Periodically, the BBC hosts debates on major global topics. The following links are to the January 2011 debate on the state of the world economy and on what policies governments and central banks should pursue.
Should governments be boosting aggregate demand by raising government expenditure and cutting taxes in order to stimulate growth and plan to bring down deficits over the long term once growth is established? Or should they embark on tough fiscal consolidation now by cutting government expenditure and/or raising taxes in order to stimulate confidence by international financiers, thereby keeping long-term interest rates down and creating the foundations for sustainable economic growth? The debate considers these two very different policy approaches.
The participants in the debate are Joseph Stiglitz (Professor of Economics, Columbia University), Christina Romer (Professor of Economics, University of California, Berkeley and Adviser to Barack Obama (2009–10)), George Papaconstantinou (Finance Minister of Greece), Dominique Strauss-Khan (Managing Director, IMF) and Zhou Xiaochuan (Governor, Chinese Central Bank). The debate is in five separate webcasts.
Webcasts
World debate on the global economy BBC World Service (20/1/11)
Part 1
Part 2
Part 3
Part 4
Part 5
Questions
- What are the arguments for maintaining economic stimulus, at least for the time being? What are the relative merits of fiscal and monetary stimulus? Explain whether such policies are consistent with Keynesian polcies.
- What are the arguments for tough fiscal consolidation? Explain whether such policies are consistent with new classical policies.
- How successful have US policies been in stimulating the US economy?
- What role can China play in the recovery and long-term growth of the global economy and are there any imbalances that need correcting?
- Why might countries’ domestic policies result in currency wars? Is currency realignment necessary for sustained global growth?
- How important are consumer and business confidence to short-term recovery and long-term growth and to what extent do government policies respond to swings in confidence?
Business leaders and politicians pay a great deal of attention to economic forecasts. And yet these forecasts often turn out to be quite wrong. Very few economists predicted the banking crisis of 2008 and the subsequent credit crunch and recession. And the recently released 2010 Q4 growth figures for the UK economy, which showed a decline in real GDP of 0.5%, took most people by surprise.
What is more, forecasters often disagree. If, for example, you look at the forecasts made by various panel members for Consensus Forecasts, you can see the divergence between their various predictions.
So why is economic forecasting so unreliable? Is it the fault of economic models? Or are there too many unpredictable factors that can impact on economies – factors such as business and consumer confidence, or political events, or natural disasters, such as the recent floods in Australia, South Africa and Brazil? Will economic forecasting always be a very inexact science?
Articles
Davos 2011: Why do economists get it so wrong? BBC News, Tim Weber (27/1/11)
Popular Semi-Science Slate, Robert J. Shiller (24/1/11)
Fed Often Gets It Wrong In Its Forecasts on US Economy American Public Media, Justin Wolfers (26/1/11)
Don’t bet on economic forecasting CNBC, Jeff Cox (21/9/10)
Forecasts
Forecasts for the UK economy HM Treasury
Econ Stats: The Economic Statistics and Indicators Database Economy Watch (large database of worldwide annual statistics, including forecasts to 2015)
World Economic Outlook IMF (follow link in right-hand panel)
OECD Economic Outlook: Statistical Annex OECD
European Economic Forecasts European Commission, Economic and Financial Affairs DG
Questions
- For what reasons may economic forecasts turn out to be wrong?.
- To what extent is economic forecasting like weather forecasting? Which is harder and why?
- Wo what extent can the poor accuracy of economic forecasts be blamed on the application of the ‘wrong type of economics’?
- How much variation is there in the independent forecasts of the UK economy reported by the Treasury (see HM Treasury link above)?
- Using the HM Treasury link, compare the forecasts made of 2010 in January 2010 with those made of 2010 in January 2011. Attempt an explanation of the differences.
The world’s population is set to go on rising – at least to 2050. And as population rises, so will the demand for food. But here we come up against a potentially catastrophic illustration of the law of diminishing returns. Population is set to grow, but the world supply of land is pretty well fixed. And with global warming, some land may become unusable.
According to Sir John Beddington, an expert in population biology and lead author of a government-commissioned report, The Future of Food and Farming, there could be serious consequences of this population rise, including rapid rises in the demand for food, rising food prices, rising land prices, the degradation of land, growing food poverty in many developing countries, growing political unrest and serious environmental damage. As the report’s Executive Summary states:
The global food system will experience an unprecedented confluence of pressures over the next 40 years. On the demand side, global population size will increase from nearly seven billion today to eight billion by 2030, and probably to over nine billion by 2050; many people are likely to be wealthier, creating demand for a more varied, high-quality diet requiring additional resources to produce. On the production side, competition for land, water and energy will intensify, while the effects of climate change will become increasingly apparent. The need to reduce greenhouse gas emissions and adapt to a changing climate will become imperative. Over this period globalisation will continue, exposing the food system to novel economic and political pressures.
Any one of these pressures (‘drivers of change’) would present substantial challenges to food security; together they constitute a major threat that requires a strategic reappraisal of how the world is fed.
The report specifically looks at five key challenges for the future:
A. Balancing future demand and supply sustainably – to ensure that food supplies are affordable.
B. Ensuring that there is adequate stability in food prices – and protecting the most vulnerable from the volatility that does occur.
C. Achieving global access to food and ending hunger – this recognises that producing enough food in the world so that everyone can potentially be fed is not the same thing as ensuring food security for all.
D. Managing the contribution of the food system to the mitigation of climate change.
E. Maintaining biodiversity and ecosystem services while feeding the world.
So what can be done and how realistic are the policy solutions? The following broadcasts and articles examine the arguments
Webcasts and podcasts
Articles
Report
Questions
- Summarise the main findings of the report.
- Does increasing the output of food per agricultural worker contradict the law of diminishing returns? Explain.
- What are the current failings of the system of global food supply?
- Why are problems of food supply likely to intensify?
- What externalities are involved in global food production? What impact do these have?
- In what ways might the externalities be internalised?
- What are the benefits and dangers of new technologies as means of increasing food supply?
- To what extent do the goals of increasing food supply and environmental sustainability conflict with each other?
- Explain the main drivers of change that affect food supply and demand? In what ways do these drivers interact with each other?
- “Although the challenges are enormous there are real grounds for optimism.” Explain the report’s authors’ thinking here.
BP has just published its latest projection of energy trends – its Energy Outlook 2030. According to the press release:
World energy growth over the next twenty years is expected to be dominated by emerging economies such as China, India, Russia and Brazil while improvements in energy efficiency measures are set to accelerate.
The following podcast from the Financial Times features a discussion of the report and the factors affecting oil prices and their relationship to economic growth
Webcast
Emerging economies seen driving energy demand Financial Times videos, John Authers and Vincent Boland (19/1/11)
Articles
Energy outlook Financial Times, Lex column (19/1/11)
BP energy outlook: main points The Telegraph (20/1/11)
High energy prices need not mean doom Sydney Morning Herald, Jeremy Warner (21/1/11)
Report
BP Energy Outlook 2030 (January 2011)
Data
Power slide The Economist: Daily Chart (19/1/11)
Questions
- What are the most powerful driving forces behind the demand for energy?
- Why does the report forecast virtually no increase in energy demand in developed countries? What assumptions are made about growth rates in OECD and non-OECD countries?
- What factors would lead to a substitution of sustainable energy sources for fossil fuels? What would detrmine the size of such substitution?
- What is the role of the price elasticity of demand for and supply of oil and the income elasticity of demand for oil in determining oil consumption in different parts of the world?
- Why may high energy prices not necessarily mean ‘doom’?
The recession caused a large rise in unemployment in many countries. In the USA the rise has been particularly steep, where unemployment now stands at 14.5 million, or 9.8% of the labour force. Unemployment has continued to rise despite renewed growth in the US economy, where the latest annual real GDP growth is 2.6% (measured in Q3 2010). The rise in unemployment has been blamed on ‘sticky wages’ – i.e. the reluctance of wage rates to fall.
But are wages genuinely sticky as far as the average worker is concerned? They may be in many specific jobs with specific employers, but many workers made redundant then find work in different jobs at lower rates of pay. For them, their wage has fallen, even if particular jobs are paying the same as before.
So what are the consequences of this? Does the willingness of workers to accept lower paid jobs mean that the labour market is flexible and that people will thus price themselves into work? If so, why is employment still rising? Or does a reduction in real wages for many people dampen spending and hence aggregate demand, thereby reducing the demand for labour? If so, why is GDP rising?
The following articles look at the apparent stickiness of wages and the implications for the labour market and the macroeconomy.
Articles
Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages Wall Street Journal, Sudeep Reddy (11/1/11)
The Causes of Unemployment Seeking Alpha, Brad DeLong (13/1/11)
Sticky, sticky wages The Economist blogs: Free Exchange, R.A. (11/1/11)
The Causes of Unemployment New York Times blogs: Wonkish, Paul Krugman (16/1/11)
America’s union-bashing backlash Guardian, Paul Harris (5/1/11)
Data
Federal Reserve Economic Data: FRED Federal Reserve Bank of St. Louis (US macroeconomic datasets)
United States GDP Growth Rate Trading Economics
US unemployment statistics Bureau of Labor Statistics
Questions
- Why might nominal wages be sticky downwards in specific jobs in specific companies?
- Why might nominal average wages in the economy not be sticky downwards?
- Why is unemployment rising in the USA?
- Why might there be a problem of hysteresis in the USA that provides an explanation of the reluctance of unemployment to fall?
- Why might a fall in wages end up being contractionary?
- What lessons can be learned from the Great Depression about cures for unemployment?
- How might unemployment be brought down in the USA?
- Why may making wages somewhat more flexible, as opposed to perfectly flexible, not be a good thing?