1. Current Issues in Economics
Policy response to crisis
Austerity vs. stimulus

2. Current Issues in Economics Overview
Knowledge and social capital as production factors
Internet Economics
Labor markets in the time of robots, aging societies, and new era of inequality
4th Industrial Revolution or Secular Stagnation
Policy response to crisis : austerity vs. stimulus

3. Great Moderation
From the early 1980s on, most advanced economies experienced what has been dubbed the “Great Moderation,” a steady decrease in the variability of output and its major components— such as consumption and investment.
There were, and are still, disagreements about what caused this moderation.
Central banks would like to take the credit for it, and it is indeed likely that some of the decline was due to better monetary policy, which resulted in lower and less variable inflation.
Others have argued that luck, unusually small shocks hitting the economy, explained much of the decrease.

4. Impact of policy worldview: Washington Consensus
Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies toward pro-growth, pro-poor services like education, health care and infrastructure investment;
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates that are market determined and positive in real terms;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;
Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.
In practice: "Stabilize, privatize, and liberalize"

5. Impact of growing complexity
Institutions: Banks are only part of a complex network of financial institutions and markets, and risks are far from gone.
Financial products: When the U.S. housing boom turned to bust, a complex and opaque structure of financial products led to confusion which institution was holding which claims and which institutions were solvent.
This in turn led to major liquidity runs, not so much on banks, but on many nonbank financial institutions, such as investment banks—many of which over the years operated like banks but without the regulation and protections banks received.

6. Impact of regulatory system
Markets, having been progressively deregulated since the 1970s, were confronted by a particularly fragmented and ineffective system of government prudential oversight.
The reality of financial regulation is that new rules open new avenues for regulatory arbitrage, as institutions find loopholes in regulations. That in turn forces authorities to institute new regulations in an ongoing cat-and-mouse game (between a very smart mouse and a less nimble cat).
Global regulatory arbitrage. Hoping to reduce their required regulatory capital under the Basel II framework, European banks eagerly acquired AAA-rated (but systemically risky and opaque) structured products.

7. Unfolding post-crisis drama
Years after the global crisis erupted, the world’s mature economies find themselves with shockingly fragile economies, and weak signs of recovery US
Eurozone
Japan

8. In Europe, causality mostly flowing from public to private
Roots
In US crisis originated from private financial sector but with monetary (low interest rates) and mortgage guarantees encouragement from the state
In Europe, causality mostly flowing from public to private
In Japan, demographics

9. Hope of soft landing
The ability to finance macroeconomic imbalances through easy foreign borrowing allowed to postpone tough policy choices.
Investors’ appetite for public debt that turned out to be toxic provided one ready source of external funding of the deficit.
At the same time, countries with current account surpluses (first of all China) faced minimal pressures to adjust.

10. Austerity
Austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies may include spending cuts, tax increases, or a mixture of the two.
Austerity policies to demonstrate governments' fiscal discipline to their creditor and credit rating agencies by bringing revenues closer to expenditures; they may also be politically or ideologically driven

11. Stimulus
Stimulus refers to attempts to use monetary and/or fiscal policy to stimulate the economy.
Fiscal stimulus refers to increasing government consumption or transfers or lowering taxes. Effectively this means increasing the rate of growth of public debt except that particularly Keynesians often assume that the stimulus will cause sufficient economic growth to fills that gap partially or completely.
Monetary stimulus refers to lowering interest rates, quantitative easing, or other ways of increasing the amount of money or credit.

12. US choice
Quantitative easing (QE) is an unconventional monetary policy used by a central bank to stimulate an economy when standard monetary policy has become ineffective.
A FED implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.
This differs from the more usual policy of buying or selling short-term government bonds in order to keep interbank interest rates at a specified target value.

13. FED QE Expansion

14. Euro-zone decision space – public debt

15. Euro-zone decision space
High public debt
Euro
European Central Bank
National governments

16. Austerity assesment
According to IMF, the quantitative easing policies undertaken by the central banks of the major developed countries since the beginning of the late-2000s financial crisis have contributed to the reduction in systemic risks
The QE policies also contributed to the improvements in market confidence and the bottoming-out of the recession in the second half of 2009.

17. Euro-zone turn&twist response
„Not our problem”
In 2009, ECB said that it would focus on buying covered bonds, a form of corporate debt. It signalled that its initial purchases would be worth only about €60 billion.
In a dramatic change of policy, on 22 January 2015, President of the ECB announced an 'expanded asset purchase programme': where €60 billion per month of euro-area bonds from central governments, agencies and European institutions would be bought. Total QE of at least €1.1 trillion. Mario Draghi announced the programme would continue: to do “whatever it takes” to save the euro

18. Japan policy space

19. Japan: problems beyond fiscal
The Japanese economy is contracting again, caught in a debt-deflation vice. Growth has been negative for four of the last eight quarters.  What was once a ‘Lost Decade’ is turning into a “Lost Quarter Century” with no remedy in sight.
The underlying problem is that Japan’s trend growth rate has fallen below zero as baby boomers retire and demographic crunch worsens. “This is something neither monetary easing or fiscal stimulus can rectify”

20. Abenomics
The economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan.
Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms.
Designed to jolt the economy out of suspended animation that has gripped it for more than two decades

21. Policy response Response German way
Germany the main supporter of austerity and enemy of stimulus

22. Stimulus a bomb with delyaed action: Inflation
Why austerity
Supporters of austerity -
Fiscal stimulus is needed most when governments already have extra costs to bear.
From 2007 to 2010 rich countries saw the ratio of their gross sovereign debt to GDP spike from 74% to 101% on average.
British public debt jumped from just 44% of GDP to 79%, while America’s leapt from 66% of GDP to 98%.
Greece’s soared by 40 percentage points, to 148% of GDP
Stimulus a bomb with delyaed action:
Inflation
Crowding-out private activites
Costs for future generations
Slippery slope for public spendings

23. Why stimulus
Supporters of stimulus looked to the ideas of Keynes. Depression occurs when too many people want to save and too few to invest, then resources (including workers) fall idle. Firms and families might save too much because of financial uncertainty or because they are rushing to “deleverage”—to reduce the ratio of their debts to their assets.
When there is slack in the economy, fiscal stimulus can be particularly powerful thanks to a “multiplier” effect. A dollar spent building a railway, for example, might go to the wages of a construction worker. He then spends the extra income on groceries, enriching a shopkeeper, who in turn goes shopping himself and so on
In normal times central banks would try to spur growth by adjusting interest rates to discourage saving and encourage borrowing. Yet by early 2009 most central banks had reduced their main interest rates almost to zero, without the desired result. Over indebtedness, have been preventing people from borrowing as much as they would like, whatever the interest rate.
Governments needed to make up for firms and families, by borrowing and spending more (or taxing less) to put excess savings to work.

24. Policy vs. Politics
A procyclical fiscal policy piles on the spending and tax cuts on top of booms, but reduces spending and raises taxes in response to downturns.
Budgetary profligacy during expansion; austerity in recessions.
Procyclical fiscal policy is destabilising, because it worsens the dangers of overheating, inflation, and asset bubbles during the booms and exacerbates the losses in output and employment during the recessions.
In other words, a procyclical fiscal policy magnifies the severity of the business cycle.

25. How deep cuts?
In 2009 many countries rolled out big packages of tax cuts and extra spending in the hope of buoying growth.
This stimulus amounted to 2% of GDP on average among the members of the G20 club of big economies but much more for some, smaller economies

26. Multiplier effect
Sceptics - it would be low, and that neither stimulus nor austerity would have much effect on output or jobs. Stimulus simply absorbs resources that would otherwise have been used by private firms. Firms and households would probably save their share of the proceeds, rather than bolster the economy by spending them, since they would assume that it was temporary.
Optimists -ith unemployment high and private demand for loans low, there was little risk that the government would “crowd out” private activity. Indeed, with indebted households forced by falling asset prices to pay off loans quickly, a boost to incomes from a fiscal stimulus would speed the financial adjustment, and thus generate a faster recovery.

27. Austerity: social consequences
In many cases, austerity measures have been associated by critics with a decline in living standards and have led to popular protest.
The financial crisis—particularly the austerity package put forth by the EU and the IMF—was met with great anger by the Greek public, leading to riots and social unrest

28. Stimulus temptation
As growth returned in 2010 some leaders argued that it was time to trim public spending.
Others worried that the recovery was too fragile to permit any hint of austerity.
There was no question that “fiscal consolidation” would eventually be necessary, but much dispute about when it should start.

29. So, is austerity/stimulus good or bad?
It is a wrong question. When an economy is in a boom, the government should run a surplus; other times, when in recession, it should run a deficit.
Many politicians in the developed countries live by procyclicality. They argue against fiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.
Historically, developing countries used to be the ones where dysfunctional political systems produced procyclical fiscal policies during But things have changed. Remarkably, during the decade , about a third of emerging market governments took advantage of the boom years to strengthen their budget positions, saving up for a rainy day. They were thus in a good position to ease up when the global recession hit them in

30. Beyond financial crisis
Today, global economy faces both lack of demand as consumers continue to reduce debt as well as structural barriers on the supply side due to lack of investment in human and physical capital, which has limited economic potential
There has been a misallocation of capital due to a period of artificially low interest rates.

31. The debate is not about the need for fiscal discipline.
Deeper roots
The debate is not about the need for fiscal discipline.
In advanced countries, with an aging population and rising healthcare costs, the large expansion of debt due to the crisis is an unwelcome addition to the fiscal burden, and requires a convincing policy response.
Rather, the debate is about the extent to which spending cuts and tax hikes in the short run are desirable and effective in containing the prospect of sovereign risk crises.
Devil’s alternative

32. IMF U-turn
Most recently, however, capitalism has been characterized by “excess”—in risk-taking, leverage, opacity, complexity, and compensation. It led to massive destruction of value. It has also been associated with high unemployment, rising social tensions, and growing political disillusion – all of this happening in the wake of the Great Recession. Christine Lagarde Managing Director, International Monetary Fund, 2014

33. Need for balanced approach
IMF managing director in August 2011, "For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow. Shaping a fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth”

34. Mix of long-term short-term measures
Strategies that involve short-term stimulus with longer-term austerity are not mutually exclusive.
Steps can be taken in the present that will reduce future spending, such as on pensions by reducing cost of living adjustments or raising the retirement age for younger members of the population,
while at the same time creating short-term spending or tax cut programs to stimulate the economy to create jobs.

35. Lesson from history (that there are no lessons)
For the first time since the 1930s, the world is suffering from a persistent lack of adequate demand; people just aren’t spending enough to make use of the productive capacity we have. This was supposed to be a solved problem, one that may have bedeviled our grandfathers but wasn’t going to come back.
Economists thought we had macroeconomic policymaking under control. Demand management was assigned to technocrats at independent central banks while fiscal policy focused on long-run issues. In the face of large, sustained shocks, however, it turns out that this system breaks down. On one side, central banks are constrained both by the zero lower bound—the fact that interest rates can’t go negative—and by concerns over the size of their balance sheets. On the other, fiscal policy, far from helping, quickly began making things worse.
Elizabeth II to economists: „why nobody told me?”

36. Austerity vs. stimulus Conclusions
The world is still seized by a debate between fiscal austerity and fiscal stimulus. Opponents of austerity worry about contractionary effects on the economy. Opponents of stimulus worry about indebtedness and moral hazard.
Have the austerity programs adopted by countries been cutting too much and too soon?
Has austerity triggered a self-defeating ‘doom loop’ whereby budget cuts and tax rises widen deficits by throwing economies into tailspins?
Is spending more by increasing public debt a solution?

37. Heretic view How fiat is fiat money?
How selective can be policy in the time of the big data?