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I just got here, but I know trouble when I see it!

WHAT can we do to get this economy going? That’s the question Ben Bernanke and his colleagues at the Federal Reserve must be asking.

business Updated: Jan 01, 2012 20:25 IST

WHAT can we do to get this economy going? That’s the question Ben Bernanke and his colleagues at the Federal Reserve must be asking.

A crucial question is how quickly the Fed will raise interest rates as the economy recovers. So far, they have said they expect to keep rates “exceptionally low” at least until mid-2013. But policy needs to be contingent on the economy, not the calendar. The more clarity the Fed offers about its contingency plans, the better off we’ll all be in the years ahead.

N. GREGORY MANKIW
Economics professor, Harvard

Two Big Problems

THE US faces two daunting economic problems: an unsustainable long-run budget deficit and persistent high unemployment. Both demand aggressive action.
On the deficit, the big worry is that over the next 20 to 30 years, rising health care costs and the retirement of baby boomers are projected to cause deficits that make the current one look puny. And at the rate we’re going, the US would surely default on its debt one day.

Worse, the longer that people remain out of work, the more likely they are to suffer a permanent loss of skills and withdraw from the labour force.
The evidence that fiscal stimulus raises employment and lowers joblessness is stronger than ever. And pairing a strong stimulus with a plan to reduce the deficit would likely pack a particularly powerful punch for confidence and spending.

Ronald Reagan once said “there are simple answers — there just are not easy ones.” What needs to happen on fiscal policy is relatively straightforward. The hard part is getting politicians to do it.

CHRISTINA D. ROMER
Economics professor, University of California

Clouds Over Europe

HOW, and when, will Europe get out of its mess?

The short answer is this: not anytime soon, and not without more pain. The longer that Europe’s troubles last, the worse and more insidious they become. Insolvent governments, troubled banks, divisive politics, painful austerity — the list of problems is formidable already.

The best-case outlook is that the euro zone will, in effect, grow its way out of this crisis. The European Central Bank is extending unlimited 3-year loans to banks provided they put up collateral. Some of these banks, in turn, are lending to their governments; others may be forced to. In the short run, this will keep euro zone governments funded.

If the economy starts growing again before the loans are due, the central bank’s efforts to fix the Continent’s solvency problems will have succeeded.

There are, however, several darker possibilities. One is that the economies of some major euro zone nations will continue to stagnate. Eventually, the central bank would have to let it be known that it is not expecting its money back. In this case, banks in weak nations would probably be unable to raise funds from the private sector. Some countries would end up abandoning the euro and printing their own currency to keep their promises to bank depositors and bondholders. The consequences could be disastrous, not only for Europe, but for the global economy.

A second danger would arise in Europe if an election gave rise to a government that repudiated the euro. Then, too, all bets would be off.

My guess — and guess is the right word — is that odds of this ending well are about one in three. Otherwise, fasten your seat belts.

TYLER COWEN
Economics
professor,
George Mason University.

WHY do many middle-class families now struggle to get by on even two paychecks?

The answer is that many second paychecks today go toward financing a largely fruitless bidding war for homes in good school districts. If the best schools tend to be those serving expensive neighbourhoods, parents must outbid 50% of other parents with the same goal to send their children to a school of average quality.

Since 1970, the top 1% have captured most of the income growth in the nation. Like everyone else, the rich spend more on housing when they have more money. High-end houses become bigger and fancier. That shifts the frame of reference for so on down the income ladder. The median new house built in the US in 2007 was about 50% larger than its counterpart in 1970.

Growing income disparities also raise the cost of basic goals.

ROBERT H FRANK
Economics professor, Johnson Graduate
School of Management,
Cornell University.