Huffington Post.  I agreee with Sachs.

"So, to summarize, what is crude Keynesianism?

(1) The belief in large, stable, and predictable multipliers on taxes and  transfers;
(2) The belief that our problems are due overwhelmingly to a deficiency of aggregate demand, rather than to structural problems that need a long-term approach;
(3) The belief that a rapidly rising debt-GDP ratio is largely benign because interest rates are low today and will stay so
indefinitely;
(4) The belief that "to a large effect, spending is spending," thereby catering to waste and vested interests while ignoring America's urgent investment needs.

That subtler set of policies should include:
(1) Decade-long public investment programs in renewable energy, upgraded public infrastructure, fast rail, job training and the like;
(2) Adequate fiscal revenues (including tolls on infrastructure) to pay for these investments over the course of a decade, including a downward path of the debt-GDP  ratio;
(3) Increased revenues through taxation on high net worth, financial  transactions, high incomes, capital gains and carried interest, offshore  corporate earnings, and carbon emissions, and a stiff crackdown on tax havens  and phony transfer pricing"

Vox presents research that goes against mainstream economic thinking. Aid actually helps economic growth. Chalk one up for Bono and Jeffrey Sachs. I am particularly annoyed with Dambisa Moyo, anti-aid economist, who I also disagree with on the issue of commodities. 

The Serletis - Barro text that I am teaching (intermediate macro) takes the perspective that trade is ineffective at raising growth -which is mainstream thinking on the topic. Barro even mentions his face to face conversations with Bono re:Debt Jubilee 2000 and his other initiatives. He views Bono as sincere but misguided.
 
Bono was calling for help to be accompanied my meaningful reforms which it strikes me is the standard IMF bailout rationale and the rationale used to  support transfers to the periphery in the Eurozone.
 
I would almost bet that most economists in favour of the latter would not be in favour of aid to Africa.
 
Its an interesting world.

One of my professors in undergraduate once told me that "there are more positions than geniuses". I think the returns to mediocrity seem to be diminishing and this has some severe implications for the society. It seems more and more of our economic activity is organized around a tournament structure where a small minority receive enormous payoffs and the rest benefit very little. 

Reality televison is the cultural canary in a coal mine that marks this broader employment trend with shows like 'The Apprentice', 'The Amazing Race', 'American Idol', 'Survivor', 'The Bachelor','The Bachelorette','The Biggest Loser' etc...

As recently reported by the NY Times,
"Now, many economists fear that the comfortable Plan B jobs are disappearing. Technology and cheaper goods from overseas have replaced many of the not-especially-creative professions. A tax accountant loses clients to TurboTax; many graphic designers have been replaced by Photoshop; and the small shopkeeper by Home Depot, Walmart or Duane Reade. Though a lottery economy is valuable to various industries, the thought of an entire lottery-based economy, in which a few people win big while the rest are forced to toil in an uncertain and not terribly remunerative dead-end labor pool, is unfair and politically  scary. If large numbers of people believe they have no shot at a better life in the future, they will work less hard and generate fewer new ideas and businesses. The economy, as a whole, will be poorer."    

This is not new, Frank and Cook identified this emerging trend 17 years ago. Robert Shiller advocates redistribution to prevent inequality from increasing.   

 
On several of my past posts, I have declared that the US is likely to become more trade protectionist in order to deal with its problems of  long term structural unemployment; whereas it would be better off pursuing a  development agenda as advocated by Jeffrey Sachs. 
  
This week, US policy went completely counter to my prediction, as three long outstanding trade bills were signed with Panama, Columbia, and South Korea.

So have I lost faith in my prediction? No, not all. We are still in the early innings, politically, of the issue of structural unemployment; my own estimate is that the real debate on this issue won’t begin until after the 2012 Presidential election. 

Also, the US politically, like most of us personally, is full of contradictions. Congress is simultaneously trying to pass legislation that would force China to make its currency appreciate so that it terms of trade with the US would worsen.

 Politico had this to say about the new free trade deals:

“Advocates say the deals will result in the export of billions of dollars of U.S. goods and boost hundreds of thousands of American jobs.”

 Really? In the same way free trade with China helped the US manufacturing sector lose 7 million jobs last  decade?

A new study by David Autor, Gordon Hanson, and David Dorn explains the “job creation benefits” of trade with China. 
http://econ-www.mit.edu/files/6613  (right click to download)

 Marginal Revolution summarizes the study:
“The study rated every U.S. county for their manufacturers’ exposure to competition from China, and found that regions most exposed to China tended not only to lose more manufacturing jobs, but also to see overall employment decline. Areas with higher exposure also had larger increases in workers receiving unemployment insurance, food stamps and disability
payments.
 
The authors calculate that the cost to the economy from the increased government payments amounts to one- to two-thirds of the gains from trade with China. In other words, a big portion of the ways trade with China has helped the U.S.—such as by providing inexpensive Chinese goods to consumers—has been wiped out. And that estimate doesn’t include any economic losses experienced by people who lost their jobs.”

The reaility in the US economy is that:
Unemployment for those people with a university degree in the US is 4%

Unemployment for those without a high school education is 16%. 

Ben Bernake has recently weighed in on the issue of structural unemployment:
“Bernanke noted that about 45 percent of the unemployed have been out of work for at least six months.

"This is unheard of," he said in a question-and-answer session after a speech in Cleveland. "This has never happened in the post-war period in the United States. They are losing the skills they had, they are losing their connections, their attachment to the labor force."

He added: "The unemployment situation we have, the job situation, is really a national crisis." Bernanke said the government needs to provide support to help the long-term unemployed retrain for jobs and find work. And he suggested that Congress should take more responsibility.”

Put simply, by signing these trade agreements, congress has put in place policies aimed at providing market access for US corporations allowing them to grow profits and send low skill jobs off shore - while simultaneously providing jobs for the high skilled labour market.

The trade agreements benefit the elites in US society at the expense of the most vulnerable in US society.

Jeffrey Sachs sums it up quite well in the first paragraph of his new book 'The Price of Civilization: Reawakening American Virtue and Prosperity'. 

"At the root of America’s crisis lies a moral crisis: the decline of civic virtue among America’s political and economic elite. A society of markets, laws and elections is not enough if the rich and powerful fail to behave with respect, honesty and compassion towards the rest of society and toward the world. America has developed the world’s most competitive market society but has squandered its civic virtue along the way. Without restoring an ethos of social responsibility there can be no meaningful and sustained recovery. I find myself deeply surprised and unnerved to have to write this book."

 

As the drama unfolding in the Eurozone is moving toward its final act, this chapter of European history, which began as a romance, is now morphing  into a Greek Tragedy.  Unfortunately for the global economy there is no “Deus ex machina”
waiting in the wings to swoop down and save the Euro – it will collapse. The  Eurozone is trying to be a little pregnant, either you completely integrate,  form a fiscal union and become “The United States of Europe” or you have to  disband and let countries have their own monetary policy. The former is unimaginable therefore the latter will happen. In April of last year, I argued  that the contagion would spread to Italy, that investors should purchase credit  default swaps (CDS) on Italian debt and that this would be the destabilizing  event that would eventually trigger the Euro’s collapse. Italian bonds just recently came under pressure.  

In the absence of monetary policy, the only way  that Greece, Italy, Ireland, Portugal, or Spain (PIIGS) can become competitive
with Germany is through a period of sustained deflation.  This traps them in a vicious cycle. PIIGS cuts its spending and raises
  taxes which lower aggregate demand; this leads to higher budget deficits which  lead to cuts in spending and higher taxes which lead to lower aggregate demand.  Rinse, wash, and repeat.  Though I  identified this problem a year ago, we can now see that this is what is actually  happening in Greece.  By way of comparison,  Argentina tried to maintain a peg with  the US dollar in the late 90s, experienced deflation that caused social upheaval  and eventually went off the peg and defaulted on its debt. 
 
Greece owes over $500 Billion Euros to French and German Banks. In commercial lending, we used to have a saying, “if  you owe the bank one hundred thousand dollars that’s your problem, if you owe the bank a million dollars that’s the bank problem.” The Greek debt is no longer a problem of the Greeks. It is a problem of the French and German banks, which,  just like the US policy response to their financial crisis in 2008, is being passed down to the French and German taxpayer.  After Greece has implemented the much needed reforms that will allow for economic competiveness, stability and long term viability, the Greek bargaining position will start at “we will refloat the drachma and default on all our debt”.  At that point, Germany, and the rest of the Eurozone will be in a very poor bargaining position.

Argentina only paid its bond holders 40 cents on the dollar. The latest  bailout for Greece represents a 21% haircut so there is still much pain in the pipeline.  And for those of you who might be  inclined to think this type of can kicking can go on forever - don’t. To cover all the bad Eurozone debt some are estimating that Germany would have to issue  debt as high as 133% of GDP.

The Eurozone was never built to last, and I warned my students in my International Macroeconomics classes, since 2002, that it would not likely survive due to differences in the various economies and their inabilility to make adjustments through monetary policy.
 
I was not the only one thinking this way.

So did Milton Freidman at a Bank of Canada conference in 2000 :
Milton Friedman:…I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to  accumulate among the various countries and that non-synchronous shocks are going  to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical  grounds, it’s hard to believe that it’s going to be a stable system for a long time.


A curiosity of all this is that although the Eurozone was never an optimal currency zone, Robert Mundell, who won a nobel prize in part for this theory, has beeen a cheerleader from the Euro's inception.

More recently Mundell was quoted as saying:
 
"The euro is too strong. A weaker euro is the best news you could have for  governments (in trouble)."


"The ECB should follow an easier policy. Of course they have a strict rule to safeguard against inflation but that is not correct. I have never believed that  central banks should have rigid inflation targeting. That is not a good thing to  stabilize. There is nothing in economic theory to back this."


He added it is folly to tighten monetary policy into a "deflationary" oil  spike, (as the ECB did in 2008 and has just done again). "That is exactly the  wrong thing to do".

While it is true that the ECB could of been following a looser  policy, the value of the Euro is basically based on Germany's productivity  which means that its equilibrium value, short of a massive inflationary policy by the ECB, will be too high for the competitiveness of the PIIGS. Only prolonged  deflation, currently being prevented by the bailouts in the case of Greece, can  bring these countries into international competitiveness.
 

What's more, these countries have to deal with the fact that the low wage manufacturing jobs that went to China and other developing countries and are not coming back. Germany is positioned in the high value added manufacturing sector and it will not be easy for these countries to carve out a competitive  niche without some sort of sustained program of economic development, akin to that which Jeffrey Sachs is advocating for the United Sates. Given these realities, it will simply be easier to dissolve the Eurozone, float your own currency, and impose trade sanctions to establish jobs for the lower skilled workers.