The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.
That's what most of our best economists have been saying: don't play deficit hawk when it's been done before and failed. The markets know this and they may be warning us right now that we're headed in the wrong direction.
In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.
On Tuesday and Wednesday, pessimism seemed the better bet. Stocks fell around the world, with more steep drops in Asia Wednesday morning over worries about economic growth.
The markets could be wrong. But there are persuasive models out there. And, business reporter David Leonhardt believes "the most recent economic numbers have offered some reason for worry, and the coming fiscal tightening in this country won’t be much smaller than the 1930s version."
From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product. Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once.
We're left to hope they know what they're doing. Experience and a little careful thought shows they don't. What our far-right politicians and their advisors may be counting on is that they can, as Leonhardt puts it, "shout louder than the data." It's a sign of their political failure.
The idea that the world’s rich countries need to cut spending and raise taxes has a lot of truth to it. The United States, Europe and Japan have all made promises they cannot afford. Eventually, something needs to change. In an ideal world, countries would pair more short-term spending and tax cuts with long-term spending cuts and tax increases. But not a single big country has figured out, politically, how to do that.
We are spending similar to the amount that got Greece in trouble. After all the spending, we barely peeped out any jobs sans the Census.
The political reality is that spending is halting, but it's not being cut.
Posted by: dissident | June 30, 2010 at 10:16 AM