Inferences from current economic situation.

In the current Scenario inferences for policy makers would seem:

a)      Markets do not relate to abnormal profits. Regulators should be proactive.

b)   If the financial sector grows at an accelerated pace than the real sector, bubbles could follow.

c)      Consumers are still absorbing the wealth effects of declines across asset classes.

d)    There are losses  in output and  jobs. Such colossal losses to output call for intellectual rethink at a coordinated level. 

e)     The paradox of policy has an implication for the Central banks like ECB  which are trying to tame inflation with its successive rate hikes.

f)     There is the Schumpeterian element of creative destruction at play. Old sources of advantage have not been replaced by new innovations in Europe.

g)   Europe suffers perhaps as there is ‘bounded rationality’ - limits on the capacity of policy makers to process information or to deal with complexity and thus pursue rational aims of integration.

h)      Contracting of Europe with all its convergence criteria, in retrospect, appears to have been incomplete. There were difficulties in measuring or signaling early warning indicators for performance of nations. In today’s market place with all the information load, there was a certain asymmetry which appears to have afflicted growth patterns.

i)   The more recent problem is simply one of technical inefficiency where advanced nations except United States have not been able to maintain ‘least cost production’ process.  This is despite falling input  costs both in fuel and human resources.  

j)    The theory of Heckscher- Ohlin that countries will export those that make intensive use of the factors of production that are locally abundant. Lower wages  in developing countries will result in non–competitiveness among advanced countries who have been used to higher wage bills. This theory also largely explains the migrant movements as industry attempts to keep wage bills by seeking out migrants. Off shoring, hollowing out companies, take all except coordination jobs abroad; it restricts tax revenues from the corporate sector  as production flies abroad. If production has to return, wage bill has to be lower and the answer would seem to be in inducing controlled migration. Populous countries like India, China and migrant economies like USA, Australia and Canada should  outperform others.USA also has research and technology on its side. Europe and Japan have to reinvent themselves.