Panel discusses transition of the global economy

The Economics department sponsored a panel discussion with Economics professors Philip Levine, Olga Shurchkov '01, Eric Hilt, Akila Weerapana, and Joseph Joyce on the transition of the global economy on Monday, Nov. 2. The drastic change in attendance since the previous panel in 2008 reflected the change in the tone of the discourses—from 250 attendees  in 2008 to a little over 60 in 2009.  Levine illustrated the reasons for the decrease with Time magazine covers. The first cover that he displayed was one that grimly recalled the gray shades of a photograph from Black Tuesday and the second, a year later (dated Aug. 3, 2009), with the caption "The Recession is Over!" strewn in bold letters across a hot air balloon. Each speaker characterized the drop in attendance as parallel and appropriate to the decline in the immediate urgency of the situation. Each speaker also, however, addressed a unique aspect of the issue at hand.

Shurchkov opened the panel with a summary of the current state of the U.S. economy and the reasons behind it. She noted how excess capacity led real output and productivity to fall by four percent. She then outlined the monetary policy responses to the potential disaster. The Federal Reserve took expansionary measures by lowering the federal funds rate, the rate at which banks can borrow from each other overnight, which boosted investment and consumption. It also purchased securities from the Treasury to lower the interest rate further by increasing the amount of money available to banks. Fiscally, the second round of the stimulus, the American Recovery and Investment Act passed on Feb. 17, 2009, was successful in creating jobs and granting tax cuts. Nonetheless, Shurchkov did not paint a rosy picture of total recovery, describing it as U-shaped. "The recovery will be slow, with high unemployment, but will be moving in the right direction," Shurchkov said.

Hilt spoke next, addressing "Panics, Politics, and Financial Reform." He briefly recapped early financial crises, specifically those in 1907 and 1929, and then drew comparisons between these past cases and the present situation. In each case, investors "borrow[ed] to purchase assets whose value is dubious" and then legislators collaborated to try to force a recovery. Hilt defined the big bailouts and rescues as "justified…but poorly executed" and explains that earlier action and terms less favorable to bankers would have produced better results. He outlined some of the proposals for further reform− new oversight powers, stronger capital requirements and the elimination of regulatory loopholes. He also predicted that they could be the focus for the 2010 congressional elections.  "Other than Osama bin Laden and maybe a couple others, these bankers are the most hated people in America. Pro-populist, anti-bank momentum will play a big factor in the upcoming elections," Hilt said.

Weerapana brought a global perspective to the discussion. In international trade, the United States spent more money abroad than it took in, rendering it vulnerable to an economic slowdown. Since interest rates in the U.S. were kept very low, outside investors looked for a market with high return and found it in the housing sector. When the housing market went bust, global growth contracted greatly between 2007 and 2008.  "GDP growth fell dramatically everywhere," Weerapana said.  To address why East Asian nations, such as China and India, are experiencing a more rapid recovery than the rest of the world, Weerapana discussed reasons such as an aggressive stimulus, zero interest rates and a better starting position. In conclusion, he outlined five lessons for the future: Better commodity surplus management, caution of fixed interest rates, importance of exchange rate regime choice, appropriate level and pace of financial deregulation and a more balanced global economy. "It shouldn't be built like a tower based on the United States," Weerapana said.

Joyce concluded the panel and elaborated upon Weerapana's points. He declared a "new order arising," represented by the expansion of control of the world economy from the G7 to the G20 countries. He emphasized the emergence of growing markets such as Russia, China and India as power players in the years to come and even hypothesized that part of the reason the U.S. maintains such diplomatic relations with China is to borrow from the burgeoning market.