Abstract
‘The Pursued Economy’ is a thought-provoking and timely exploration of the complex challenges faced by advanced economies in the ever-evolving global landscape. Authored by prominent economists and experts in the field, this book offers an insightful analysis of the forces reshaping the economic landscape and provides pragmatic strategies to navigate the path ahead. Navigating the transition from the ‘golden era’ to the ‘pursued era’ of economic development, the author elucidates the shortcomings of traditional economic solutions that once thrived but now falter. The author emphasizes the outdated policy assumptions that have led to an over-reliance on monetary policy, inadvertently exacerbating inequality and distorting economies. The author embarks on a meticulous journey through the intricacies of macroeconomics, weaving historical context with the challenges and shifts of the contemporary global economic landscape. Through real-world examples and a thorough examination of fiscal versus monetary policy dynamics, the author presents a compelling case for reimagining economic frameworks in a rapidly transforming world. This book serves as both a guide and a critique, offering readers a panoramic view of the evolution and implications of macroeconomic theories and practices.
The introduction sets the stage with a comprehensive overview of introductory macroeconomics, emphasizing the pivotal role of borrowing in economic growth. As the narrative progresses, the author explores the concept of balance sheet recessions, drawing parallels with significant historical events like the Great Depression, and introduces the novel concept of the ‘Pursued Economy’. This concept, detailing the three stages of economic development in Chapter 4, stands out as one of the book’s most enlightening sections. This chapter presents various figures illustrating the progression of Western urbanization, income dynamics, and wage trends in different countries. It highlights the Lewis Turning Point (LTP) as a significant milestone in economic development. Before reaching the LTP, capitalists could exploit workers due to the abundance of labor from rural areas, leading to limited job security and low wages for workers. However, after surpassing the LTP, the power dynamics shifted in favor of the workers, offering them better opportunities and bargaining power. The chapter underscores the importance of understanding these stages to grasp the unique challenges faced by pursued economies (pp. 17–18, 161). The author discusses the policy responses to economic challenges in both eras. During the Golden Era, monetary policy was effective in controlling inflation, but in the Pursued Era, monetary policy alone was less effective. Fiscal policy, including government spending, plays a more crucial role in stimulating demand and economic growth.
Here, I would like to emphasize the concept of ‘balance sheet recessions’, given that it represents the author’s most renowned work, and it is discussed in various parts of this book. A balance sheet recession occurs when the private sector shifts its priority from maximizing profits to minimizing debt due to a large-scale negative net worth, often following the bursting of an asset bubble. This leads to a significant decrease in demand as companies and households focus on paying down debt rather than spending or investing. As a result, the economy can enter a prolonged period of stagnation, even if central banks lower interest rates to near zero or engage in quantitative easing (pp. 330, 331). The book also draws parallels between the balance sheet recessions experienced in different countries, such as Japan in the 1990s and the Eurozone economies after 2008. Japan was the first advanced country to experience a balance sheet recession after the Great Depression. Following the burst of a massive asset bubble in the 1990s, Japan’s commercial real estate prices plummeted, severely damaging the balance sheets of businesses and financial institutions across the country. In both balance sheet recessions and pursued economies, there is a lack of private-sector demand for borrowings. The solution lies in external entities, like the government, borrowing, and reintroducing those savings into the income stream (pp. 184,183). In essence, a balance sheet recession represents a unique economic challenge where the usual monetary policy tools may be ineffective, and fiscal stimulus becomes crucial to counteract the deflationary pressures arising from private-sector deleveraging.
From the onset of the Great Depression to Japan’s asset price bubble and the US subprime mortgage crisis, each of these economic downturns exhibits the hallmarks of a ‘balance sheet recession’. Recently, this conceptual framework has been critically analyzing the current ‘crisis’ with the Evergrande debt default in the Chinese economy. The core premise of the ‘balance sheet recession’ theory is a significant decline in asset prices. However, while China has witnessed some decline in asset prices, the magnitude of this decline pales in comparison to Japan’s asset price bubble or the US subprime mortgage crisis. Furthermore, in preceding years within the capital markets, financial instruments yielding returns in excess of 5% designed with fixed returns were readily accessible. Currently, among the fixed-return financial instruments, they can only offer an anticipated yield of around 2.5%. However, the prevailing mortgage interest rates gravitate around 5%. In addition, the expected returns from both the equity and real-estate markets are showing signs of growing restraint. This has catalyzed a trend among households to expedite loan repayments as a strategy to mitigate high-cost liabilities. The current trend of avoiding new debt and paying off existing ones does not match the usual signs of a ‘balance sheet recession’, which is often linked to falling asset prices. In China, the current decline in credit demand and the trend of deleveraging are not a result of the ‘balance sheet recession’ triggered by dropping asset values. Furthermore, I believe the extensive debt default in China has causes that are more intricate, for example, the legacies brought by fast urbanism and state-led investment economic development.
One of the book’s most timely chapters is the one that discusses the implications of monetary policies during global crises such as the pandemic and post-pandemic. As the author points out, the current scenario, detailed in the book, is particularly dire as policymakers grapple with both structural challenges and balance sheet recessions (pp. 377, 378). The book highlights the over-reliance on monetary policy, such as low-interest rates and quantitative easing, as a response to economic challenges. In the current economic scenario, central banks around the world have employed similar policies to combat the long-term economic impacts of the pandemic, making the discussion on the limitations of monetary policy especially pertinent. The author’s critique of quantitative easing and its challenges provides a fresh perspective on the subject. The discussion on corporate bond yield movements in Japan and Europe and the impact of central bank financing of fiscal deficits is both insightful and relevant in the current economic scenario. The pandemic has created new economic challenges that require innovative policy solutions, and the book’s emphasis on the need for timely and effective policy measures aligns with current efforts to address the pandemic’s economic fallout.
The chapter on the backlash against globalization is particularly salient. The author discusses the growing discontent with globalization, highlighting the inherent conflict between free trade and free capital flows. The growing backlash against globalization, particularly in pursued countries, is primarily attributed to the disappointment and despair felt by many, e.g., the growing issues with the Stability and Growth Pact (SGP) and the design of the Euro in the Eurozone. These issues have hindered governments from addressing balance sheet recessions effectively. Moreover, there is a widespread sense of frustration over income inequality, stagnant wages, and a general feeling of helplessness. The backlash is characterized by the view that globalization is the root of many problems, leading to opposition of the free movement of goods and people. This sentiment has resulted in hostility toward immigration and arguments in favor of protectionism. The book also critiques certain notions in economics regarding trade, which have inadvertently contributed to the global imbalances and the social reaction against free trade.
In this book, inequality is a recurring theme, highlighting the widening wealth gap in advanced economies. The book references Thomas Piketty’s ‘Capital in the 21st Century’, which reignited the debate on wealth distribution. Income inequality has become a significant issue, with growing concerns about the divide between the wealthy and the less fortunate (p. 157). The Pursued Era tends to exacerbate inequality, significantly if workers do not improve their skills. The book emphasizes the importance of education as a means to address this growing inequality (pp. 248, 247). Ensuring equal access to quality education can help reduce inequality in the Pursued Era. The book critiques President Ronald Reagan’s drastic cuts in federal education spending, suggesting it contributed to the current inequality and social divide in the United States (p. 248). In addition, the book mentions that economic inequality in the United States has reached a point where 50% of people below 38 years prefer a socialist system. It suggests that central banks should be cautious with monetary easing, as it might exacerbate social and political problems (p. 540).
The author’s meticulous analysis and insightful recommendations provide readers with a comprehensive understanding of the current economic landscape. First, the author offers policy recommendations for the Pursued Era, including a greater focus on fiscal policy, investment in education and technology, and addressing income inequality. The author also emphasizes the need for policymakers to adapt to the new economic realities. Furthermore, the emphasis is placed on the importance of infrastructure development for future growth, particularly in systems that foster innovation, such as a liberal arts education and a supportive financial environment. The deepening inequality in pursued economies is addressed, highlighting the need for equal access to quality education. The author suggests that political parties must adapt their policies to this new economic landscape. Advocacy is made for supply-side reforms, labor market flexibility, and an educational system overhaul to meet the demands of pursued economies. To maximize creative potential, countries should revamp their tax and regulatory regimes to support new ventures. Finally, when governments invest in the future, the selection of projects, potentially overseen by an independent commission, becomes crucial to ensure they are self-financing and beneficial for the country’s long-term growth.
‘The Pursued Economy’ stands as a masterwork in this challenging new reality. It challenges established paradigms, offers fresh perspectives, and stands as an invaluable resource for scholars, policymakers, and anyone with a keen interest in understanding the intricacies of the global economy. This book is not only an essential read for policymakers and sociologists but also for anyone seeking to grasp the complexities of today’s global economic and geopolitics dynamics.