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Edward C. Prescott - Importance of Good Governance for Economic Prosperity
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Edward C. Prescott - Importance of Good Governance for Economic Prosperity

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Slides from a roundtable on "The Wealth of Nations in the 21st Century," organized by the Barcelona Graduate School of Economics and FemCat Foundation. …

Slides from a roundtable on "The Wealth of Nations in the 21st Century," organized by the Barcelona Graduate School of Economics and FemCat Foundation.

Edward C. Prescott (Arizona State University, Nobel Laureate in Economics) is a member of the Barcelona GSE Scientific Council.

Read about the Scientific Council: http://j.mp/1hXEm6L

Published in Education
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  • 1. Importance of Good Governance for Economic Prosperity Edward C Prescott 21 March 2014
  • 2. • Nearly all of Asia doing well • The notable exception is North Korea
  • 3. GDP per Capita (Current USD) $0 $5,000 $10,000 $15,000 $20,000 $25,000 1970 1980 1990 2000 2010 South Korea North Korea
  • 4. Five Asian Economies have joined the set of the most advanced industrial economies after experiencing growth miracles
  • 5. Japan & Four Asian Tigers 0.2 0.4 0.6 0.8 1 1960 1970 1980 1990 2000 2010 Per Capita GDP relative to US (PPP)
  • 6. Some Are Experiencing Growth Miracles
  • 7. China: Detrended GDP per Adult 60 80 100 120 140 2002 2005 2008 2011 2007=100
  • 8. Last 10 years US and EU Losing Ground Relative to Trend They Need to Reverse their Bad Policy Regime Shift
  • 9. How is Spain Doing? • Poorly as this figure shows • This is detrended GDP per adult –Flat line is growing at trend –There will be above trend growth for a while associated with a shift to a better policy regime –There will be a recession and convergence to a lower growth path associated with a shift to a worse policy regime
  • 10. Spain Trend Real 80 85 90 95 100 105 110 2002Q4 2004Q4 2006Q4 2008Q4 2010Q4 2012Q4 GDP per adult (2007-Q4 =100) 10
  • 11. Asian Industrial Countries Doing Fine • Growth is at trend of 1.85% a year –Means doubling every 39 years • Trend is common across countries and is due to growth in the stock of useful knowledge • Level differences at a point in time are due to differences in policy regimes
  • 12. Japan 90 92 94 96 98 100 102 104 106 2002-Q4 2004-Q4 2006-Q4 2008-Q4 2010-Q4 2012-Q4 GDP per adult (2007-Q4 =100) Real Trend 12
  • 13. Japan Did Well During the Koizumi Administration 80 90 100 110 120 1990 1995 2000 2005 2010 GDP per 15-64 Years Old Koizumi Administration 13
  • 14. Government Purchase of Goods and Services as Percent of GDP 10% 12% 14% 16% 18% 20% 22% 1994 1998 2002 2006 2010 Koizumi Administration 14
  • 15. The U.S. Economy • Not doing well • No recovery yet or likely in the future • The following figure shows this 15
  • 16. 88 92 96 100 104 2002-IV 2004-IV 2006-IV 2008-IV 2010-IV 2012-IV 2007-II=100 Detrended GDP per Adult
  • 17. Path to Greater Prosperity • Based on McGrattan and Prescott (Minneapolis Fed Staff Report 374, Oct 2013) – Use theory that has been tested through successful use – Life tables used • (worker/retiree falls from 3.4 to 2.0) – Consistent with national income, product, and capital accounts as well as balance sheet facts – Results are robust (see Appendices)
  • 18. Proposed Policy Regime Change 1. Have mandatory savings for retirement 2. Eliminate capital income taxes 3. Broaden tax base and lower the marginal tax rate 4. Phase in reforms so all birth-year cohorts are made better off 5. Leave welfare programs and local public good shares the same
  • 19. Simple Way to Eliminate US Capital Income Taxes • Savings not part of taxable income • Saving withdrawals part of taxable income • With these changes, the US income tax is a consumption tax • With individual savings account, the US has moved far in this direction What will happen with this policy regime?
  • 20. US Detrended GDP per Capita 90 100 110 120 130 2002 2012 2022 2032 2042 2052 2007=100 Growing at trend from 2013-I Growing at trend from 2007-II M-P Reforms from 2007-II
  • 21. Economic Problems are Political • To conclude, it is time for the Spanish and American people to agree to a good policy regime, institute it, stick with it, and enjoy the benefits