Professor Christian T. Lundblad May flagler.unc.edu/faculty/lundblac/ The U.S. & Global Economy: Navigating the New Normal 2013 CAHEC Partners Conference

Where are we now? Economic Output, Employment and Inflation Monetary & Fiscal Policy External Balance & Globalization Headwinds going forward… © Prof. Christian T. Lundblad

Where are we now? Slow recovery… © Prof. Christian T. Lundblad

Immediate Challenges: © Prof. Christian T. Lundblad

Where are we now? The Great Recession…. still… © Prof. Christian T. Lundblad

European Unemployment © Prof. Christian T. Lundblad

Where are we now? The Great Recession…. still… © Prof. Christian T. Lundblad

Youth Unemployment is a Particular Policy Concern © Prof. Christian T. Lundblad McKinsey.com

Structural Unemployment In the U.S., housing remains an issue Firms face elevated uncertainty and frictions Headwinds: Unemployment © Prof. Christian T. Lundblad

Headwinds: Unemployment McKinsey.com These are not coming back in the same way Serious questions about structural unemployment © Prof. Christian T. Lundblad

Headwinds: Unemployment “The Great Mismatch” © Prof. Christian T. Lundblad

Labor Adjustments…? Unemployment by States September 2012 Bls.gov © Prof. Christian T. Lundblad

Together, … Excess Capacity in the U.S. Source: CBO © Prof. Christian T. Lundblad

Together, … Excess Capacity in the Europe. © Prof. Christian T. Lundblad

Financial Crises and Recessions Around the World Downturns, while painful, are usually relatively brief © Prof. Christian T. Lundblad

Additional Contraction? Despite all this, the baseline forecast (still) does not call for a so-called “double-dip” Forecast Risks: (1) U.S. fiscal drag (2) Euro-area contagion (3) Global political instability At best, will likely have more of the same for (2% GDP growth) The efficacy of active policy is necessarily limited in the face of these broader challenges.

Macroeconomic Policy Macroeconomic policy broadly describes the main levers that are available to the government to stimulate or re-direct economic activity  Fiscal & Monetary policy  Much of modern macroeconomic policy attempts to limit excess capacity (e.g. keep the economy at full employment) © Prof. Christian T. Lundblad

Fiscal Policy = Deficit Spending © Prof. Christian T. Lundblad

Monetary Policy = Interest Rate (through ?) © Prof. Christian T. Lundblad

Non-traditional Monetary Stimulus (QE) © Prof. Christian T. Lundblad

Road to Recovery The U.S. (and global) economy will not see a healthy recovery until significant long-run imbalances are rectified. This will take some time. In fact, a return to 2005 is undesirable. Active policies will struggle in the face of these rebalancing dynamics. © Prof. Christian T. Lundblad

Challenge #1: The U.S. Consumer The days of excess consumption are over; where is the engine of the global economy? This raises particular challenges for exporting nations. Consumer-oriented U.S. and global businesses will continue to struggle. © Prof. Christian T. Lundblad

Challenge #1: Excess U.S. Consumption is Over © Prof. Christian T. Lundblad

GDP by Expenditure in the U.S. (% of GDP) © Prof. Christian T. Lundblad

Challenge #2: The Trade Imbalance © Prof. Christian T. Lundblad

Challenge #3 Fiscal Austerity The United States

Demographic Shifts © Prof. Christian T. Lundblad

Federal Reserve Corollary to #2 and #3: Foreign Holdings of U.S. Treasuries © Prof. Christian T. Lundblad

Challenge #4: Finally, Globalization & Inequality © Prof. Christian T. Lundblad

Income inequality in the U.S. (and globally) has unambiguously widened Challenge #4: Finally, Globalization & Inequality © Prof. Christian T. Lundblad

Road to Recovery… Final Thoughts We are slowly recovering. We must also acknowledge that the global economic landscape is changing. The U.S. needs to establish a sustainable balance with the rest of the world. Emerging countries, including China, must significantly re- allocate resources This does not call for protectionism. We need not fear the future, but it will be different. Households, firms, and governments need to prepare for an altered playbook. © Prof. Christian T. Lundblad

Partnerships & Engagement: The good news is that opportunities are plentiful (but this requires greater global engagement). The engine of global economic growth increasingly resides in the emerging world (but important changes are required). Competition… –Math & science education –Renewed commitment to technological innovation –Fostering entrepreneurial spirit and risk-taking Road to Recovery… Final Thoughts © Prof. Christian T. Lundblad