Friday, June 18, 2010

Barack Krugman warns the G-20

Today, once again, Paul Krugman plays Cassandra as deficit hawks gain traction globally. Again he warns that raising taxes and cutting spending now will stop global recovery in its tracks, again raising the specter of 1937:
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich BrĂ¼ning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.

But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
Singing the same tune is Barack Obama, in a June 16 letter to the G-20. Laying down a marker for deficit reduction in the "medium term," Obama stresses the need the continue to boost consumption while the recovery is in midstream: 
Our highest priority in Toronto must be to safeguard and strengthen the recovery. we worked exceptionally hard to restore growth; we cannot let it falter or lose strength now. This means that we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong...

We need to commit to fiscal adjustments that stabilize debt-to-GDP ratios at appropriate levels over the medium term. I am committed to the restoration of fiscal sustainability in the United States and believe that all G-20 countries should put in place credible and growth-friendly plans to restore sustainable public finances. But it is critical that the timing and pace of consolidation in each economy suit the needs of the global economy, the momentum of private sector demand, and national circumstances. We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession (my emphasis).
Obama also warns that the U.S. can't continue as the consumer of last resort and that export countries must boost domestic consumption:
I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses.  Our ability to achieve a durable global recovery depends on our ability to achieve a pattern of global demand growth that avoids the imbalances of the past.

But he embeds currency appreciation, presumably mainly for China, in a range of steps by which export-reliant countries may boost domestic demand:
Our ability to achieve a durable global recovery depends on our ability to achieve a pattern of global demand growth that avoids the imbalances of the past. In Pittsburgh, we agreed that countries with external surpluses would need to strengthen domestic sources of growth. Leaders and governments will need to decide for themselves how to achieve that objective. In some countries, strengthening social safety nets would help boost low levels of consumption. In others, product and labor market reforms could strengthen both consumption and investment. I also want to underscore that market-determined exchange rates are essential to global economic vitality.

Citing a plurality of demand-boosting measures would seem to be in keeping with seeking a plurality of voices to urge China to let the yuan appreciate. In both cases, the aim is to defuse the perception of a  zero-sum bipolar struggle on that marquee flashpoint.

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