Mixing with the Nobel Economists

Is Europe and the United States facing a decade of very slow growth as their economies struggle to emerge from the global financial crisis? Peter Day's In Business programme has been attending a conference of some of the world's top Nobel Prize winning economists to hear their thoughts about approaches to stimulate innovation and growth and take economics as a discipline into new directions

Stiglitz (Columbia University): Inadequate regulation of financial institutions was a root cause of the crisis. Monopoly power of the banking system is greater than it was before the crisis and there is actually less transparency about where the debts are - a major fault-line in the current EU banking system

Professor Robert Mundell (Columbia University) is a specialist in optimal currency areas. At the inception of the new single currency in 2001, Euro Land ignored “fiscal solvency" as one of the main requirements for a successful monetary union. The Maastricht Treaty allowed annual budget deficits of 3% of GDP which became the rule - not a problem during the boom years of the early 2000's but a rule that has become exposed as public finances have collapsed during the recession. The Growth and Stability Pact was not strong enough because it was not a sovereign institution and because policy-makers were not prepared to make it clear to member nations that there would be no bail-outs.

Professor Peter Diamond (Massachusetts Institute of Technology) - a labour market specialist - asked about debt burdens accumulated in many countries including the UK. Macro policies need “staying power" that address the long run need to reduce debt but without hitting growth e.g. fixing pension systems, fast-forwarding big infrastructure investment projects (bridges and roads) to achieve the Keynesian multiplier effects.

Professor Edmund Phelps (Columbia University) - savings and prosperity - the US economy needs an across-the-board increase in tax rates (e.g. a 10% rise in tax rates for everyone). The US economy has not been saving enough - consumers, governments - and the economy is fragile because of bad balance-sheets of the banks, timid consumers many of whom are broke and government finances in terrible shape. Trend growth in the USA is probably 2% per annum or less.

The Radio 4 programme can be found here