America and the Global Economy Flashcards
How and why has the world economy changed since 1950?
- The world was much more de-globalized after WWII than it is now.
- Decades of strife - WWI, the Great Depression, WWII, had stopped global trade.
- After WWII, the global economy returns to a level of activity reminiscent of the 1910s.
- Asia was completely in tatters. China, South Korea, and India had GDPs that were lower than that of Sub-Saharan Africa.
- And this was an era of concentrated globalization. OECD/IMF/World Bank, etc
Not until the 1980s did economic activity resemble the 1910s
What caused the 1970s to be such a brutal decade and how did the US economy finally recover?
- The Great Society + The Vietnam War (“guns and butter”) lavish spending of the 60s triggers inflation
- OPEC oil embargo - key resource price goes up
- The solution was to, bull-headedly, fight inflation, even sacrificing growth with high interest rates
- Nixon’s artificial juicing for growth to avoid recession to win election
Why did the 90s boom?
- Technology of the 70s and 80s finally paying off.
- While computer was invented in the 70s, it takes a while for technology to be applied to actual situations. This application of computers finally happened in the 90s with a lot of productivity gained from digitization (e.g hospital room)
Why did the European economy stagnate after catching up?
- Reaching a natural limit of growth - A lot of the first stage of growth during the 50s, 60s, was extensive and easy: Economies of scale and simply pouring resources.
- Socialist policies? Disincentives to invest
- Socialist-adjacent policies cause disincentives for businesses to grow
It was like they were pouring more money into capital per worker, but not hiring more workers. High unemployment rates
What was the state of the European economy in the 90s and how did it change?
- As a reaction to the over-socialism of the 70s, by the 90s restrictions on social programs cause an improvement in unemployment
- Formation of the European Union spurs modest growth/trade
- It got better, modestly
How can you stem the drawbacks of a single, unified currency to reap the benefits?
- Create an economic union that provides for free flow of goods/labor/people/capital so that regional shocks can be adjusted for
- Diversity. No quartered off specialization
What year was the Euro adopted?
2002
What was the emotional view of the Soviet Union economy? How was the view different from the reality?
- The Soviet Union was seen as a real alternative, especially after the tumult of the first half of 20th century (World Wars, Depression).
- But in reality, Soviet Union economy was very inefficient. State plans by ministries (Gosplan) that laid out production quotas.
- Yet planning before computers. This meant “planning from the achieved level”, just do a little more than last year
- Bad incentives - No one wanted to succeed because if you did, then you were expected to do more. No innovation. “They pretend to pay us, we pretend to work”
- Money didn’t really mean much in Soviet Union. State services. Other goods were rationed/waiting lists
- The raw materials are worth more than the final product! Raw leather worth more than a Soviet shoe!
What happened after economically after the fall of communism in the Eastern Bloc?
Big Bang switch over to capitalism (The Washington Consensus), which caused:
- Hyperinflation, spurred on by monetary overhang
- Privatization of previously nationalized companies, resulting in oligarchs (many ways to do this, including giving public stock but all not great)
- Suspension of social welfare programs
- A time of misery and pain, especially for men as role in society changes (alcoholism, suicide, despair)
- A severe economic depression (cutting economy by half!)
How was Japan seen in the 70s and 80s? Why was this wrong?
- In the 70s and 80s, Japan was seen as a new, burgeoning economic model. Rapid growth. Overtake West
- “Japan, Inc” - A business friendly government
- “Long term” investment, rather than greedy shareholders
- But actually, Japan was just flush with too much capital that masked deeper problems. High savings rate
- Japan’s economy grew not from some new approach, but getting the fundamentals of economics right - a steady focus on core public goods (education) and a high savings rate, willingness to import foreign ideas
How can Japan recover from the economic bubble burst of the early 1990s?
- Japan has a two tier economy. One tier is world-class and competitive (e.g. Nintendo, Sony). The other in less-sexy industrial sectors (where is Japan’s Walmart?) is propped up by subsidies.
- Stop this “Japan, Inc” nonsense. Japan needs to cull these inefficient “zombie” companies and banks. Stop endless lending, and let those that need to fail, fail.
- The economic bubble burst is caused by American devaluing the dollar, causing American exports to compete with Japanese exports.
- Housing bubble collapses. Emperor’s garden is worth more than Canada. 80% loss.
- Need competition
How did the East Asian Tigers rise?
- Focusing on the basics of an economy - education, infrastructure, keeping stats stable (e.g. inflation), being open to foreign ideas/investment
- Healthy measures to encourage competition (e.g. export contests) and domestic incentives (e.g. subsidies)
Why did the East Asian financial crisis of 1997 happen?
- The currency of the Asian Tigers (specifically starting in Thailand) devalues in 1997, causing a spiral of problems with foreign loans. With devalued currency, foreign loans in dollars are worth less and can’t pay back. Investors lose confidence and pull out
- Solution: To keep foreign reserve currency to buy back currency to strengthen.
- Solution: Allow flexible exchange rates to respond to market forces
How did China reform its economy starting in the 80s?
- Gradual introduction of market forces, including the abolishing collective agriculture, and reducing price controls
- Introduction of free-market with TVE (town and village enterprises) doing light manufacturing
- Evolution of nationalized industries into SOE (state owned enterprises) that was a hybrid of state owned and private market
Opening up to foreign trade with foreign trade zones
What is the solution for the next phase of China’s economy?
- Regulating inefficient SOEs (companies that have soft budget constraints)
- Labor shortage/population problems looming. Not just birth rate, but as country richer, less actual unskilled
- Increase spending on social welfare state - infrastructure, education, healthcare
- Evolve from export (and manufacturing/industry) driven economy, to domestic household consumption economy
