent Greece. Likewise, loans by eurozone governments to Ireland, Portugal, and Spain primarily bailed out insolvent local banks – and thus their German creditors.

To make matters worse, in exchange for these loans, Merkel obtained much greater control over all eurozone governments’ budgets through a demand-sapping, democracy-constraining fiscal straitjacket: tougher eurozone rules and a fiscal compact.

Germany’s clout has resulted in a eurozone banking union that is full of holes and applied asymmetrically. The country’s Sparkassen – savings banks with a collective balance sheet of some €1 trillion ($1.1 trillion) – are outside the European Central Bank’s supervisory control, while thinly capitalized mega-banks, such as Deutsche Bank, and the country’s rotten state-owned regional lenders have obtained an implausibly clean bill of health.

The one rule of the eurozone that is meant to be sacrosanct is the irrevocability of membership. There is no treaty provision for an exit, because the monetary union is conceived as a step toward a political union – and it would otherwise degenerate into a dangerously rigid and unstable fixed-exchange-rate regime. Germany has not only trampled on this rule; its finance minister, Wolfgang Schäuble, recently invented a new one – that debt relief is forbidden in the eurozone – to justify his outrageous behavior toward Greece.

As a result, Greece’s membership in the eurozone – and by extension that of all other members – is now contingent on submission to the German government. It is as if the United States unilaterally decided that NATO’s principle of collective defense was now conditional on doing whatever the American government dictated.

The eurozone desperately needs mainstream alternatives to this lopsided “Berlin Consensus,” in which creditors’ interests come first and Germany dominates everyone else. Merkelism is causing economic stagnation, political polarization, and nasty nationalism. France, Italy, and Europeans of all political stripes need to stand up for other visions of what the eurozone should be.

One option would be greater federalism. Common political institutions, accountable to voters across the eurozone, would provide a democratic fiscal counterpart to the ECB and help cage German power. But increasing animosity among eurozone member states, and the erosion of support for European integration in both creditor and debtor countries, means greater federalism is politically unfeasible – and potentially even dangerous.

A better option would be to move toward a more flexible eurozone, in which elected national representatives have a greater say. With the no-bailout rule restored, governments would have more space to pursue countercyclical policies and respond to voters’ changing priorities.

To make such a system credible, a mechanism for restructuring the debt of insolvent governments would be created. This, together with reform of the rules covering the capitalization of banks – which incorrectly treat all sovereign debt as risk-free and do not cap banks’ holdings of it – would enable markets, not Germany, to rein in truly excessive borrowing. Ideally, the ECB would also be given a mandate to act as a lender of last resort for illiquid but solvent governments. Such changes could garner broad support – and would serve Germany’s own interests.

The eurozone’s members are trapped in a miserable marriage, dominated by Germany. But fear is not enough to hold a relationship together forever. Unless Merkel comes to her senses, she will eventually destroy it.

Philippe Legrain, a former economic adviser to the president of the European Commission, is a visiting senior fellow at the London School of Economics’ European Institute.

Y ¿por qué no un Cementerio?

A Radioactive Bank to be Welcomed

 

AUG 24, 2015

CANBERRA – One of the many things the world has learned from the Iran nuclear saga is that its leaders made a mistake, when negotiating the Nuclear Non-Proliferation Treaty (NPT) in the 1960s, in not doing anything to constrain uranium enrichment and plutonium reprocessing. This failure apparently stemmed from the belief – long since proven wrong, certainly in the case of uranium – that the only states ever likely to possess that technical capability already possessed nuclear weapons, or (like Germany) were totally committed never to acquire them. 

As a result, any member state can argue for its “inalienable right” under the NPT to pursue any stage of the nuclear fuel cycle. Although any such right extends only to activities for “peaceful purposes,” the loophole is gaping. Any technically capable state – and there are now dozens of them – can build uranium enrichment facilities with the official purpose of producing fuel for nuclear power or research reactors, but which are nonetheless inherently capable of producing the much higher-grade fuel needed for nuclear weapons. 

It is not for nothing that such facilities have been described as “bomb starter kits,” and that Iran’s progress down that path – whether deliberately designed to give it a latent weapons breakout capability or not – has spooked so many others in the international community. That is why there was so much pressure to produce the deal now on the table, which dramatically limits Iran’s enrichment capability.

While renegotiating the NPT itself to close the enrichment loophole seems for now a lost cause, there are other ways to address this proliferation risk. One of the most important, and long-advocated, strategies is to demonstrate to countries that rely on nuclear power, or are planning to develop it, that they do not need their own uranium-enrichment program to ensure their fuel supply’s security.

Concern about fuel-supply security has always been Iran’s main publicly stated justification for acquiring its enrichment capability – a justification that its critics assert was manufactured simply to conceal a covert weapons agenda. Whether or not that is the case, all current and would-be nuclear power producers are entitled to be anxious about having an absolutely assured fuel supply, given the major economic and social consequences they would face in the event of a disruption.

Yes, until now, the commercial nuclear-fuel market has worked well: no power reactor has had to shut down because of fuel-supply disruptions. But the cut-off of the supply of other energy resources (notably Russia’s disruption of natural-gas supplies to Ukraine and, by extension, to Western Europe) has raised legitimate concerns about whether this could happen with nuclear fuel.

Although the issue has been much debated, until now there has been only modest progress in developing fuel-supply assurance arrangements that would meet this concern. Russia, with the support of the International Atomic Energy Agency (IAEA), maintains a sizeable reserve of low-enriched uranium (LEU) at its international center in Angarsk; but, in the current security environment, there has been understandable international reluctance to rely on it. The United Kingdom has proposed a supply guarantee of its own, though it has so far attracted little attention.

Now, in an important new development, to be officially launched this month (on August 27), Kazakhstan is establishing a major new international fuel bank, which it will operate on behalf of the IAEA. The new facility should once and for all remove the main excuse that has been advanced, sincerely or not, for building and maintaining homegrown enrichment capability.

Scheduled to commence operations in 2017, the Kazakh fuel bank will store up to 90 tons of LEU, sufficient to refuel three typical power-producing light water reactors. While Kazakhstan will physically operate the bank, the uranium will be owned and controlled by the IAEA, and made available to non-nuclear-weapon states if, for any reason, they cannot secure the LEU they need from the commercial market.

Provided the state in question is in compliance with its comprehensive non-proliferation safeguards agreement with the IAEA, it can draw the required fuel from the bank and transfer it to a fuel fabricator to make fuel assemblies for the reactors involved.

The Kazakh fuel bank has very wide and high-level international backing, helped by the country’s credentials. A former nuclear test-site state, Kazakhstan willingly gave up the nuclear weapons on its territory when the opportunity arose with the dissolution of the Soviet Union, and it has been a strong and consistent advocate of nuclear arms control and disarmament ever since.

The bank has been funded by voluntary contributions, including $50 million from the Nuclear Threat Initiative, a United States-based NGO, $49 million from the US government, up to $25 million from the European Union, $10 million each from Kuwait and the United Arab Emirates, and $5 million from Norway.

Aside from the Iran deal, good news on nuclear weapons has been sparse in recent years. The new Kazakh fuel bank is a significant step toward achieving a world free of nuclear weapons. Those who have worked to establish it deserve the world’s gratitude.

Gareth Evans, former Foreign Minister of Australia (1988-1996) and President of the International Crisis Group (2000-2009), is currently Chancellor of the Australian National University.

Son los datos ¡estúpido!... Todo, todo está en los Big Data

Economic Forecasts in the Age of Big Data

AUG 24, 2015

WASHINGTON, DC – In late July, it came to light in the press that the US Federal Reserve had accidentally published economic forecasts for the next five years on its website. The forecasts, which make clear that the Fed does not expect a recession before 2020, revealed worrying problems not just in terms of data security, but also in the methods used by its economists. 

Given that periods of economic expansions historically average about 4.8 years, the Fed’s predictions seem like wishful – and perhaps dangerous – thinking. The economic recovery following the 2009 global financial crisis may have been extremely weak; but we would be wise to prepare for another downturn in the next few years.

The disconnect between the Fed’s forecast data – upon which, in theory, it bases its decisions – and the historical trends is not surprising. Attempts by economists to predict the future have had mixed results, at best; very few foresaw the depth of the Great Recession, even after it had already started. The trouble lies in the fact that many of the leading indicators used to measure the economy rely on out-of-date, incomplete, or flawed data. 

For example, forecasters calculate real GDP on the basis of initial monthly estimates of quarterly GDP – a statistic that is often substantially revised as more data become available. As a result, forecasts lag behind reality. During the third quarter of 2008, fewer than 30% of the forecasters who contribute to the Survey of Professional Forecasters predicted a decline in GDP in the remaining months of the year; in fact, GDP plunged more than 8% in the fourth quarter of 2008, one of the largest drops on record. 

Economists, policymakers, and business leaders need better data on which to base their forecasts. Fortunately, new sources of information on the economy have recently emerged: the vast collections of private data collected by search engines and other Internet companies.

At Indeed, the job-search company where I am chief economist, real-time job data allow us to see which sectors are attempting to recruit the most candidates – a powerful economic indicator when evaluating the labor market. A look at the job postings in the building industry, for example, allows us to see whether construction is up or down compared to the previous year, providing insights into the housing market. Examining how workers are behaving in their job searches indicates their perception of the labor market’s health, with implications for economic growth. 

My company is just one example of potential sources of real-time economic data. The Billion Prices Project at MIT measures inflation using real-time data on online purchases from hundreds of retailers globally. The Google Price Index provides similar information, and Google Trends offers insights from Internet search data. 

Researchers are also mining social media sites for useful leading economic indicators, including the Twitter hashtag #NFPGuesses, a weekly aggregation of predictions about non-farm payroll gains. Zillow, an online real-estate service, collects information about home sales and mortgages, and companies such as SpaceKnow are using satellite imagery to track production.

Unlike the sample survey data that currently drive forecasts, these newly available data reflect the real-time behavior of economic actors, revealing previously undetectable shifts in the economy. For example, data on job searches and job postings could be used to predict employment for the following month.

Properly used, new data sources have the potential to revolutionize economic forecasts. In the past, predictions have had to extrapolate from a few unreliable data points. In the age of Big Data, the challenge will lie in carefully filtering and analyzing large amounts of information. It will not be enough simply to gather data; in order to yield meaningful predictions, the data must be placed in an analytical framework.

The Fed may have blundered in releasing its data ahead of schedule. But its mistake offers us an important opportunity. In order to improve economic predictions, economists must be encouraged to seek new sources of data and develop new forecasting models. As we learn how to harness the power of big data, our chances of predicting – and perhaps even preventing – the next recession will improve.

Tara M. Sinclair, Chief Economist at Indeed, is a professor of economics at George Washington University.

ONU Septiembre-2015... Jubilarse ó renovarse para el siglo XXI

The UN at 70

AUG 21, 2015

NEW YORK –The United Nations will mark its 70th anniversary when world leaders assemble next month at its headquarters in New York. Though there will be plenty of fanfare, it will inadequately reflect the UN’s value, not only as the most important political innovation of the twentieth century, but also as the best bargain on the planet. But if the UN is to continue to fulfill its unique and vital global role in the twenty-first century, it must be upgraded in three key ways.

Fortunately, there is plenty to motivate world leaders to do what it takes. Indeed, the UN has had two major recent triumphs, with two more on the way before the end of this year. 

The first triumph is the nuclear agreement with Iran. Sometimes misinterpreted as an agreement between Iran and the United States, the accord is in fact between Iran and the UN, represented by the five permanent members of the Security Council (China, France, Russia, the United Kingdom, and the US), plus Germany. An Iranian diplomat, in explaining why his country will scrupulously honor the agreement, made the point vividly: “Do you really think that Iran would dare to cheat on the very five UN Security Council permanent members that can seal our country’s fate?” 

The second big triumph is the successful conclusion, after 15 years, of the Millennium Development Goals, which have underpinned the largest, longest, and most effective global poverty-reduction effort ever undertaken. Two UN Secretaries-General have overseen the MDGs: Kofi Annan, who introduced them in 2000, and Ban Ki-moon, who, since succeeding Annan at the start of 2007, has led vigorously and effectively to achieve them.

The MDGs have engendered impressive progress in poverty reduction, public health, school enrollment, gender equality in education, and other areas. Since 1990 (the reference date for the targets), the global rate of extreme poverty has been reduced by well over half – more than fulfilling the agenda’s number one goal.

Inspired by the MDGs’ success, the UN’s member countries are set to adopt the Sustainable Development Goals (SDGs) – which will aim to end extreme poverty in all its forms everywhere, narrow inequalities, and ensure environmental sustainability by 2030 – next month. This, the UN’s third triumph of 2015, could help to bring about the fourth: a global agreement on climate control, under the auspices of the UN Framework Convention on Climate Change, in Paris in December.

The precise value of the peace, poverty reduction, and environmental cooperation made possible by the UN is incalculable. If we were to put it in monetary terms, however, we might estimate their value at trillions of dollars per year – at least a few percent of the world economy’s annual GDP of $100 trillion.

Yet spending on all UN bodies and activities – from the Secretariat and the Security Council to peacekeeping operations, emergency responses to epidemics, and humanitarian operations for natural disasters, famines, and refugees – totaled roughly $45 billion in 2013, roughly $6 per person on the planet. That is not just a bargain; it is a significant underinvestment. Given the rapidly growing need for global cooperation, the UN simply cannot get by on its current budget.

Given this, the first reform that I would suggest is an increase in funding, with high-income countries contributing at least $40 per capita annually, upper middle-income countries giving $8, lower-middle-income countries $2, and low-income countries $1. With these contributions – which amount to roughly 0.1% of the group’s average per capita income – the UN would have about $75 billion annually with which to strengthen the quality and reach of vital programs, beginning with those needed to achieve the SDGs. Once the world is on a robust path to achieve the SDGs, the need for, say, peacekeeping and emergency-relief operations should decline as conflicts diminish in number and scale, and natural disasters are better prevented or anticipated.

This brings us to the second major area of reform: ensuring that the UN is fit for the new age of sustainable development. Specifically, the UN needs to strengthen its expertise in areas such as ocean health, renewable energy systems, urban design, disease control, technological innovation, public-private partnerships, and peaceful cultural cooperation. Some UN programs should be merged or closed, while other new SDG-related UN programs should be created.

The third major reform imperative is the UN’s governance, starting with the Security Council, the composition of which no longer reflects global geopolitical realities. Indeed, the Western Europe and Other Group (WEOG) now accounts for three of the five permanent members (France, the United Kingdom, and the US). That leaves only one permanent position for the Eastern European Group (Russia), one for the Asia-Pacific Group (China), and none for Africa or Latin America.

The rotating seats on the Security Council do not adequately restore regional balance. Even with two of the ten rotating Security Council seats, the Asia-Pacific region is still massively under-represented. The Asia-Pacific region accounts for roughly 55% of the world’s population and 44% of its annual income but has just 20% (three out of 15) of the seats on the Security Council.

Asia’s inadequate representation poses a serious threat to the UN’s legitimacy, which will only increase as the world’s most dynamic and populous region assumes an increasingly important global role. One possible way to resolve the problem would be to add at least four Asian seats: one permanent seat for India, one shared by Japan and South Korea (perhaps in a two-year, one-year rotation), one for the ASEAN countries (representing the group as a single constituency), and a fourth rotating among the other Asian countries.

As the UN enters its eighth decade, it continues to inspire humanity. The Universal Declaration of Human Rights remains the world’s moral charter, and the SDGs promise to provide new guideposts for global development cooperation. Yet the UN’s ability to continue to fulfill its vast potential in a new and challenging century requires its member states to commit to support the organization with the resources, political backing, and reforms that this new era demands.

Jeffrey D. Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.

Bonos indexados al PIB... ¿solución para Europa?: "De cada cual según su capacidad, a cada cual según su necesidad"

A New Approach to Eurozone Sovereign Debt

 AUG 17, 2015

ATHENS – Greece’s public debt has been put back on Europe’s agenda. Indeed, this was perhaps the Greek government’s main achievement during its agonizing five-month standoff with its creditors. After years of “extend and pretend,” today almost everyone agrees that debt restructuring is essential. Most important, this is true not just for Greece.

In February, I presented to the Eurogroup (which convenes the finance ministers of eurozone member states) a menu of options, including GDP-indexed bonds, which Charles Goodhart recently endorsed in the Financial Times, perpetual bonds to settle the legacy debt on the European Central Bank’s books, and so forth. One hopes that the ground is now better prepared for such proposals to take root, before Greece sinks further into the quicksand of insolvency.

But the more interesting question is what all of this means for the eurozone as a whole. The prescient calls from Joseph Stiglitz, Jeffrey Sachs, and many others for a different approach to sovereign debt in general need to be modified to fit the particular characteristics of the eurozone’s crisis.

The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times. Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need.

One such rule is the Maastricht Treaty’s cap on member states’ public debt at 60% of GDP. Another is the treaty’s “no bailout” clause. Most member states, including Germany, have violated the first rule, surreptitiously or not, while for several the second rule has been overwhelmed by expensive financing packages.

The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union. When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse.

Here, then, is an idea (part of A Modest Proposal for Resolving the Euro Crisis, co-authored by Stuart Holland, and James K. Galbraith) aimed at re-calibrating the rules, enhancing their spirit, and addressing the underlying economic problem.

In brief, the ECB could announce tomorrow morning that, henceforth, it will undertake a debt-conversion program for any member state that wishes to participate. The ECB will service (as opposed to purchase) a portion of every maturing government bond corresponding to the percentage of the member state’s public debt that is allowed by the Maastricht rules. Thus, in the case of member states with debt-to-GDP ratios of, say, 120% and 90%, the ECB would service, respectively, 50% and 66.7% of every maturing government bond.

To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state. Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond.

The member state would then be legally obliged to make deposits into that account to cover the ECB bonds’ coupons and principal. Moreover, the member state’s liability to the ECB would enjoy super-seniority status and be insured by the European Stability Mechanism against the risk of a hard default.

Such a debt-conversion program would offer five benefits. For starters, unlike the ECB’s current quantitative easing, it would involve no debt monetization. Thus, it would run no risk of inflating asset price bubbles.

Second, the program would cause a large drop in the eurozone’s aggregate interest payments. The Maastricht-compliant part of its members’ sovereign debt would be restructured with longer maturities (equal to the maturity of the ECB bonds) and at the ultra-low interest rates that only the ECB can fetch in international capital markets.

Third, Germany’s long-term interest rates would be unaffected, because Germany would neither be guaranteeing the debt-conversion scheme nor backing the ECB’s bond issues.

Fourth, the spirit of the Maastricht rule on public debt would be reinforced, and moral hazard would be reduced. After all, the program would boost significantly the interest-rate spread between Maastricht-compliant debt and the debt that remains in the member states’ hands (which they previously were not permitted to accumulate).

Finally, GDP-indexed bonds and other tools for dealing sensibly with unsustainable debt could be applied exclusively to member states’ debt not covered by the program and in line with international best practices for sovereign-debt management.

The obvious solution to the euro crisis would be a federal solution. But federation has been made less, not more, likely by a crisis that tragically set one proud nation against another.

Indeed, any political union that the Eurogroup would endorse today would be disciplinarian and ineffective. Meanwhile, the debt restructuring for which the eurozone – not just Greece – is crying out is unlikely to be politically acceptable in the current climate.

But there are ways in which debt could be sensibly restructured without any cost to taxpayers and in a manner that brings Europeans closer together. One such step is the debt-conversion program proposed here. Taking it would help to heal Europe’s wounds and clear the ground for the debate that the European Union needs about the kind of political union that Europeans deserve.

Yanis Varoufakis, a former finance minister of Greece

¿Mi Internet?, ¿Tú Internet? No, Internet. El Sistema (Antigüo Régimen) nos está retrasando.

Reassessing the Internet of Things

 

 AUG 6, 2015

SAN FRANCISCO – Nearly 30 years ago, the economists Robert Solow and Stephen Roach caused a stir when they pointed out that, for all the billions of dollars being invested in information technology, there was no evidence of a payoff in productivity. Businesses were buying tens of millions of computers every year, and Microsoft had just gone public, netting Bill Gates his first billion. And yet, in what came to be known as the productivity paradox, national statistics showed that not only was productivity growth not accelerating; it was actually slowing down. “You can see the computer age everywhere,” quipped Solow, “but in the productivity statistics.”

Today, we seem to be at a similar historical moment with a new innovation: the much-hyped Internet of Things – the linking of machines and objects to digital networks. Sensors, tags, and other connected gadgets mean that the physical world can now be digitized, monitored, measured, and optimized. As with computers before, the possibilities seem endless, the predictions have been extravagant – and the data have yet to show a surge in productivity.

A year ago, research firm Gartner put the Internet of Things at the peak of its Hype Cycle of emerging technologies.

As more doubts about the Internet of Things productivity revolution are voiced, it is useful to recall what happened when Solow and Roach identified the original computer productivity paradox. For starters, it is important to note that business leaders largely ignored the productivity paradox, insisting that they were seeing improvements in the quality and speed of operations and decision-making. Investment in information and communications technology continued to grow, even in the absence of macroeconomic proof of its returns.

That turned out to be the right response. By the late 1990s, the economists Erik Brynjolfsson and Lorin Hitt had disproved the productivity paradox, uncovering problems in the way service-sector productivity was measured and, more important, noting that there was generally a long lag between technology investments and productivity gains.

Our own research at the time found a large jump in productivity in the late 1990s, driven largely by efficiencies made possible by earlier investments in information technology. These gains were visible in several sectors, including retail, wholesale trade, financial services, and the computer industry itself. The greatest productivity improvements were not the result of information technology on its own, but by its combination with process changes and organizational and managerial innovations.

Our latest research, The Internet of Things: Mapping the Value Beyond the Hype, indicates that a similar cycle could repeat itself. We predict that as the Internet of Things transforms factories, homes, and cities, it will yield greater economic value than even the hype suggests. By 2025, according to our estimates, the economic impact will reach $3.9-$11.1 trillion per year, equivalent to roughly 11% of world GDP. In the meantime, however, we are likely to see another productivity paradox; the gains from changes in the way businesses operate will take time to be detected at the macroeconomic level.

One major factor likely to delay the productivity payoff will be the need to achieve interoperability. Sensors on cars can deliver immediate gains by monitoring the engine, cutting maintenance costs, and extending the life of the vehicle. But even greater gains can be made by connecting the sensors to traffic monitoring systems, thereby cutting travel time for thousands of motorists, saving energy, and reducing pollution. However, this will first require auto manufacturers, transit operators, and engineers to collaborate on traffic-management technologies and protocols.

Indeed, we estimate that 40% of the potential economic value of the Internet of Things will depend on interoperability. Yet some of the basic building blocks for interoperability are still missing. Two-thirds of the things that could be connected do not use standard Internet Protocol networks.

Other barriers standing in the way of capturing the full potential of the Internet of Things include the need for privacy and security protections and long investment cycles in areas such as infrastructure, where it could take many years to retrofit legacy assets. The cybersecurity challenges are particularly vexing, as the Internet of Things increases the opportunities for attack and amplifies the consequences of any breach.

But, as in the 1980s, the biggest hurdles for achieving the full potential of the new technology will be organizational. Some of the productivity gains from the Internet of Things will result from the use of data to guide changes in processes and develop new business models. Today, little of the data being collected by the Internet of Things is being used, and it is being applied only in basic ways – detecting anomalies in the performance of machines, for example.

It could be a while before such data are routinely used to optimize processes, make predictions, or inform decision-making the uses that lead to efficiencies and innovations. But it will happen. And, just as with the adoption of information technology, the first companies to master the Internet of Things are likely to lock in significant advantages, putting them far ahead of competitors by the time the significance of the change is obvious to everyone.

Martin Neil Baily is Chair in Economic Policy Development and Senior Fellow and Director of the Business and Public Policy Initiative at the Brookings Institution.

James Manyika is a director of the McKinsey Global Institute (MGI), McKinsey & Company’s business and economics research arm, and a non-resident fellow at the Brookings Institution.

EUROPA, esperando a Godot

We the People of Europe

AUG 11, 2015

 

FLORENCE – Europeans who are eager to revive the continent’s unification process have recently turned their attention to the founding of the United States. Many, however, reject the US precedent on the grounds that today’s problems are too dissimilar from those encountered then. Others, who accept that federalist principles might be well suited to addressing the problems of a European common market, despair that the “European people” who could bring about this new political structure are missing.

But there are striking parallels between America’s founding years and the European Union’s ongoing political and economic crisis. In fact, the creation of the US Constitution and the birth of the American people offer reasons to hope that some of the most difficult issues facing Europe can one day be resolved.

The years following the American War of Independence were difficult. Under the Articles of Confederation, the 13 former British colonies had created a common market, with common institutions, including a central bank. Nevertheless, they spent a great deal of time squabbling over fiscal policies, in disagreements between creditors and debtors, and fights over the currency. Schisms emerged between northern and southern states, and between smaller and larger ones. It seemed as if the young country was on the verge of tearing itself apart.

In the 1780s, a small group of American political leaders completely reframed these problems. Their key insight is as relevant in Europe today as it was in the US then. The problems facing the country were not the result of politicians acting in bad faith or of an ill-informed or ignorant citizenry; they were a direct consequence of an ill-suited political structure.

Under the Articles of Confederation – as in the EU today – all politics was truly local. Individual states held elections for their officials, but there were no elected officials (or parties) who ran on platforms and programs that transcended the boundaries of the sovereign state units. What leaders like Alexander Hamilton, John Jay, James Madison, and George Washington understood was that this structure rewarded parochialism and provincialism at the expense of the “national interest” – the shared interests of the union’s member states.

Addressing these problems, the drafters of the US Constitution proposed the creation of a national government accountable to the people of the US, empowered to attend to the interests of the entire union and to mediate conflicts among member states. To do so, they rooted the sovereignty of the US in its people – a truly novel concept.

But, having located national sovereignty in “the people,” they did not insist on a single principle of sovereignty. Instead, they invented the idea of shared sovereignty – the system of federalism that allows for multiple levels of government and for local, state, regional, and national loyalties to coincide, rather than compete.

To be sure, no one is proposing that the EU simply copy the US Constitution. But the principles developed by its drafters have clear relevance for those attempting to resolve the challenges confronting Europe today.

The conflict between Greece and its creditors has highlighted the mismatch between an ever-more-integrated continental economy and a European political structure built primarily around the interests of sovereign states. In the absence of a transnational government with the incentive, legitimacy, and capacity to resolve the conflict, Greece and the other eurozone countries have resorted to challenging each other’s sovereignty.

Greece first tried and failed to use a referendum to impose its preferences on its creditors, which then used their superior leverage to render the referendum’s outcome moot. According to the most recent deal between the two sides, the Greek government must seek its creditors’ approval on all relevant draft legislation before seeking public consultation or even submitting it to its own parliament.

Open almost any European newspaper, and you will find criticisms of ministers and politicians on all sides in the Greek crisis. But, as in the early years of the US, the problem lies not with the quality of Europe’s politicians, but with the EU’s political structure. As long as no politicians or parties offer programs that compete for votes in Germany and in Greece, in Finland and in France, and across the European continent, future crises are inevitable. What Europe needs are European politicians.

Some might argue that an appeal to create a European national government in the middle of the current turmoil is unrealistic. Others might insist on waiting for the emergence of a European identity before devising ways to create a single European polity. But here, too, early American history provides a reason to ignore the doubters.

The first words of the US Constitution are, “We the People of the United States.” And yet, in his book The Quartet: Orchestrating the Second American Revolution, the American historian Joseph J. Ellis points out that at the time that phrase was written, few in the country had a strong American identity. The vast majority of the country’s citizens had lived their lives within a 30-mile radius of where they were born; their political attachments, if they had any, were to their state – not to the union.

It took the creation of a national government to change that. The US Constitution may have been rooted in “the People of the United States,” but it was only after it was drafted that those people came to think of themselves that way.

It is difficult today to know how much support in Europe – with its schisms, suspicions, and passions – could be mustered for a document starting with the words, “We the People of Europe.” But the situation on the continent is no worse than that of the US in the 1780s. It took bold political action to change the course of history and give birth to a new and stable union. Europe requires no less today.

Laszlo Bruszt is Professor of Sociology and Head of the Department of Political and Social Sciences at the European University Institute in Florence.

David Stark is Professor of Sociology at Columbia University.