From the July 12, 2009 Sunday Times (London)
July 12, 2009
by Irwin Stelzer
Sometimes we might be better off if this globalised world of instant communication were less global and less instant. This week we benefited, if that is the right word, from simultaneous news from London, England; Sun Valley, Idaho; Washington, DC; and L’Aquila, Italy. Integrating all of this information is no small feat.
The Bank of England led the parade with an announcement that, despite the continued shrinking of the UK economy, it does not intend to expand its programme of quantitative easing, known to laymen as printing money. That might, but only might, mean that Mervyn King, the governor, thinks that so long as the British government continues to borrow and spend, with no end to deficits in sight, the Bank had best not throw more petrol on the fire. Alternatively, it might mean that King thinks the worst is over.
If the latter, he is on all fours with the International Monetary Fund’s report, but is in disagreement with the news leaking out of Sun Valley.
The IMF says that the world is coming out of its recession. “The recovery is coming,” announced Oliver Blanchard, the IMF’s chief economist. China and India will lead the way with strong growth, Japan will rebound, and the US will contribute with a slow recovery. But two cheers only: the global recovery is likely to be more tortoise than hare.
Or a dead parrot. News from the Sun Valley meeting of media moguls is about as grim as it can get. Ken Chenault, chief executive of American Express, says: “It is way too early to say that we’re in an economic recovery.” More importantly, a leak from the usually secretive gathering says that the attendees agree the stock market is over-priced. Since these folks should have a pretty good idea of future earnings, and have no reason to talk down share prices, the ivory-tower cheer of the IMF’s economists has to be weighed against the gloom of executives in the trenches.
Which might explain why President Obama is adjudicating a dispute among his advisers. Some worry with Mervyn King that deficits have gone higher than can be sustained, others argue that a further stimulus is needed, even if more red ink is spilled.
The Obama team regrets predicting that the $787 billion stimulus package the President pushed through congress would cause the unemployment rate to peak at around 8%, instead of the current 9.5%, and rising. But only 11% of the $308 billion allocated to infrastructure will be spent by the end of this fiscal year on September 30, and only half by the end of fiscal 2010. The so-called “shovel-ready” projects turn out to have been in rather an earlier stage of development than the administration believed, and some states are using stimulus money to fill gaps created by their own spending cuts.
Some in the administration are arguing that this is a reason to do nothing until the stimulus money hits the streets. Among other things, they are nervous that the rising tide of red ink will trigger inflation, a flight from the dollar by China and others who hold trillions in American IOUs, and a recovery-stifling rise in interest rates. Not to mention increased voters’ fears they are leaving an enormous pile of debt for their children and grandchildren.
Economists among those advising the President to double down are convinced that we were lulled into premature euphoria by the so-called green shoots, which seem to have withered, and that the original stimulus was too small to turn the unemployment rate around. They see delinquency rates rising on consumer loans and prime mortgages, doubt that the plan to get toxic assets off the banks’ books will work, and read reports that house prices won’t recover for at least two years. All in all, say these economists, the economy needs another shot in the arm. Now. To which Obama’s political advisers, their eyes on the 2010 congressional elections, add an “amen”.
As he tries to decide what the US economy needs in coming months, Obama must be pining for the longer-term time horizons he confronted in L’Aquila. He only had to decide whether to sign on to an 80% cut in carbon emissions — by 2050. By then Obama would be just short of 90 years old, Gordon Brown would be closing in his 100th birthday, and his host, Prime Minister Berlusconi would have reached 114, perhaps the end of his days as an international man-about-town. Not much the voters can do to them if the target is not met. And in their memoirs the G8ers can always blame China and India, not members of the G8, and with no intention of curtailing their economic growth by slowing the construction of coal-fired generating stations.
Before then, while still capable of displaying his athleticism on the basketball court, Obama needs a recovery. But he has a problem — the measures he is supporting just might murder any recovery in its crib.
The rise in the minimum wage on July 24 from $6.55 per hour to $7.25 will drive up unemployment among the 2.5m young, unskilled, black and Hispanic workers whose unemployment rates are already between 15% and 24%.
The administration’s energy bill, which last week the fractured Senate decided not to consider until after the summer, favours expensive renewables and a cap-and-trade emissions reduction programme that will drive up costs and taxes, creating a drag on the economy.
The estimated $1 trillion-plus cost of the Obama health-care plan will almost certainly result in new taxes, probably on those geese that the administration thinks it can pluck without reducing their production of golden eggs.
Rising protectionism, fuelled by administration pressure on General Motors to make small cars here rather than in China, no matter the higher cost.
The expiry of the Bush tax cuts, new taxes on corporations doing business overseas, and a variety of state tax increases, will add to the strong headwinds impeding the progress of a nascent recovery.
Not the sort of wind power that the President favours.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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