Macroeconomic Vulnerabilities in the TwentyFirst Century: A Preliminary Taxonomy

1
Macroeconomic Vulnerabilities in the Twenty-First
Century A Preliminary Taxonomy

• J. Bradford DeLongU.C. Berkeley and NBERJuly
  2002Draft 2.0 Conference Draft

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Old Macroeconomic Vulnerabilities

• Confidence shocks that reduced investment.
• Overly contractionary monetary policies.
• Self-reinforcing debt-deflation mechanisms.
• Loss of central bank reputation.
• Persistent deficits and political need for the
  central bank to finance the government's deficit.

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Magnitude of Our Current Technological Revolutions

• Industrial Revolution in textiles 10 per year
  productivity gain.
• Second Industrial Revolution in electric power
  9 per year.
• Today (Nordhaus) 58 per year.
• Salience of new technology at between 5 and 7
  of gross expenditure, two to three times as
  salient as was steam or the electron

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Five Possible Effects on Macroeconomic
Vulnerabilities

• Uncertainty and asset price volatility.
• Inventories and information technology.
• Institutions of macroeconomic management.
• Labor market rigidities and productivity growth.
• Financial market sophistication and regulatory
  surveillance.

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Uncertainty and Asset Price Volatility
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Inventories and Information Technology
7
Productivity Growth and the Labor Market
8
Governmental Capacity

• Capacity to manage the macroeconomy
• Example of Japan
• Administrative capacities not used atrophy
  quickly
• Capacity to regulate financial markets
• Increasing sophistication of instruments
• LTCM

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Conclusion

• Three things we think we know
• More asset price vulnerability
• Reduced inventory mistakes
• Greasing the wheels of the labor market
• Three things we dont know
• Magnitudes?
• Degraded macro management capability?
• Dealing with more sophisticated financial
  structures?