Tag: Laura Tyson

Must-Read: Laura Tyson and Eric Labaye: Jumpstarting Europe’s Economy

Posted on by Brad DeLong

Must-Read: Laura Tyson and Eric Labaye: Jumpstarting Europe’s Economy: “Not so long ago… ‘helicopter money’… seemed outlandish…

…But today a surprising number of mainstream economists and centrist politicians are endorsing the idea of monetary financing of stimulus measures in different forms…. After years of stagnant growth and debilitating unemployment, all options, no matter how unconventional, should be on the table…. The United Kingdom’s referendum decision to leave the European Union only strengthens the case for more stimulus and unconventional measures in Europe. If a large majority of EU citizens is to support continued political integration, strong economic growth is critical…. The wave of corporate investment that was supposed to be unleashed by a combination of fiscal restraint (to rein in government debt) and monetary easing (to generate ultra-low interest rates) has never materialized. Instead, European companies slashed annual investment by more than €100 billion ($113 billion) a year from 2008 to 2015, and have stockpiled some €700 billion of cash on their balance sheets.
This is not surprising–businesses invest when they are confident about future demand and output growth….

Proponents of helicopter money… rightly argue that it has the advantage of putting money directly into the hands of those who will spend it…. The boost to demand might give central banks the opening they need to move interest rates back toward historical norms. This could take the air out of incipient asset bubbles that might be forming…. A less risky and time-tested route for stimulating demand would be a significant increase in public infrastructure investment funded by government debt…. Yet governments across Europe have clamped down on infrastructure spending for years, giving precedence to fiscal austerity and debt reduction in the misguided belief that government borrowing crowds out private investment and reduces growth. But the crowding-out logic applies only to conditions of full employment, conditions that clearly do not exist in most of Europe today…

Must-Read: Laura Tyson and James Manyika: Putting Profits in Perspective

Posted on by Brad DeLong

Must-Read: Laura Tyson and James Manyika: Putting Profits in Perspective: “Corporate profits may be near all-time highs…

but their variance among firms and industries has also increased significantly. The most profitable firms in the US are… in sectors that capitalize on research and development, brands, software, and algorithms. Companies in sectors like pharmaceuticals, media, finance, information technology, and business services have the highest profit margins… excluding finance, these sectors’ share of US corporate profits has increased significantly, from 25% in 1999 to 35% in 2013…. In the most digitally advanced sectors of the economy, margins have grown 2-3 times faster than average. And even within these sectors, there are enormous spreads between the top-performing companies and the rest of the pack. The ‘winner-take-most’ dynamic of the digital economy is not only producing record profits for leading firms; it may be accelerating the pace of innovation and broadening the areas in which companies can enter and quickly establish market power…

Must-read: Laura Tyson: “Closing the Investment Gap”

Posted on by Brad DeLong

Must-Read: Investment has been weak because demand growth has been weak–and because the residential-investment credit channel broke in 2007, and neither Barack Obama nor Tim Geithner nor Jack Lew nor Ed de Marco nor Mel Watt nor any congressional coalition has taken any steps to fix it.

This is a very important channel for “hysteresis”–especially if, like me, you believe in powerful external benefits from investment, especially equipment investment:

Laura Tyson: Closing the Investment Gap: “BERKELEY – The weakness of private investment in the United States and other advanced economies is… worrisome… perplexing…

…Through 2014, private investment declined by an average of 25% compared to pre-crisis trends.
The shortfall in investment has been deep and broad-based, affecting not only residential investment but also investment in equipment and structures. Business investment remains significantly below pre-2008 expectations, and has been hit hard again in the US during the last year by the collapse of energy-sector investment in response to the steep drop in oil prices….

The investment shortfall in the US coincides with a strong rebound in returns to capital. By one measure, returns to private capital are now at a higher point than any time in recent decades. But extensive empirical research confirms that at the macro level, business investment depends primarily on expected future demand and output growth, not on current returns or retained earnings. According to the IMF, this ‘accelerator’ theory of investment explains most of the weakness of business investment in the developed economies since the 2008 crisis. In accordance with this explanation, investment growth in the US has been in line with its usual historical relationship with output growth. In short, private investment growth has been weak primarily because the pace of recovery has been anemic….

As the accelerator theory of investment would predict, much R&D investment is occurring in technology-intensive sectors where current and future expected demand has been strong. There is also evidence that the distribution of returns to capital is becoming increasingly skewed toward these sectors…