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Experts report world economy in good health

Two MIT economists agreed on the generally vigorous health of the global economy in an IAP presentation held Tuesday, Jan. 24, in E51-325.

The presentation, "The State of the World's Economy," drew a standing-room-only crowd to hear Robert Solow, 1987 Nobel laureate in economics, and Olivier Blanchard, professor and former department head of economics, report on the vital signs.

Blanchard described these as "good economic times," noting the high growth rate, high productivity and relatively low unemployment in the United States. Europe, he said, is "emerging from a long slump," though it still faces low productivity and high unemployment; Japan is also emerging from its 15-year slump. China and India are growing robustly.

Reasons to worry, said Blanchard, include global imbalances due to the United States' "enormous deficit versus the surpluses in Japan, China and the Middle East" and the consequences if other countries cease to find investing in the United States as attractive as they do now. This is especially important since the foreign investment in the United States, previously made by individuals, is now largely made by central banks and governments.

Blanchard also marked a "nonevent -- the macroeconomic effect of the price of oil" -- as significant to current economic health. He contrasted the "nonevent" of the past few years to the oil crisis, inflation and economic ills of the 1970s.

"This time, the change in oil prices was a nonevent, thanks to better monetary policies and weaker bargaining power by workers. Last time, workers tried to keep their purchasing power through higher wages, despite higher oil prices. This time, workers appear to have had no alternative than to accept lower wages," he said.

Solow diagnosed with more caution, predicting U.S. growth would be "OK, but not splendid" and Europe's growth would be slow, due to bad policies and an imperfect adaptation to technology. He also noted that U.S. workers' wages are "paying for increases in oil prices."

"The failure of the U.S. to invest more in renewable energy resources is a piece of stupidity. The risks of a sharp rise in oil prices are very great," he said.

Solow characterized the NASDAQ boom of the 1990s as a "fit of madness" that yielded the 2001 recession but is now passing, based on the rise in real equipment spending over the past three years.

Solow said he anticipates that central banks will continue to find investment prospects in the United States attractive, but warned against generalizing.

"The best economists can do is try to predict the consequences of small events," he said.

A version of this article appeared in MIT Tech Talk on February 1, 2006 (download PDF).

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