Economics 1490 THE WORLD ECONOMY: GROWTH OR STAGNATION? with Professor Dale W. Jorgenson Lecture 1. September 4, 2018 COURSE DESCRIPTION Harvard University Department of Economics Fall 2018

ENROLLMENT INFORMATION Are you ready to take this course? Send these 3 items to Trina Ott at ott@fas.Harvard.edu: Resume Unofficial transcript Completed information sheet (available here or on the course website) Professor Jorgenson will begin reviewing these files at 5 p.m. on Tuesday, Sept. 4. Enrollment in this course is limited. Students will begin being notified of permission to enroll on Wednesday, Sept. 5. Be prepared to respond promptly and add the course, as we work through the waitlist throughout the week. Harvard University Department of Economics Fall 2018

THE WORLD ECONOMY: GROWTH OR STAGNATION?

TRANSFORMATION OF THE WORLD ECONOMY World Economic Growth Has Accelerated since 1995. Will More Rapid Growth Continue or Will Slower Growth of the Advanced Economies Lead to Stagnation? The Balance of World Economic Growth Has Shifted from the Advanced Economies of the G7, Such as the U.S. and Japan, to the Emerging Economics, Especially China and India. The Transformation of the World Economy Has Led to a New Economic Order, Led by China, the U.S., India, and Japan.

THE WORLD ECONOMY: GROWTH OR STAGNATION? A. Comparing Economies B. U.S. Crisis and Recovery C. European Slowdown D. Asian Economic Miracles E. Sustainability of Economic Growth F. World Economic Outlook

A. COMPARING ECONOMIES 1. Course Description 2. The World Economy since 1990 3. Purchasing Power Parities 4. Sources of Growth 5. Globalization and Competitiveness

THE SOURCES OF ECONOMIC GROWTH Comparisons among Regions and Countries Sources of Growth in Capital Input Information Technology and Non-Information Technology Labor Input and Labor Quality Total Factor Productivity

MODEL OF PRODUCTION: Production Possibility Frontier. where: I - Investment C – Consumption K – Capital L – Labor A - Total Factor Productivity (TFP)

SOURCES OF WORLD ECONOMIC GROWTH Average annual growth rates, weighted by the income share

B. U.S. CRISIS AND RECOVERY 6. U.S. Financial Crisis 7. Monetary Policy  8. Financial Regulation 9. Fiscal Policy  10. Secular Stagnation

TIMELINE OF THE FINANCIAL CRISIS IN 2008 March 14: Federal Reserve Provides Financial Backing to JPMorgan Chase's Purchase of Bear Stearns. September 7: Federal Government Bails Out Fannie Mae and Freddie Mac. September 12: Treasury Secretary Hank Paulson States That No Government Money Can Be Used in Any Rescue. September 13: Barclay's Purchase of Lehman Vetoed by British Regulators. September 15: Lehman Brothers Bankruptcy. September 16: Fed Announces $85 Billion Bailout of AIG. October 3: Congress Passes Troubled Asset Relief Program. October 14: TARP Equity Program Announced by the Treasury.

MONETARY POLICY Profile from Bernanke's Harvard facebook page in 1971

FINANCIAL REGULATION DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT OF 2010 Re-organized Regulatory Agencies to Elimination Overlapping Jurisdictions. Undertook Comprehensive Regulation of Financial Markets. Provided a Resolution Mechanism for Insolvent Financial Institutions. Greatly Extended Consumer Protection.

FISCAL POLICY

SECULAR DEFICIENCY OF AGGREGATE DEMAND SECULAR STAGNATION SECULAR DEFICIENCY OF AGGREGATE DEMAND The key to understanding this situation lies in the concept of secular stagnation [5], first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates. When significant growth is achieved, meanwhile—as in the United States between 2003 and 2007—it comes from dangerous levels of borrowing that translate excess savings into unsustainable levels of investment (which in this case emerged as a housing bubble). Larry Summers

C. EUROPEAN SLOWDOWN 11. U.S. Growth Resurgence  12. Global Trade Slowdown  13. Europe 2020 and the Single Market  14. European Policy Response: The Euro  15. European Policy Response: Brexit

AND THE EUROPEAN SLOWDOWN U.S. GROWTH RESURGENCE AND THE EUROPEAN SLOWDOWN

GLOBAL TRADE SLOWDOWN THE FRAGMENTATION OF TRADE The Domestic Share of GVC Income Has Declined and the Global Share Has Increased. Emerging Economies Have Increased Their Share of GVC Income, Relative to Advanced Economies. The Share of Capital in GVC Income Has Increased Relative to the Share of Labor. The Collapse of Trade in 2009, the Peak of the Crisis, Was Quickly Reversed in 2010.

EUROPE 2020 AND THE SINGLE MARKET A NEW STRATEGY FOR THE SINGLE MARKET “The services sectors are crucially important for our economies. They account for 70% of GDP, they are the most important source of foreign direct investment, and they are the only sector of net job creation in the EU. Nevertheless, services markets remain strongly fragmented with only 20% of the services provided in the EU having a cross-border dimension. As a result, the productivity gap between the US and the Euro area remains much wider than acceptable (about 30%).” Mario Monti, 2010

EUROPEAN POLICY RESPONSE: THE EURO RECOVERY IN EUROPE Recovery from the Second Recession Has Been Slow and Limited So Far to Exports. Europe Is Developing a New Framework for Financial Regulation. A Fiscal Union Has Been Discussed, but Little Progress Has Been Made. Structural Reforms Like a Single Market in Services Appear to Be on Hold.

D. ASIAN ECONOMIC MIRACLES 16. Is Asia’s Miracle a Myth?  17. Reviving Japanese Economic Growth 18. The Rise of Developing Asia 19. China: The World’s Largest Economy 20. India: The Most Rapidly Growing Economy

IS ASIA’S MIRACLE A MYTH? KRUGMAN: 1994, 2005, and 2013 Paul Krugman, “The Myth of Asian Miracles,” Foreign Affairs, November-December 1994: “From the perspective of the year 2010, current projections of Asian supremacy extrapolated from recent trends may well look as silly as 1960s-vintage forecasts of Soviet industrial supremacy did in from the perspective of the Brezhnev years.” Paul Krugman Blog, New York Times, October 31, 2005: “[I]n the mid-1990’s I made some modestly pessimistic predictions about Asia back when everyone else was wildly optimistic. When a terrible financial crisis struck, people said I had been proved right. My response was that I had been 90 percent wrong, it’s just that everyone else had been 150 percent wrong.”

“Hitting China’s Wall,” PAUL KRUGMAN 2013 Paul Krugman, “Hitting China’s Wall,” New York Times, July 18, 2013: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.

THE ASIAN MODEL OF ECONOMIC GROWTH Just as predicted by the neo-classical model, growth rates have declined and are approaching a long-run equilibrium determined by growth of population and the Harrod-neutral productivity growth rate. Japan entered this phase around 1973; the Four Tigers entered at various times, beginning around 1980. China is about to enter this phase and India’s growth rate was still rising in 2010. We will have to address the issue of whether India will be following the Asian model outlined by Alwyn Young or will fall short through deficient factor accumulation. For this purpose we need growth accounts that are comparable to other Asian countries.

E. SUSTAINABILITY OF ECONOMIC GROWTH 21. Demographic Projections  22. Investing in Human Capital 23. Fiscal Sustainability 24. Environmental Sustainability 25. Ending Extreme Poverty