{"id":2315,"date":"2010-08-11T20:55:54","date_gmt":"2010-08-12T00:55:54","guid":{"rendered":"https:\/\/freedom24.org\/rationalpost\/?p=2315"},"modified":"2014-04-09T20:23:23","modified_gmt":"2014-04-10T00:23:23","slug":"the-great-recession-act-ii","status":"publish","type":"post","link":"https:\/\/freedom24.org\/rationalpost\/the-great-recession-act-ii\/","title":{"rendered":"the great recession: act ii"},"content":{"rendered":"

\"\"<\/a>As Canadians sparred over\u00c2\u00a0fake lakes<\/a>, budget-busting\u00c2\u00a0security<\/a>, and the\u00c2\u00a0global capitalist conspiracy<\/a>, the world\u00e2\u20ac\u2122s twenty most influential leaders convened in Toronto this past June to negotiate a response to the worst financial crisis<\/a> in generations. At issue was an\u00c2\u00a0age old debate<\/a> between two economic philosophies: stimulus as a life vest<\/a> versus stimulus as a straitjacket<\/a>. The pro-life camp was championed by\u00c2\u00a0consumerist<\/a> America and its\u00c2\u00a0global<\/a> supply<\/a> chain<\/a>. The pro-restraint camp was led by\u00c2\u00a0conservative<\/a> Germany and its\u00c2\u00a0regional demand chain<\/a>. At risk were millions of\u00c2\u00a0jobs<\/a>, trillions in\u00c2\u00a0debt<\/a>, and quite possibly the fate of our modern\u00c2\u00a0political economy<\/a>.<\/p>\n

With so much on the line, the G20\u00e2\u20ac\u2122s\u00c2\u00a0vague<\/a> and\u00c2\u00a0non-committal<\/a> communique was particularly troublesome, since a crisis\u00c2\u00a0this big<\/a> requires a coordinated and comprehensive response. Instead, the world\u00e2\u20ac\u2122s two largest economies spent the weekend channeling their\u00c2\u00a0biggest historical fears<\/a> — a wave of\u00c2\u00a0premature austerity<\/a> in America that prolonged the Great Depression, and debt-fueled German\u00c2\u00a0hyperinflation<\/a> that gave rise to National Socialism and sparked a continental war.<\/p>\n

This failure to build consensus might have been expected but it wasn\u00e2\u20ac\u2122t inevitable. Stimulators and Austerians already agree that governments, businesses and households have each spent\u00c2\u00a0decades borrowing and spending<\/a> well beyond their means, leaving future generations a legacy<\/a> of their grandparents\u00e2\u20ac\u2122 debt<\/a>. They are both aware of the structural dangers of excessive leverage<\/a>, and admit that it was only allowed to proliferate because nobody wanted to take away the\u00c2\u00a0punch bowl<\/a> while the party was still going. Their only two fundamental disagreements involve dealing with the resulting debt hangover<\/a> and charting the least painful\u00c2\u00a0path toward fiscal sobriety<\/a>.<\/p>\n

Coordinating an emergency response was a much easier sell during the global panic<\/a> of late 2008. Now that most major economies have stabilized, the timing and scale of stimulus withdrawal has evolved from an exercise in economic triage to a debate about theraputic recovery.\u00c2\u00a0Exit too soon<\/a> and we could tip back into recession. Exit too late and a\u00c2\u00a0cascade<\/a> of debt default could\u00c2\u00a0fracture<\/a> the global banking system and plunge the world economy back into the abyss<\/a>.<\/p>\n

To put the G20\u00e2\u20ac\u2122s challenge in\u00c2\u00a0context<\/a>, nearly three years after the onset of the recession, America\u00e2\u20ac\u2122s economy — the world\u00e2\u20ac\u2122s largest — still\u00c2\u00a0hasn\u00e2\u20ac\u2122t emerged<\/a> from its slump.\u00c2\u00a0Persistently<\/a> high\u00c2\u00a0unemployment<\/a> has devastated\u00c2\u00a0consumer confidence<\/a> and removed any hope of a quick\u00c2\u00a0housing<\/a> recovery. At the same time, a\u00c2\u00a0shell-shocked<\/a> banking sector has slowed critical\u00c2\u00a0business lending<\/a>. Without a resurgence in\u00c2\u00a0demand<\/a> a viscous\u00c2\u00a0deflationary trend<\/a> will likely cause the nascent global recovery to\u00c2\u00a0stall<\/a>.<\/p>\n

Despite these considerable headwinds, the US remains one of the few countries with\u00c2\u00a0enough debt capacity<\/a> to fund another round of stimulus — unlike\u00c2\u00a0Japan<\/a>,\u00c2\u00a0Italy<\/a>,\u00c2\u00a0France<\/a> or even the\u00c2\u00a0UK<\/a> — fueling calls for more shock therapy<\/a>. The Stimulators are worried about a\u00c2\u00a0pulling the plug<\/a> too quickly, claiming that recessions<\/a> are the worst possible time for the public sector to\u00c2\u00a0retrench<\/a>. As Nobel Laureate Paul Krugman\u00c2\u00a0suggests<\/a>: \u00e2\u20ac\u0153Yes, America has long-run budget\u00c2\u00a0problems<\/a>, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems.\u00e2\u20ac\u009d<\/p>\n

In contrast, Germany\u00e2\u20ac\u2122s economy — the world\u00e2\u20ac\u2122s fourth largest — seems to be firing on\u00c2\u00a0all cylinders<\/a>. Unemployment is relatively\u00c2\u00a0low and falling<\/a>, manufacturing\u00c2\u00a0output<\/a> is at pre-recessionary peaks, and a lower euro is helping\u00c2\u00a0boost sales<\/a> to key Asian markets. However, the country\u00e2\u20ac\u2122s exporters are still heavily exposed to other struggling trading partners, many of whom are in\u00c2\u00a0much<\/a> worse<\/a> shape<\/a>. Moreover, after the trillion\u00c2\u00a0euro bailout<\/a> announcement this past May, Germany\u00e2\u20ac\u2122s financial system is now tied<\/a> even more intimately to the fiscal health of its neighbours. Given years of profligate spending<\/a>, these sluggish<\/a> regional economies are now a dangerous liability for the fragile German recovery.<\/p>\n

The typical Austerian\u00c2\u00a0response<\/a> calls for a strong dose of fiscal consolidation<\/a>, trading off near-term economic pain for a more sustainable<\/a> long-term recovery. Globetrotting economist Jeff Sachs\u00c2\u00a0puts the argument in perspective<\/a>: \u00e2\u20ac\u0153It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America\u00e2\u20ac\u2122s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment.\u00e2\u20ac\u009d<\/p>\n

Outside of the irony of capitalist America and socialist Europe swapping policy playbooks, their\u00c2\u00a0compromise<\/a> at the summit did little to resolve the inescapable tension between\u00c2\u00a0hair-of-the-dog<\/a> stimulus and\u00c2\u00a0cold turkey<\/a> austerity. One reason this\u00c2\u00a0increasingly<\/a> popular<\/a> debate<\/a> has been so difficult to resolve is that it involves fundamental beliefs about the role of public debt in a free market society.<\/p>\n

Put simply, debt allows borrowers to \u00e2\u20ac\u0153pull demand forward\u00e2\u20ac\u009d and consume today what they would otherwise have to wait to consume tomorrow. Such borrowing can help entrepreneurs start-up businesses, governments build roads and schools, and young families buy their first homes. More recently, however, it has allowed individuals, businesses, and governments in developed economies to consume well\u00c2\u00a0beyond their means<\/a> with little of value to show for it<\/a>.<\/p>\n

Rising American public debt over the last\u00c2\u00a0three decades<\/a> provides a useful illustration. Populist programs like\u00c2\u00a0tax cuts<\/a>,\u00c2\u00a0mortgage subsidies<\/a>, and\u00c2\u00a0cash-for-clunkers<\/a> have predominantly supported\u00c2\u00a0retail<\/a> and\u00c2\u00a0residential<\/a> consumption while the nation\u00e2\u20ac\u2122s highways, bridges, power grids, schools and health systems have been\u00c2\u00a0left to decay<\/a>, causing trillions in lost\u00c2\u00a0productivity<\/a> and\u00c2\u00a0competitive disadvantage<\/a>. Similar trends in Europe have pushed some of the region\u00e2\u20ac\u2122s more egregious borrowers like\u00c2\u00a0Greece<\/a> and\u00c2\u00a0Spain<\/a> to the brink of\u00c2\u00a0default<\/a>. Had Western governments followed the example of centrally-planned\u00c2\u00a0China<\/a> or emerging\u00c2\u00a0Brazil<\/a> and invested public borrowing in critical\u00c2\u00a0infrastructure<\/a> rather than\u00c2\u00a0pet projects<\/a> or plump payrolls<\/a>, there might be less debate over the\u00c2\u00a0merits<\/a> of additional stimulus and more to\u00c2\u00a0show<\/a> for trillions in government spending.<\/p>\n

After the last double-dip recession in the early 1980s<\/a>, one of Jimmy Carter\u00e2\u20ac\u2122s economic advisers\u00c2\u00a0observed<\/a> that “it is not the wolf at the door but the termites in the walls that require attention.” This time around, both near term\u00c2\u00a0relapse<\/a> and longer-term\u00c2\u00a0default<\/a> represent clear and present dangers to the fledgling global recovery. Additional stimulus will only work if it is strategic and surgical, and austerity only if it includes a credible plan to promote longer-term growth. But neither approach alone can heal the global economy without Stimulators and Austerians collaborating on a sustainable path to prosperity<\/a>. In that respect the summit in Toronto was a missed opportunity, one with potentially\u00c2\u00a0painful repercussions<\/a> if global recovery\u00c2\u00a0fails to bloom<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

At issue is an age old debate between two economic philosophies: stimulus as a life vest versus stimulus as a straitjacket.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_s2mail":"yes","footnotes":""},"categories":[31,21,4],"tags":[290,73,62,154,26,291,18,90,28,99,71],"class_list":["post-2315","post","type-post","status-publish","format-standard","hentry","category-featured","category-financial-crisis","category-world-affairs","tag-austerity","tag-bailout","tag-banking-system","tag-capitalism","tag-crisis","tag-debate","tag-financial-markets","tag-geopolitics","tag-history","tag-macroeconomics","tag-stimulus"],"yoast_head":"\nthe great recession: act ii - The Rational Post<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/freedom24.org\/rationalpost\/the-great-recession-act-ii\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"the great recession: act ii - 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