[A-List] Mark Weisbrot - Bad Economic Policy Still Biggest Threat to Global Economic Recovery

james daly james.irldaly at ntlworld.com
Tue Jun 15 05:11:44 MDT 2010 



            Bad Economic Policy Still Biggest Threat to Global Economic 
Recovery
            By Mark Weisbrot


--------------------------------------------------------------------


            This column was published by The Guardian Unlimited on June 11, 
2010. If anyone wants to reprint it, please include a link to the original.


--------------------------------------------------------------------

            The U.S. and European Union together make up about half of the 
global economy, and recovery is quite uncertain in both of these big 
economies. Contrary to a lot of folk wisdom and political posturing, the 
problem is not irresponsible government spending in either case, but a lack 
of commitment by the authorities in both areas to ensure a robust economic 
recovery from the world's deepest recession since the Great Depression. This 
is true in many other countries as well.

            The continued weakness of the U.S. economy was hammered home 
last week with the monthly employment report for May. The creation of only 
20,000 non-Census jobs in May, down from 217,000 the previous month, sent 
shock waves through the financial markets.

            The Eurozone's problems are seen as driven by a financial 
crisis, and this is partly true, in the sense that financial markets have 
adopted a skeptical attitude towards the sovereign debt of Greece, Spain and 
some of the other weaker European economies.

            But the Eurozone's financial problems can also be resolved with 
a robust economic recovery. Spain's economic problems, like those of the 
United States, were caused by the collapse of a huge real estate bubble. Its 
public debt, currently at a relatively low 60 percent of GDP, will be quite 
manageable when its economy is growing at a reasonable pace. In fact, it 
could be quite manageable right now, if only the European authorities would 
agree to finance its borrowing costs at a low (or even zero) interest rate 
until the economy is growing again. Spain has about $68 billion to borrow 
for the rest of the year; the cost to the Eurozone authorities of financing 
this at zero interest rates would be minimal.

            In fact, both Europe and the United States have very low 
inflation at present - less than two percent in the U.S. and about one 
percent in the Eurozone. This enables both the Fed and the ECB to engage in 
money creation without fear of inflationary impact. The U.S. Federal Reserve 
has doubled its balance sheet during this recession, creating more than $1 
trillion of base money in the last two years without any appreciable effect 
on inflation. As my colleague Dean Baker has pointed out, in these 
circumstances the Fed can buy U.S. Treasury bonds to finance deficit 
spending, thereby eliminating the burden of such debt.  Japan has done quite 
a bit of this kind of financing over the years. The country's gross public 
debt is over 220 percent of GDP (nearly twice that of Greece) but nobody is 
talking about a "sovereign debt crisis" in Japan, and the government can 
currently borrow at 1.24 percent for its 10-year bonds. The Japanese 
government currently pays less than 2 percent of GDP in net interest on its 
public debt - a low debt burden.

            All this is not to ignore the structural problems in both of 
theses mega-economies, or the world economy as a whole. As many economists 
have noted since the adoption of the Euro, there are serious problems with a 
common currency across countries with large differences in productivity and 
no common fiscal policy. The structural problems in the U.S. economy are 
also serious: the dollar has been overvalued for many years, causing chronic 
trade deficits and a reliance on bubble-driven consumption (first stocks, 
then real estate) to maintain economic growth. As a result, most baby 
boomers have next-to-nothing in net savings for their retirement, and the 
economy's savings rate has been much too low in general.

            But these problems will have to be resolved in the context of a 
growing economy, not one with mass unemployment, deficit demagoguery, and 
all the associated dysfunctional politics. This is also true of the 
environmental transition that needs to take place if we are to avoid climate 
catastrophe.

            That is why it is such a pity that the richest governments and 
central banks in the world have only a half-hearted, vacillating commitment 
to economic recovery - and are actively inhibiting it in the case of the 
weaker Eurozone economies. (They are also actively slowing recovery in the 
developing world: a UNICEF report in April looked at 86 IMF country reports 
and found that nearly 40 percent of the governments are planning to cut 
spending in 2010-2011, as compared to 2008-2009; some of these cuts are 
being encouraged by the IMF.)

            At the highest levels there are undoubtedly economists who 
understand the basic national income accounting of what is going on - hence 
President Obama's top economic advisor Larry Summers' recent support for a 
$200 billion "mini-stimulus." But the power of the financial sector, which 
cares little about economic growth and often sees it as a threat to its 
wealth, is strong. It is no coincidence that China, where the government 
controls the financial sector instead of the other way around - is the only 
one of the world's largest economies that ploughed right through the world 
recession with 8.7 percent growth last year. Deficit hawks and other 
economically-challenged ideologues with disproportionate access to major 
media also make it politically difficult for many governments to do what is 
right for their constituents.

            But there are practical policies in the world's largest 
economies that can restore growth and employment, and they are hardly 
radical. They would just take a bit of political courage that is lacking at 
the highest levels.


            Mark Weisbrot is co-director of the Center for Economic and 
Policy Research, in Washington, D.C.  He is also president of Just Foreign 
Policy.

            View our latest:
            Reports
            Op-eds & Columns
            Data Bytes
            Events

            Donate
            Please consider making a donation to CEPR. In addition to 
foundations, we rely on people like you to support our work.

            About
            The Center for Economic and Policy Research is an independent, 
nonpartisan think tank that was established to promote democratic debate on 
the most important economic and social issues that affect people's lives. 
CEPR's Advisory Board includes Nobel Laureate economists Robert Solow and 
Joseph Stiglitz; Janet Gornick, Professor at the CUNY Graduate Center and 
Director of the Luxembourg Income Study; Richard Freeman, Professor of 
Economics at Harvard University; and Eileen Appelbaum, Professor and 
Director of the Center for Women and Work at Rutgers University.








            Center for Economic and Policy Research, 1611 Connecticut Ave, 
NW, Suite 400, Washington, DC 20009
            Phone: (202) 293-5380, Fax: (202) 588-1356

            Subscribe . Update Subscriptions


-------------- next part --------------
A non-text attachment was scrubbed...
Name: QMARK.GIF
Type: image/gif
Size: 1011 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment.gif>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: ARROW.GIF
Type: image/gif
Size: 993 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment-0001.gif>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: header.gif
Type: image/gif
Size: 4094 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment-0002.gif>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: mwbio_small.jpg
Type: image/jpeg
Size: 37994 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment.jpg>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: facebook_fan.gif
Type: image/gif
Size: 2391 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment-0003.gif>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: twitter_fan.gif
Type: image/gif
Size: 3517 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment-0004.gif>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: cpr-rss.gif
Type: image/gif
Size: 3413 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment-0005.gif>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: TrackImage?key=1438731819
Type: application/octet-stream
Size: 43 bytes
Desc: not available
URL: <http://greenhouse.economics.utah.edu/pipermail/a-list/attachments/20100615/40a855eb/attachment.obj>

More information about the A-List mailing list