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How Inequality Damages Economies

Economic expansion last longer in regions with more equal income distributions, my IMF colleagues Andy Berg and Jonathan Ostry say in Foreign Affairs. The effect is large. If Latin America, for example, could bridge half of its inequality gap with East Asia, its growth spells would last twice as long as they do now. This work is part of a growing research emphasis at the IMF on the consequences and causes of income inequality. In earlier work, my colleagues and I showed that fiscal austerity leads to greater declines in wages than in profits — see this earlier post and a summary of it in the press.

Economic expansion last longer in regions with more equal income distributions, my IMF colleagues Andy Berg and Jonathan Ostry say in Foreign Affairs. The effect is large. If Latin America, for example, could bridge half of its inequality gap with East Asia, its growth spells would last twice as long as they do now. This work is part of a growing research emphasis at the IMF on the consequences and causes of income inequality.

Read the full article…

Posted by at 8:40 PM

Labels: Inclusive Growth

The Good, the Bad and the Ugly (Boom, Gloom or Doom?): Global GDP Outlook from Ethan Harris

The Economic Cycle Research Institute (ECRI) made a controversial call in September last year: it said a U.S. recession in 2012 was a ‘done deal’. Yesterday, Ethan Harris of BofA/Merrill Lynch was more hedged: he said there was a 40% chance of a U.S. recession but a 50% chance that U.S. growth would be 1.9%. Harris was pretty sure the eurozone was headed for a recession in 2012.

Harris, the co-head of Global Economics Research at BofA/Merrill Lynch, was speaking yesterday to the National Economists Club in Washington, D.C.

Europe: a recession, but how big? Europe is almost certainly going to go into a recession, according to Harris, and this will have an impact on the U.S. economy through banking, trade and confidence channels. For the Eurozone’s 2012 GDP growth, Harris forecast -0.6% with a 50% probability and -2.5% with a probability of 40%.

U.S. Triple Dip: in 2012, look for another soft patch. Harris said the U.S. is facing three shocks in the year ahead.

  •  First, the U.S. will get a downgrade. Neither party has a credible deficit reduction plan. Also, the deficit commission has no chance of success. 
  • Second, there will be an automatic tightening of U.S. fiscal policy. The total of programs expiring in 2012 adds up to US$225 billion (1.4% of GDP). 
  • And third is the post election pothole. He said that the post-election fiscal shocks adds to US$430 billion (2.9% of GDP), this include debt deal part I and II and the expiration of Bush tax cuts. 

Putting all the three shocks together, he forecasts US real GDP growth of 1.9% for 2012 and 1.4% for 2013 (vs. Consensus projections of 2.1% and 2.5%, respectively). On a quarterly basis, he projects a downward path for GDP growth of 1.8% in Q1 and Q2, 1.3% in Q3 and 1% in Q4; this is in sharp contrast to Consensus, which projects an upward path.

Harris also said the housing recession in the U.S. continues, there is way too much inventory. It will take 18 months to clear the home inventory at the current sales pace. He thus projects a recovery in the housing market around the third quarter of 2013. He expects U.S. inflation to fade in the summer. He forecasts core PCE 1.5% for 2012 and 1.3% for 2013 vs. consensus projections of 1.8% for both years.

Meanwhile, ECRI seems to be sticking with its recession call for the U.S. – see the latest on their position here.

The Economic Cycle Research Institute (ECRI) made a controversial call in September last year: it said a U.S. recession in 2012 was a ‘done deal’. Yesterday, Ethan Harris of BofA/Merrill Lynch was more hedged: he said there was a 40% chance of a U.S. recession but a 50% chance that U.S. growth would be 1.9%. Harris was pretty sure the eurozone was headed for a recession in 2012.

Harris,

Read the full article…

Posted by at 1:31 PM

Labels: Forecasting Forum

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