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Between 1991 and 2012 the average annual increase in real wages in Britain was 1.5% and in America 1%, according to the Organisation for Economic Co-operation and Development, a club of mostly rich countries.

Real wage growth in Germany from 1992 to 2012 was just 0.6%; Italy and Japan saw hardly any increase at all.

And the dramatic dip in productivity growth after 2000 seems to have coincided with an apparent acceleration in technological advances as the web and smartphones spread everywhere and machine intelligence and robotics made rapid progress.

A second explanation for the Solow paradox, put forward by Erik Brynjolfsson and Andrew McAfee (as well as plenty of techno-optimists in Silicon Valley), is that technological advances increase productivity only after a long lag.

John Fernald, an economist at the Federal Reserve Bank of San Francisco and perhaps the foremost authority on American productivity figures, earlier this year published a study of productivity growth over the past decade. He found that its slowness had nothing to do with the housing boom and bust, the financial crisis or the recession. Instead, it was concentrated in ICT industries and those that use ICT intensively.

Once an online course has been developed, it can be offered to unlimited numbers of extra students at little extra cost.

For example, new techniques and technologies in medical care appear to be slowing the rise in health-care costs in America. Machine intelligence could aid diagnosis, allowing a given doctor or nurse to diagnose more patients more effectively at lower cost. The use of mobile technology to monitor chronically ill patients at home could also produce huge savings.

Health care and education are expensive, in large part, because expansion involves putting up new buildings and filling them with costly employees. Rising productivity in those sectors would probably cut employment.

The integration of large emerging markets into the global economy added a large pool of relatively low-skilled labour which many workers in rich countries had to compete with. That meant firms were able to keep workers’ pay low.

Productivity growth has always meant cutting down on labour. In 1900 some 40% of Americans worked in agriculture, and just over 40% of the typical household budget was spent on food. Over the next century automation reduced agricultural employment in most rich countries to below 5%,

A new paper by Peter Cappelli, of the University of Pennsylvania, concludes that in recent years over-education has been a consistent problem in most developed economies, which do not produce enough suitable jobs to absorb the growing number of college-educated workers.

Where prices were rigid, as in goods and labour markets, fewer euros meant slow disinflation but rapid contraction in output and a big rise in unemployment.

If there had been no single currency, the northward capital flight would have depreciated peripheral currencies. Had the periphery borrowed in its own currency, that would have imposed losses on its foreign creditors while also boosting its export industry. Had peripheral economies instead borrowed in dollars or deutschmarks their debt burdens would have ballooned with depreciation, potentially pushing banks and sovereigns into default—but the depreciation boost to competitiveness would have remained. Either way, the depreciation of the currency would effectively shrink the value of wealth in the periphery.

The debt-to-GDP ratio is best reduced through sustained nominal GDP growth.

Besides, having been there, no one really wants to unleash inflation anymore. That leaves us with real GDP growth as a necessary condition for bringing the debt-to-GDP down painlessly.

But in today’s world voters are angry at everything that is called Europe and will not back a fiscal union.

In most Eurozone countries, structural reforms are as needed now as they were before the crisis.

Banks are at the heart of a diabolic loop: bank holdings of their national public debts (Brunnermeier et al., 2011).

Massive forbearance has allowed many banks to not fully account for the losses that they incurred in 2007-8.

For that reason, they deleverage, which leads to a credit crunch, which slows growth down.

The ECB is the lender of last resort both to banks and to governments.

The long-hoped-for awakening of the ECB has produced several miracles, especially a major relaxation of market anguish.

The authors come up with a variety of numbers, including one that has received a lot of attention: potential G.D.P.—broadly speaking, the level of G.D.P. consistent with stable inflation—“is currently about 7 percent below the trajectory it appeared to be on prior to 2007.” According to the latest figures from the Commerce Department, the G.D.P. is now close to seventeen trillion dollars, and seven per cent of that figure is $1.2 trillion. This is a lot of money to have gone missing, especially if it will never be recovered. Hence Krugman’s dire conclusion: “By tolerating high unemployment we have inflicted huge damage on our long-run prospects …. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come.”

As well as figuring out the current level of potential G.D.P., the authors estimate its growth rate. This is the more important figure, because it’s what determines living standards over the long term

In the nineteen-eighties, Larry Summers and Olivier Blanchard, who is now the chief economist of the I.M.F., resurrected the idea and gave it a new name, which they borrowed from engineering: hysteresis. Blanchard and Summers examined hysteresis in Europe, where high rates of unemployment have long been a problem.

The good news is that things aren’t quite as bad as the figures in the Fed paper might suggest. If we can get policy right and sharply increase the level of over-all demand in the economy, most of the damage done in the past five years is reversible.

At the moment, sadly, there is no prospect of any more fiscal stimulus, let alone a war-sized one, and the onus is falling on the Fed to gee up the economy.

levels of private and public debt, domestic and foreign, are still too high, and continue to rise as a share of GDP, owing to slow or negative output growth. This means that the issue of medium-term sustainability remains unresolved.

At the same time, the loss of competitiveness has been only partly reversed, with most of the improvement in external balances being cyclical rather than structural.

The euro is still too strong, severely limiting the improvement in competitiveness that is needed to boost net exports in the face of weak domestic demand.

a continuing credit crunch, as undercapitalised banks deleverage by selling assets and shrinking their loan portfolios.

The larger problem, of course, is that progress toward banking, fiscal, economic and political union, all of which are essential to the eurozone's long-term viability, has been too slow.

all imply that banks will have to focus on raising capital at the expense of providing the financing needed for economic growth.

Moreover the ECB, in contrast to the Bank of England, is unwilling to be creative in pursuing policies that would ameliorate the credit crunch.

Meanwhile, austerity fatigue is rising in the eurozone periphery.

And bailout fatigue is emerging in the eurozone's core.

But the eurozone's political strains may soon reach a breaking point,

Eurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis. Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments.

Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk.

Europe’s leaders did not recognize this rising danger, which could easily be averted by a common guarantee, which would simultaneously correct the market distortion arising from the differential implicit subsidy.

If these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked.

Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high.

While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it.CommentsView/Create comment on this paragraph

Despite the international standing of Deutsche Bank, Germany’s banking system is fragile. Several German banks required government support during the financial crisis. Highly fragmented (in part due to heavy government involvement) and with low profitability, German banks, especially the German Länder (state) owned Landsbanks, face problems. They have large exposures to European sovereign debt, real estate and structured securities.

Prior to 2005, the Landesbanken were able to borrow cheaply, relying on the guarantee of the state governments. The EU ruled these guarantees amounted to subsidies. Before the abolition of the guarantees, the Landesbanks issued large amounts of state-guaranteed loans which mature by December 2015.

While it insists on other countries reducing public debt, German debt levels are high—around 81% of GDP. The Bundesbank, Germany’s central bank, has stated that public debt levels will remain above 60% (the level stipulated by European treaties) for many years.

Germany’s greatest vulnerability is its financial exposures from the current crisis. German exposure to Europe, especially the troubled peripheral economies, is large.

German banks had exposures of around US$500 billion to the debt issues of peripheral nations. While the levels have been reduced, it remains substantial, especially when direct exposures to banks in these countries and indirect exposures via the global financial system are considered. The reduction in risk held by private banks has been offset by the increase in exposure of the German state, which assumed some of this exposure.

For example, the exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is euro 918 billion as of April 2012. This exposure is also rising rapidly, especially driven by capital flight out of these countries.

Germany is now caught in a trap. Irrespective of the resolution of the debt crisis, Germany will suffer significant losses on its exposure – it will be the biggest loser.

Once the artificial boom ends, voters will discover they were betrayed by Germany’s pro-European political elite. There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.

In late May 2012, French President Francois Hollande provided a curious argument in support of eurozone bonds: “Is it acceptable that some sovereigns can borrow at 6% and others at zero in the same monetary union?”

Political will for integration

In the peripheral economies, continued withdrawal of deposits from national banks (a rational choice given currency and confiscation risk) may necessitate either a Europe wide deposit guarantee system or further funding of banks.

A credible deposit insurance scheme would have to cover household deposits (say up to euro 100,000), which is around 72% of all deposits, in the peripheral countries. This would entail an insurance scheme for around euro 1.3 trillion of deposits.

Given that the Spanish Economy Ministry reports that euro 184 billion in loans to developers are “problematic,” the additional recapitalization needs of Spain’s banks may be as high as euro 200-300 billion in additional funds (20-30% of GDP)

A Greek default would result in losses to Germany of up to around euro 90 billion. Germany’s potential losses increase rapidly as more countries default or leave the eurozone.

Austerity or default will force many European economies into recession for a prolonged period. German exports will be affected given Europe is around 60% of its market, including around 40% within the eurozone. In case of a break-up of the euro, estimates of German growth range from -1% to below -10%. It is worth remembering that the German economy fell in size by around 5% in 2008, the worst result since the Second World War, mainly on the back of declining exports.

For example, Greece owes about euro 400 billion to private bondholders but increasingly to public bodies, such as the IMF and ECB, mainly due to the bailouts. If Greece walks away as some political parties have threatened, then the fallout for the lenders, such as Germany, are potentially calamitous.

But the largest single direct German exposure is the Bundesbank’s over euro 700 billion current exposure under the TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) to other central banks in the Eurozone.

by Satyajit Das

Today, Germany grudgingly does the minimum needed to keep the euro area intact. If exit to emulate Greece becomes an attractive proposition, Germany will be put on the spot—and the magnanimity it shows in place of its current miserliness will be the ultimate test of how much it values the euro area.

60 percent of the net job losses occurred in middle-income occupations with median hourly wages of $13.84 to $21.13. In contrast, these occupations have accounted for less than a quarter of the net job gains in the recovery, while low-wage occupations with median hourly wages of $7.69 to $13.83 have accounted for more than half of these gains.

Based on history, what’s distinctive about this recovery is its sluggish pace, not the composition of its jobs.

What is distinctive during this recovery relative to earlier ones is the growing disparity in wages across sectors, a trend that was apparent long before the Great Recession.

Since then, however, wage growth has fallen far short of productivity growth, and that’s true for workers regardless of education, occupation, gender or race.

But technological change and the globalization it has enabled have played major roles, and these driving forces have probably strengthened during the recovery.

Jobs that are routine, that do not involve manual tasks and that do not need to be done near the customer are being replaced by computers and automation or are being outsourced to low-cost workers in other countries.

According to another study, the top 1 percent of households captured 65 percent of real family income gains (including realized capital gains) between 2002 and 2007 and 95 percent of the gains between 2009 and 2012. In 2012, the top decile claimed more than 50 percent of income, the highest share ever.

Italy faces no immediate threat for as long interest rates remain low. The country will be able to muddle through for a while until some political or economic shock will force a decision one way or the other.

Meanwhile, the single largest constraint on the resumption of eurozone growth is not fiscal policy – which is broadly neutral at present across the single currency area – but the continued failure to clean up the banks. The growth rate of loans to the non-financial sector turned negative in 2009, showed some intermittent improvements, only to then deteriorate again last year.

The monetary and banking data are telling us that the economy will teeter on the brink of zero or low growth for the foreseeable future because the financial sector is not supplying the economy with sufficient funds to expand.

Banking union could help, but only if it were to break the relationship between banks and sovereigns and clean up the balance sheets.

Yet educational attainment has slowed so much that the United States has lost its once-enormous global lead.

the biggest reason to think economic growth may translate more directly into wage gains is the turnabout in health costs. After years of rapid increases, they have slowed sharply in the last three years. Mr. Obama likes to give more credit to the 2010 health care law than most observers do, but he’s not wrong about the trend’s significance.

It’s also possible that the forces behind the great wage slowdown – from globalization to our often-sclerotic government to (at least for many workers) technological change – are still more powerful than the positive forces.

As in all developing countries, farmers in Africa are flocking to the cities. And yet, as a recent study from the Groningen Growth and Development Center shows, rural migrants do not end up in modern manufacturing industries, as they did in East Asia, but in services such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic in Africa

Xinshen Diao of the International Food Policy Research Institute has shown that this growth was led by non-tradable services, in particular construction, transport, and hotels and restaurants. The public sector dominates investment, and the bulk of public investment is financed by foreign grants. Foreign aid has caused the real exchange rate to appreciate,

Studies show that very few microenterprises grow beyond informality, just as the bulk of successful established firms do not start out as small, informal enterprises.

For example, in November 2011, interest rates on Italian sovereign bonds were around 8% all along the curve, even as the government faced refinancing needs totaling nearly 30% of GDP over the following year. Because debt monetization was not an option, austerity had to ensue at that point, regardless of what Merkel – or anyone else – had to say.

Southern countries, still largely in denial, should accept the need for deeper, competiveness-enhancing reforms. Germany and its allies, for their part, should accept that running high external surpluses is damaging the eurozone and themselves, and that it is time for them to put part of their huge excess savings to work to support growth.