Globalization and the Economy

FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Working Paper 2010-01 http://www.frbsf.org/publications/economics/papers/2010/wp10-01bk.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Macro-Finance Models of Interest Rates and the Economy Glenn D. Rudebusch Federal Reserve Bank of San Francisco January 2010 Macro-Finance Models of Interest Rates and the Economy Glenn D. Rudebusch ∗ Federal Reserve Bank of San Francisco Abstract During the past decade, much new research has combined elements of finance, mone- tary economics, and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I describe three different strands of such interdisciplinary macro-finance term structure research. The first adds macroeconomic variables and structure to a canonical arbitrage-free finance representa- tion of the yield curve. The second examines bond pricing and bond risk premiums in a canonical macroeconomic dynamic stochastic general equilibrium model. The third de- velops a new class of arbitrage-free term structure models that are empirically tractable and well suited to macro-finance investigations. ∗ This article is based on a keynote lecture to the 41st annual conference of the Money, Macro, and Finance Research Group on September 8, 2009. I am indebted to my earlier co-authors, especially Jens Christensen, Frank Diebold, Eric Swanson, and Tao Wu. The views expressed herein are solely the responsibility of the author. Date: December 15, 2009. 1 Introduction The evolution of economic ideas and models has often been altered by economic events. The Great Depression led to the widespread adoption of the Keynesian view that markets may not readily equilibrate. The Great Inflation highlighted the importance of aggregate supply shocks and spurred real business cycle research. The Great Disinflation fostered a New Keynesianism, which recognized the potency of monetary policy. The shallow recessions and relative calm of the Great Moderation helped solidify the dynamic stochastic general equilibrium (DSGE) model as a macroeconomic orthodoxy. Therefore, it also seems likely that the recent financial and economic crisis—the Great Panic and Recession of 2008 and 2009—will both rearrange the economic landscape and affect the focus of economic and financial research going forward. A key feature of recent events has been the close feedback between the real economy and financial conditions. In many countries, the credit and housing boom that preceded the crisis went hand in hand with strong spending and production. Similarly, during the crash, deteriorating financial conditions helped cause the recession and were in turn exacerbated by the deep declines in economic activity. The starkest illustration of this linkage occurred in the fall of 2008, when the extraordinary financial market dislocations that followed the bankruptcy of Lehman Brothers coincided with a global macroeconomic free fall. Such macro- finance linkages pose a significant challenge to both macroeconomists and finance economists because Globalization and the Economy Globalization and the Economy Bởi: OpenStaxCollege Instant communications have allowed many international corporations to move parts of their businesses to countries such as India, where their costs are lowest (Photo courtesy of Wikimedia Commons) What Is Globalization? Globalization refers to the process of integrating governments, cultures, and financial markets through international trade into a single “world market.” Often, the process begins with a single motive, such as market expansion (on the part of a corporation) or increased access to health care (on the part of a nonprofit organization) But usually there is a snowball effect, and globalization becomes a mixed bag of economic, philanthropic, entrepreneurial, and cultural efforts Sometimes the efforts have obvious benefits, even for those who worry about cultural colonialism, such as campaigns to bring clean-water technology to rural areas without access to safe drinking water Other globalization efforts, however, are more complex Let us look, for example, at the free-trade agreement known as NAFTA (North American Free Trade Agreement) The agreement is among the countries of North America, including Canada, the United States, and Mexico, allowing much freer trade opportunities without the kind of tariffs (taxes) and import laws that restrict international trade Often, trade opportunities are misrepresented by politicians and economists, who sometimes offer them up as a panacea to economic woes For example, trade can lead to both increases and decreases in job opportunities This is because while easier, more lax export laws mean there is the potential for job growth in the U.S., imports can mean the exact opposite As Americans import more goods from outside the country, jobs typically decrease, as more and more products are made overseas 1/8 Globalization and the Economy Many prominent economists believed that when NAFTA was created in 1994 it would lead to major gains in jobs But by 2010, the evidence showed an opposite impact; the data showed 682,900 U.S jobs lost across all states (Parks 2011) While NAFTA did increase the flow of goods and capital across the northern and southern U.S borders, it also increased unemployment in Mexico, spurring greater amounts of illegal immigration motivated by a search for work There are several forces driving globalization, including the global economy and multinational corporations that control assets, sales, production, and employment (United Nations 1973) Characteristics of multinational corporations include the following: A large share of their capital is collected from a variety of different nations, their business is conducted without regard to national borders, they concentrate wealth in the hands of core nations and already wealthy individuals, and they play a key role in the global economy There are several components to the global economy and many changes that occur as countries grow more interdependent First, there is an increasing number of global cities, which headquarter multinational corporations, such as Coca-Cola exercise significant international political influence, such as what comes from Beijing or Berlin host headquarters of international nongovernmental organizations (NGOs) such as the United Nations host influential media such as the BBC and Al Jazeera host advanced communication and transportation infrastructure, such as is seen in Shanghai (Sassen 2001) Second, we see the emergence of global assembly lines, where products are assembled over the course of several international transactions For instance, Apple designs its next-generation Mac prototype in the United States, components are made in various peripheral nations, they are then shipped to another peripheral nation such as Malaysia for assembly, and tech support is outsourced to India Globalization has also led to the development of global commodity chains, where internationally integrated economic links connect workers and corporations for the purpose of manufacture and marketing (Plahe 2005) For example, in maquiladoras, mostly found in northern Mexico,workers may sew imported precut pieces of fabric into garments Globalization also brings an international division of labor, in which comparatively wealthy workers from core nations compete with the low-wage labor pool of peripheral and semi-peripheral nations This can lead to a sense of xenophobia, which is an illogical 2/8 Globalization and the Economy fear and even hatred of foreigners and foreign goods Corporations trying to maximize their profits in the United States are conscious of this risk and attempt to “Americanize” their products, selling shirts printed with U.S flags that were nevertheless made in Mexico Aspects of Globalization Globalized trade is nothing new Societies in ancient Greece and Rome traded with other societies in Africa, the Middle East, India, and China Trade expanded further during the Islamic Golden Age and after the ...CRS Report for Congress Prepared for Members and Committees of Congress Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 Thomas L. Hungerford Specialist in Public Finance September 14, 2012 Congressional Research Service 7-5700 www.crs.gov R42729 Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 Congressional Research Service Summary Income tax rates have been at the center of recent policy debates over taxes. Some policymakers have argued that raising tax rates, especially on higher income taxpayers, to increase tax revenues is part of the solution for long-term debt reduction. For example, the Senate recently passed the Middle Class Tax Cut (S. 3412), which would allow the 2001 and 2003 Bush tax cuts to expire for taxpayers with income over $250,000 ($200,000 for single taxpayers). The Senate recently considered legislation, the Paying a Fair Share Act of 2012 (S. 2230), that would implement the “Buffett rule” by raising the tax rate on millionaires. Other recent budget and deficit reduction proposals would reduce tax rates. The President’s 2010 Fiscal Commission recommended reducing the budget deficit and tax rates by broadening the tax base—the additional revenues from broadening the tax base would be used for deficit reduction and tax rate reductions. The plan advocated by House Budget Committee Chairman Paul Ryan that is embodied in the House Budget Resolution (H.Con.Res. 112), the Path to Prosperity, also proposes to reduce income tax rates by broadening the tax base. Both plans would broaden the tax base by reducing or eliminating tax expenditures. Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the economic pie). Proponents of higher tax rates argue that higher tax revenues are necessary for debt reduction, that tax rates on the rich are too low (i.e., they violate the Buffett rule), and that higher tax rates on the rich would moderate increasing income inequality (change how the economic pie is distributed). This report attempts to clarify whether or not there is an association between the tax rates of the highest income taxpayers and economic growth. Data is analyzed to illustrate the association between the tax rates of the highest income taxpayers and measures of economic growth. For an overview of the broader issues of these relationships see CRS Report R42111, Tax Rates and Economic Growth, by Jane G. Gravelle and Donald J. Marples. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, Housing and the Economy: Policies for Renovation Chapter from forthcoming: Economic Policy Reforms 2011 Going for Growth Economic Policy Reforms 2011 Going for Growth © OECD 2011 3 PART II Chapter 4 Housing and the Economy: Policies for Renovation 1 1 This chapter compares a number of housing policies for a range of OECD countries and concludes that badly-designed policies can have substantial negative effects on the economy, for instance by increasing the level and volatility of real house prices and preventing people from moving easily to follow employment opportunities. Some of these policies played an important role in triggering the recent financial and economic crisis and could also slow down the recovery. The chapter makes some recommendations for efficient and equitable housing policies that can also contribute to macroeconomic stability and growth. II.4. HOUSING AND THE ECONOMY: POLICIES FOR RENOVATION ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011 4 Summary and conclusions Badly-designed housing policies played an important role in triggering the recent economic and financial crisis. This chapter investigates how housing policies should be designed to ensure adequate housing for citizens, support growth in long-term living standards and strengthen macroeconomic stability. Governments intervene in housing markets to enhance people’s housing opportunities and to ensure equitable access to housing. These interventions include fiscal measures, such as taxes and subsidies; the direct provision of social housing or rent allowances; and various regulations influencing the quantity, quality and price of housing. Housing policies also have a bearing on overall economic performance and living standards, in that they can influence how households use their savings as well as residential and labour mobility, which is crucial for reallocating workers to new jobs and geographical areas. Indeed, as recent OECD analysis shows, effectively supervised financial and mortgage market development combined with policies that enhance housing supply flexibility are key for macroeconomic stability. The main conclusions of that analysis are summarised below, and each is then described in more detail in the remaining sections of this chapter: ● Innovations in mortgage markets should be coupled with appropriate regulatory oversight and prudent banking regulations. Financial liberalisation and mortgage innovations have increased access to credit and lowered the cost of housing finance. This has had positive implications for previously credit-constrained households, allowing them a better chance of owning their own home. But regulatory reforms in mortgage markets may also be behind a noticeable increase in house prices – by an average of 30% in OECD countries – and in house price volatility. Moreover, deregulation can pose risks for macroeconomic stability if it triggers a significant relaxation in lending standards and a subsequent increase in non-performing loans. This is why there is a need for regulatory oversight and prudent banking regulations. ● Housing supply responsiveness to demand can be improved in many OECD countries, but care is needed to avoid volatility in residential housing investment. Supply of new housing that is responsive to prices helps to avoid excessive volatility in house prices, but greater responsiveness can also translate into more volatile residential investment. Responsiveness can be q 2007 by Taylor & Francis Group, LLC q 2007 by Taylor & Francis Group, LLC q 2007 by Taylor & Francis Group, LLC q 2007 by Taylor & Francis Group, LLC q 2007 by Taylor & Francis Group, LLC q 2007 by Taylor & Francis Group, LLC q 2007 by Taylor & Francis Group, LLC Preface In the past few decades, worldwide social, political, legal, ethical, cultural and technological forces have led to a globalization movement. Indeed, many efforts have been made in globalizing various economic areas, including global environmental protection, world trade agreements, global sustainable develop- ment, etc. However, there are many debates on globalization and its effects on the environment and/or sustainable economic growth around the globe. Some argue that globalization protects the global environment from environmental degradation and promotes sustainable economic growth in the world, especially in developing countries. But some others, particularly those in developing countries, believe that globalization is a threat to economic growth and sustain- able development. This handbook will address these major issues: globalization, development, and the environment. We hope that the book will enrich this debate. Khi V. Thai Dianne Rahm Jerrell D. Coggburn q 2007 by Taylor & Francis Group, LLC [...]... institutions like the WTO the focus of Fariborz Zelli’s contribution to this handbook The relationship between trade and the environment and the role of the WTO in mediating that relationship is not all at once clear Skeptics contend that the WTO and international trade liberalization will harm the environment by, for example, creating a race to the bottom in environmental standards, shifting environmental... short-term at the expense of the environment, with the idea that environmental problems can be fixed “later.” In contrast, the UN’s Conference on the Environment and Development and its Agenda 21 have spurred some q 2007 by Taylor & Francis Group, LLC 6 & Handbook of Globalization and the Environment countries to develop specific sustainable development strategies In the second part of the chapter, Prizzia... seriously the interconnection between development and environmental deterioration The author argues that the UN first recognized the potential conflict between development and the environment in the early 1970s, and since then has woven a concern for the environment into all development programs and a concern for development into all environment programs In addition, acknowledgment of global interdependence and. .. Antonio 1.1 Overview There are many debates on globalization and its effects on the environment and/ or sustainable economic growth around the globe Proponents of globalization argue that it protects the global Immigrants and the Economy Contribution of Immigrant Workers to the Country’s 25 Largest Metropolitan Areas Fiscal Policy Institute with a focus on the five largest metro areas in the East Introduction by Mike Fishman, President of 32BJ Service Employees International Union Immigrants and the Economy Contribution of Immigrant Workers to the Country’s 25 Largest Metropolitan Areas with a focus on the five largest metro areas in the East December 2009 The Fiscal Policy Institute prepared this report as part of its Immigration Research Initiative. 32BJ of the Service Employees International Union provided generous support that helped make this report possible. The Carnegie Corporation of New York provides the core funding of the Immigration Research Initiative. Introduction Mike Fishman President of 32BJ Service Employees International Union As a new administration and congress take up immigration reform, lawmakers need to rely on hard facts about the role of immigrant workers in our economy if they are to deliver a responsible bill to the President for his signature. Congress has come close to passing comprehensive immigration reform in recent years, but fell short time and again when politics, disinformation and heated rhetoric trumped the urgent need to overhaul a system that is hurting not just immigrant workers but U.S born workers and our economy. Immigrants and the Economy, which was prepared by the Fiscal Policy Institute, aims to provide legislators, policy makers, stakeholders and the public with the eco- nomic data they should rely on to bring our country’s immigration system into line with today’s economic and social realities. By looking at each of the 25 largest metro- politan areas in the country, the report provides a fresh perspective on the issue—one that can inform lawmakers in Washington when drafting legislation and also cast new light on the issue for sometimes skeptical state and local leaders. Our union’s long-standing position on immigration reform is clear: We fully support a comprehensive solution to our broken and outdated immigration system. Millions of undocumented men and women who are already part of our communities must be brought out of the shadows and given protection under the law. Providing these men and women with a path to citizenship would rightly protect them from unscrupulous employers who often pay less than minimum wage and provide no health care or sick days. Just as importantly, fixing our immigration system must also address a range of issues including safe and secure borders, law enforcement and the future flow of immigrants into our country. Never again should countless workers find themselves without legal rights and protections. The current immigration system is, by all measures, broken. It fuels an under- ground economy that forces workers into low-wage jobs and poor and often abusive conditions. It drags down wage and benefit standards that unions like ours fight to establish and maintain, and it jeopardizes economic security for millions of workers who are already struggling to make ends meet. We must fix this system, and we believe this report will provide lawmakers with in- formation needed to reform our immigration system and align it with our country’s economic needs and humanitarian values. Acknowledgments Immigrants in the Economy was produced as part of the Fiscal Policy Insti- tute’s Immigration Research Initiative, an ongoing effort begun in 2006 to better understand the role of immigrants in the economy. The first major ... concentrate wealth in the hands of core nations and already wealthy individuals, and they play a key role in the global economy There are several components to the global economy and many changes that... and Rome traded with other societies in Africa, the Middle East, India, and China Trade expanded further during the Islamic Golden Age and after the rise of the Mongol Empire The establishment of... Press 7/8 Globalization and the Economy Speth, James G., ed 2003 Worlds Apart: Globalization and the Environment Washington, DC: Island Press The United Nations: Department of Economic and Social