Summertime Thoughts

June 17, 2010

Wide disagreement persists over what caused the Great Recession and how to reestablish sustainable long-term growth that puts unused labor back to work.  Global growth remains very uneven and fraught with imbalances that make economic convalescence very fragile.  A great fear is that eroded living standards in advanced economies is on a course with no end in sight. 

Governments are an easy whipping boy.  Budget deficit have soared, and officials cannot readily make the case that heroic efforts to avert a catastrophic recession was worth the price.  Estimates of what might have happened if governments acted less aggressively or not the reality that people see.

It’s harder to vent against elements of the private sector: the overly leveraged consumer or banks and investors who made a collective bet against a national housing market sell-off.  It’s also hard to transform dissatisfaction with the private sector into some kind of action.  The fall-guy is always going to be the elected official, so one sees a revolving door of Japanese prime ministers, new political leadership in Britain, a German coalition that seems to be teetering, and a highly mobilized and anger-filled opposition to U.S. President Obama’s administration.

In both the United States and Europe, racism stirs the pot.  Obama inherited enormous problems, including a dramatic deterioration of public finances.  He acted boldly and is routinely called a socialist even though he did not nationalize any banks as many academic and other experts urged. Obamacare resembles a plan that former Governor Romney, never mistaken for a socialist, implemented in Massachusetts and a deal similar to what Nixon seemed disposed to support some four decades ago.  The high-debtor members of Euroland — Spain, Ireland, Greece, Portugal and Italy — could be known as the SIGPI bloc but have instead been labeled the PIIGS, a very pejorative term in several cultures.

If private enterprise and not government deficit spending is to carry the burden of future growth, personal consumption in the United States and China will be critical.  Time and again, insatiable U.S. consumers have carried the U.S. economy on their shoulders.  That’s going to be a difficult assignment this time.  Improvement in the U.S. labor market is proceeding at a snail’s pace.  A downtrend in the layoff rate has stalled despite GDP growth of 3.6% annualized over the past three calendar quarters.  New jobless insurance claims averaged 463.5K per week over the last four weeks.  That pace compares with four-week averages of 460K, 456K, 474K, 453K, 460K, and 454K in previous successive four-weekly periods beginning last December.  Without employment growth, incomes stagnate, and the confidence in asset price inflation that households otherwise need to extend debt will not make up the gap.

Beijing officials have the means but probably not the will to raise consumption growth to a much higher trajectory.  History justifies caution.  Social revolution repeatedly has stirred not when times are toughest but rather after conditions start to improve and whet the imagination of how much more is possible.  It’s one thing to engineer an export- and investment-led boom but quite something else for a politically authoritarian government that craves security above everything else to focus its effort on consumer enlightenment.

It is surprising how easily deficit fear-mongers disregard Japan’s experience since 1990.  The perils of Greece have not visited the G-7’s second largest economy.  After experiencing real GDP growth in the 1980s of 4.6% per annum, Japan expanded at greatly reduced rates of 1.6% in 1990-94, 0.9% in 1995-99, 1.4% in 2000-04, and 0.2% per annum since end-2004.  Nominal GDP growth slowed from 6.4% in the 1980s to 2.8% in the first half of the 1990s, 0.4% in 1995-99, 0.0% in 2000-04, and negative 0.7% since the start of 2005.  Ten-year JGB yields averaged 5.94% in 1990-04 but fell to means of 2.29% in 1995-99, 1.38% in 2000-04, and 1.52% on average since the middle of the last decade.  The yield now is 1.24%.

Deficit spending per se isn’t going to cause accelerating inflation or climbing interest rates.  Private domestic demand holds the key.  If rising debt in the public sector picks up the slack of deleveraging in the private sector, it fills a critical need.  If policy support is withdrawn before private demand is on a self-generating footing, that goal will remain elusive.  Too little is understood about the world recession’s dynamics, let alone Japan’s two lost decades, to take a leap of faith assuming that everything will turn out well if government is shorn to bare essentials.

But don’t expect voter wrath to turn on the private sector, which is too disbursed to rail against.  Proponents of states rights have been around since the American Revolution.  The Articles of Confederation, an early attempt to organize the former British colonies in a highly decentralized way, was a failed experiment.  The right of state governments to arbitrarily choose which federal laws to enforce was again rejected in the War Between the States. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.


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