Unless I misunderstand these stories, it appears the world’s biggest economies just decided, over US objections, to resurrect Herbert Hoover, rebury Keynes and pursue another Great Recession, tanking their economies and putting millions more out of work. And it’s all driven by a world-wide plague of deficit hysteria syndrome.
You can’t tell what the world’s largest economies just agreed on from the AP (via WashPost) article of the G-20 financial summit in South Korea. The piece has several diplomatic statements from Tim Geithner warning Europe it can’t look to a booming US economy to lift Europe, so they better have plans to grow their own economies by expanding internal demand. Stronger demand in Europe would then support US hopes to use increased exports to help drive US economic growth. That plan now looks dead.
The Financial Times coverage of the same event tells us a majority of G20 nations plus the International Monetary Fund (IMF) are planning to shrink their economies and depress demand, signaling a broad rejection of the claimed US position.
First, the US/Geithner centric version from the AP (via WashPost):
The Group of 20 welcomed measures taken by the European Union, the European Central Bank and the IMF, including a $1 trillion bailout, to help countries cope with the fallout from unsustainably high debt.
"All of us have a strong interest in seeing those programs succeed in restoring confidence," U.S. Treasury Secretary Timothy Geithner told reporters after the meetings ended.
Long-term, sustainable growth will depend on rebalancing growth, he said.
"The United States is moving aggressively to fix things we got wrong and to strengthen our economic fundamentals," Geithner said, noting that as Americans boost savings and investment and consume less, other countries will need to generate more growth.
"All the countries recognize the basic reality that the U.S. is reforming and adjusting and that for the world to grow at its potential it is going to require that growth outside the U.S. will come more from domestic demand than in the past," he said.
Next, what the Europeans are saying, via the Financial Times (subscription required):
The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.
“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.
These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.
So, our trading partners, particularly Europe, are giving up trying to increase demand through stimulus and other measures and are focused on reducing deficits, even though that switch is bound to depress economic growth and put millions of people out of work. And the deficit reduction and other "austerity" measures are aimed directly at wages, benefits and safety nets for the less well off — exactly what the deficit hawks are urging for the US through Obama’s stacked deficit reduction commission.
It seems there’s a world-wide pandemic of deficit derangement syndrome, being pushed by the usual economic elites at the expense of everyone else. And even if "belt-tightening" is needed in some cases, there’s no talk of asking for shared sacrifice among the wealthy. Bond holders/Creditors must be protected.
The angry citizens demonstrating in Europe’s cities know this is class war being waged against them by the world’s economic elite, but nobody calls it that; instead, it’s all wrapped there and here in the language of "fiscal responsibility" (from FT):
Many other finance ministers accepted market realities had changed the G20’s policy, Christine Lagarde, French finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth”.
Even Dominique Strauss Kahn, managing director of the International Monetary Fund who championed fiscal stimulus since January 2008, recognised the world was suddenly different. Asked whether he felt comfortable with the change in tone from the G20, he replied: “Totally comfortable. I am not the champion of fiscal stimulus, but the champion of right fiscal policy.”
Where’s Our Plan B? New Team A?
The Obama Administration is staring at a failed economic policy. The recovery is not robust enough, and they can’t point to a credible driver for sustained growth. At best, it’s likely to take years to recover the 9 million or so jobs we’ve lost.
They’ve shackled themselves to half policies. Obama was unwilling to ask for more than half the fiscal stimulus his own economists told us we needed last year. Now they’re afraid to ask Congress for what the economy still needs and can do nothing while nihilist Republicans and inexcusably ignorant Blue Dogs tell us we can’t afford to keep states from laying off hundreds of thousands teachers and others as they curtail Medicaid. We can’t even afford to have summer jobs for students.
It’s inexcusable that Ben Bernanke told us, before he was confirmed, it’s not his problem, even though it is. Now more of his Fed colleagues are clamoring for policies that could produce another recession if pursued now.
Once the Administration was unwilling to spend enough and unwilling to demand the Federal Reserve follow its mandate to pursue full employment, the economic team told us we’d use expanded trade to grow our way out of the Great Recession, e.g., looking to European expansion. But G20 and panic in Europe just killed that, and Obama’s own pandering to the deficit hysterics makes our protests unconvincing.
We need more than a Plan B; we need a different Team A (save Romer). Even if the current team claims they "saved" the financial sector (to do what? The "reforms" preserve the same looters, only bigger) after ignoring how they let it nearly collapse, it’s not convincing to say we shouldn’t give a different economic team a chance. We might even find some actual Democratic economists for a change. I suspect Democratic voters would approve.
Paul Krugman, The pain caucus; Lost decade looming
Dean Baker, Pearlstein nails spendthrift Blue Dogs; Deficit Hawks opposed to the jobs bill were too dumb to see $8 trillion housing bubble
Brad DeLong, The ten-year US treasure rate is . . . 3.20%; Well yes, my hair is on fire . . . linking to Duncan at Eschaton
Simon Johnson, French Connection: European crisis worsens; Eugene Fama and TBTF banks
Calculated Risk: check out the unemployment graphs, esp. here and here.