INTERVIEWING A. MICHAEL SPENCE (2001 Nobel Memorial Prize in Economic Sciences)
«WE ARE RUNNING A LITTLE SHORT OF SAFE ASSETS. US TREASURIES ARE STILL RELATIVELY SAFE, THOUGH THAT COULD CHANGE. GERMAN BONDS ARE QUITE SAFE, THOUGH EVEN THAT COULD CHANGE IF THE EURO DEBT ISSUES ARE NOT RESOLVED.»
«YOU NEVER KNOW WHAT WILL TIP THE SYSTEM INTO A DOWNWARD SPIRAL WHEN IT IS IN A FRAGILE STATE, AS NOW. IT IS POSSIBLE THAT WE WILL LOOK BACK AND THINK THE S&P DOWNGRADE WAS SUCH AN EVENT, EVEN THOUGH IT CONTAINED RELATIVELY LITTLE NEW INFORMATION.»
«A MIX THAT STIMULATES GROWTH WILL HELP THE FISCAL SITUATION MORE THAN JUST DEEP CUTS. THE TIMING OF THE DEFICIT REDUCTION IS ALSO AN IMPORTANT AND CHALLENGING ISSUE.»
« EUROPE NEEDS A PLAN TO RESTORE FISCAL BALANCE AND JUMP START GROWTH IN THE PLACES WHERE IT IS LOW AND NEEDS TO GO UP. IT IS A HARD PROBLEM. THE US NEEDS A SIMILAR PLAN, BUT THE PARAMETERS ARE DIFFERENT.»
«EVEN CHINA IS VULNERABLE TO A MAJOR GLOBAL SLOWDOWN.»
« THERE ARE LOTS OF INFORMATIONAL ASYMMETRIES, COMPLEXITY AND TRANSPARENCY ISSUES THAT BECAME EVIDENT IN THE CRISIS AND APPEAR TO HAVE CONTRIBUTED TO THE INSTABILITY.»
Professor Michael Spence wrote this week at Global Public Square (CNN): “The recent dramatic declines in equity markets worldwide are a response to the interaction of two factors: economic fundamentals and policy responses – or, rather, the lack of policy responses”. The worldwide costs in stock markets of this crisis for the last 10 trading days before August 9th was $7.8 trillion (Bloomberg). This was the departure for an interview in the day after Black Monday August 8th.
Interview by Jorge Nascimento Rodrigues, August 2011
Q: Politics is now the main problem regarding the new phase of the global crisis, when the fundamentals in economics and sovereigns are gaining the stage?
A: YES. POLITICS IS IMPEDING A FORCEFUL POLICY RESPONSE TO A DIFFICULT AND CHALLENGING ECONOMIC SITUATION IN MANY COUNTRIES AND IN THE EU AS A WHOLE. THIS INABILITY TO ACT EXCEPT IN RESPONSE TO A CLEAR CRISIS, PLUS THE REAL THREAT OF A SIZABLE GLOBAL SLOWDOWN IS CAUSING MARKETS TO FALL AND THAT OF COURSE MAKES GROWTH PROSPECTS WORSE.
Q: You also mean the US?
Q: It seems politicians in the West put in the hands of ECB markets’ intervention and FED quantitative easing the strategy for dealing with this new phase of the global crisis? Will they succeed?
A: NO. MONETARY POLICY IS AN IMPORTANT ASPECT OF RECOVERY, AN ENABLING ONE I WOULD SAY. AND THE ECB AND FED HAVE A CLEAR MANDATE TO INTERVENE WHEN MARKETS GET INTO A DESTRUCTIVE DOWNWARD SPIRAL AS IN THE RECENT CASE OF ITALY AND SPAIN. BUT THE CENTRAL BANKS CANNOT SOLVE THE PROBLEM OF RESTORING FISCAL BALANCE AND GROWTH BY THEMSELVES. THE LATTER REQUIRE REFORMS AND INVESTMENTS – THE DETAILS VARY ACROSS.
Q: Can you be more specific about the limitations of QE from FED and “non standard measures” from ECB?
A: NEITHER THE FED NOR THE ECB OR FOR THAT MATTER ANY CENTRAL BANK CONTROLS PUBLIC SECTOR INVESTMENT, LABOR MARKET REFORM, COMPETITION OR TAX POLICY, THE PUBLIC SECTOR RESEARCH AND TECHNOLOGY BUDGETS. THAT WOULD BE JUST A FEW THINGS THAT ARE DIRECTLY RELEVANT TO GROWTH AND HENCE TO LONGER TERM DEBT REDUCTION AND FISCAL STABILITY THAT THEY DON’T CONTROL.
Q: We risk a double dip like in 1937? Or nothing is still “decided”? What kind of decisions can circumvent this major global risk?
A: WE DO HAVE SIGNIFICANT RISK OF A DOUBLE DIP – OR AS ONE ANALYST SAID, SINCE WE NEVER RECOVERED MAYBE WE SHOULD CALL IT A CONTINUED DIP. BOLD, CLEAR, AND AGGRESSIVE POLICIES IN EUROPE AND THE US WOULD DO MUCH TO STABILIZE AND TURN THE SITUATION AROUND. THAT MEANS BOTH FISCAL STABILIZATION AND REFORMS DESIGNED TO STIMULATE GROWTH.
Q: The problem is the “mix,” the balance. Now, most Governments are pressed by Political Opositions or Public Opinion, or even by big lenders (like the ECB and the IMF) for severe austerity. How can they put in place aggressive policies for growth?
A: BY ARGUING CORRECTLY THAT A MIX THAT STIMULATES GROWTH WILL HELP THE FISCAL SITUATION MORE THAN JUST DEEP CUTS. THE TIMING OF THE DEFICIT REDUCTION IS ALSO AN IMPORTANT AND CHALLENGING ISSUE.
Q: Keynes once said the re-balancing of the world economy needs surplus countries to be proactive. China in a certain sense is doing his job buying US T-bonds and euro zone bonds. But do you think Europe needs a kind of a Marshall Plan and the US a cluster of new projects probably in an international framework?
A: CHINA IS ALSO TRYING TO GET ITS CURRENT ACCOUNT SURPLUS DOWN. EUROPE NEEDS A PLAN TO RESTORE FISCAL BALANCE AND JUMP START GROWTH IN THE PLACES WHERE IT IS LOW AND NEEDS TO GO UP. IT IS A HARD PROBLEM. THE US NEEDS A SIMILAR PLAN, BUT THE PARAMETERS ARE DIFFERENT.
Q: The global financial system and the world economy dynamics is non-linear. What can trigger an abrupt change? Have we reached a tipping point?
A: YOU NEVER KNOW WHAT WILL TIP THE SYSTEM INTO A DOWNWARD SPIRAL WHEN IT IS IN A FRAGILE STATE, AS NOW. IT IS POSSIBLE THAT WE WILL LOOK BACK AND THINK THE S&P DOWNGRADE WAS SUCH AN EVENT, EVEN THOUGH IT CONTAINED RELATIVELY LITTLE NEW INFORMATION.
Q: With the bear market in the stock exchanges, the real estate in jeopardy, which are the “safe” assets? Gold? US treasury bonds and German Bunds?
A: WELL WE ARE RUNNING A LITTLE SHORT OF SAFE ASSETS. US TREASURIES ARE STILL RELATIVELY SAFE, THOUGH THAT COULD CHANGE. GERMAN BONDS ARE QUITE SAFE, THOUGH EVEN THAT COULD CHANGE IF THE EURO DEBT ISSUES ARE NOT RESOLVED.
Q: With Chinese inflation growing – 6.5% in July -, what can we expect from the second world economy?
A: CHINA HAS INFLATION AND ASSET BUBBLE CHALLENGES. THEY HAVE A COMPLEX SET OF MIDDLE INCOME TRANSITIONS UNDER THE 12TH FIVE YEAR PLAN TO IMPLEMENT. THERE ARE SOCIAL TENSIONS, AND THE CRASH OF THE TWO HIGH-SPEED TRAINS DIDN’T HELP THE GOVERNMENT’S IMAGE. IN ADDITION THEY ARE QUITE ANGRY WITH THE US BECAUSE OF THE EXPOSURE TO A TECHNICAL DEFAULT. THAT WILL INCREASE TENSIONS. FINALLY, IF EUROPE AND AMERICA HAVE A MAJOR DOWNTURN, THAT IS LIKELY TO SLOW CHINA’S GROWTH, WHICH THUS FAR HAS HELD UP QUITE WELL IN THE POSTWAR PERIOD. CHINA HAS MANY STRENGTHS AND A SOUND BALANCE SHEET WITH WHICH TO DEAL WITH THESE CHALLENGES. BUT EVEN CHINA IS VULNERABLE TO A MAJOR GLOBAL SLOWDOWN.
Q: You mention in your recent articles at Foreign Affairs [July/August 2011 edition] and Global Public Square (CNN) the structural problems in the United States regarding the tradable sector. People in Europe when talking about the tradable sector usually refer only to goods.
A: THE TRADEABLE SECTOR IN THE WAY I THINK OF IT INCLUDES GOODS AND SERVICES. IT IS A MISTAKE TO THINK OF IT AS ONLY GOODS. ADVANCED ECONOMIES CAN BE AND ARE COMPETITIVE IN LOTS OF HIGH VALUE ADDED SERVICES, SOME OF WHICH ARE PARTS OF MANUFACTURING SUPPLY CHAINS. THAT IS A SOURCE OF ECONOMIC STRENGTH AND GROWTH.
Q: Regarding the tradables and non-tradables. Even some non-tradables – health cluster, energy, construction, high-value public services, etc. – has the potential to have global projection strategies and be part of world supply chains. We must be careful in putting fences around non-tradable sectors?
A: YES. WHAT IS TRADABLE IS EXPANDING AS YOU SAY. THE BOUNDARY IS NOT STATIC. FOR EXAMPLE, THERE IS IN HEALTH CARE, MEDICAL TOURISM, AND OUTSOURCING AND OFFSHORING OF CERTAIN FUNCTIONS, LIKE DIAGNOSTIC RADIOLOGY. STILL RELATIVE TO THE SIZE OF ECONOMIES, THE TRADABLE-NONTRADABLE BOUNDARY SHIFTS RELATIVELY SLOWLY.
Q: To end our conversation. In what sense the core of your research that gave you the Nobel Prize is useful for this crisis period?
A: WELL THERE ARE LOTS OF INFORMATIONAL ASYMMETRIES, COMPLEXITY AND TRANSPARENCY ISSUES THAT BECAME EVIDENT IN THE CRISIS AND APPEAR TO HAVE CONTRIBUTED TO THE INSTABILITY. LOTS OF RESEARCH NOW IS FOCUSSED ON TRYING TO UNDERSTANDING THE WAY IN WHICH RISK EVOLVES IN THE FINANCIAL SYSTEM UNDER VARIOUS REGULATORY REGIMES.
Andrew Michael Spence, 68, joined New York University Stern as a professor of economics in September 2010. Professor Spence was awarded the Nobel Memorial Prize in Economic Sciences in 2001 with George A. Akerlof and Joseph E. Stiglitz. The three were awarded the Prize for their work on the dynamics of information flows and market development. He conducted this research while at Harvard University.
Michael Spense was also awarded the John Bates Clark Medal from the American Economics Association in 1981. He is a senior fellow at the Hoover Institution and the Philip H. Knight Professor Emeritus of Management in the Graduate School of Business at Stanford University. Professor Spence, whose scholarship focuses on economic policy in emerging markets, the economics of information, and the impact of leadership on economic growth, was chairman of the independent Commission on Growth and Development (2006 – 2010), a global policy group focused on strategies for producing rapid and sustainable economic growth, and reducing poverty. He also serves as a consultant to PIMCO, a senior adviser at Oak Hill Investment Management, and as a member of the board of the Stanford Management Company as well as a number of public and private companies.
Professor Spence served as Philip H. Knight Professor and dean of the Stanford Business School from 1990 to 1999. Before that, he was a professor of economics and business administration at Harvard University, chairman of its economics department, and dean of its Faculty of Arts and Sciences. Professor Spence earned a Ph.D. from Harvard University in 1972, a B.A./M.A. from Oxford University in 1968 and a B.A. (summa cum laude) from Princeton University in 1966. He was interviewed in 2001, when he received the Nobel, by janelanaweb.com.