Short-term pain for long-term pain
Published On Fri Jul 09 2010. By David Olive, Business Columnist
No one sought your vote on this. Just the same, we are embarked on a dangerous experiment.
A fragile economic recovery worldwide has barely begun. Yet the world’s leading economies are abruptly removing the stimulus measures that revived a global economy hurtling toward a second Great Depression only 18 months ago.
With unemployment still at intolerably high levels, Canada has begun to engage in “fiscal consolidation.” This is the new euphemism for austerity. For cutbacks in jobless benefits and pensions, for tax increases on the working class, and reductions in social-service spending.
This shift in global consensus from stimulus to austerity was the centerpiece agreement of the latest G20 summit, in Toronto last month. The official communiqué warned that continued stimulus to reboot the global economy “would undermine confidence and hamper growth.”
Which is nonsense. Even the stock market knows that much, having lately given up much of the huge gains it made at the peak of the stimulus last year. As a show of “confidence,” the markets have been sliding ever since the austerity talk began in earnest.
Governments understandably are concerned about mounting deficits after the unarguable success of deficit-financed stimulus efforts in arresting the freefall in world economies last year.
But the way to eradicate those deficits is by creating jobs, and the tax revenues they generate, until the private sector feels confident enough to take back the 400,000 jobs it eliminated in Canada since the recession began, and the millions of jobs lost in Europe and the U.S.
Just the same, “fiscal consolidation” has become holy writ practically everywhere. China is pulling back on fears of an emerging housing bubble. Germany fears an outbreak of inflation. (Inflation everywhere is practically non-existent. It’s deflation, notably in Japan, that poses a threat.)
Fiscal hawks, Democrat and Republican alike, have taken charge of the conversation in the U.S. That’s despite last month’s plunge in new-job creation, auto and home sales, and consumer and business confidence.
A clutch of White House economic advisers recently put out a memo to administration department heads on the wisdom of curtailing stimulus efforts. Those efforts boosted America’s economy more than 11 per cent last year.
We’ve been here before. In 1938, Franklin Roosevelt unwisely let New Deal stimulus programs expire, thinking economic recovery was secure. It wasn’t. GDP plunged 3.4 per cent in 1938, and unemployment spiked.
“The world may be making a mistake,” Adam Posen, a U.S. economist currently at the Bank of England, recently told the New York Times. The sudden switch from stimulus to austerity “may turn out to make things worse rather than better.”
But there’s no bucking a consensus, it seems. And what a consensus it is. It includes the European Central Bank, the International Monetary Fund (infamous for its “shock treatment” austerity measures imposed on developing-world aid recipients), the Organization for Economic Cooperation and Development (OECD), the Bank for International Settlements (the Swiss-based “central bankers’ bank”), the British Treasury and analysts at Goldman Sachs Group Inc.
Offhand, I can’t think of a group better able to steer me in the wrong direction than that gang. Its members were sanguine or worse about the looming credit crisis of the 2000s that caused the Great Recession. And Goldman, of course, helped ignite the meltdown.
“I think the case for additional short-term stimulus is much stronger” than that for austerity, says Bruce Bartlett of the Fiscal Times. He suggests that world leaders are courting a second recession so soon after the Great Recession.
Bartlett shares that view with the likes of Nobel laureate economists Paul Krugman and Joseph Stiglitz. What makes Bartlett stand out is his erstwhile service as an economic adviser in the Reagan administration.
We can be certain of this much. The new austerity, same as old austerities, will fall unevenly on those least able to shoulder the burden of sacrifice.
The legacy of widened income inequality in Canada traces to the brutal cutback regime of then-finance minister Paul Martin in the 1990s. (Which of late has been misrepresented by Britain’s new coalition government as an economic cure-all).
At least Martin wasn’t gleeful in wielding the hatchet the way then-Ontario premier Mike Harris was. We look Harris for the consequences of chronic under-investment in healthcare and education.
Just as further needed stimulus is now off the table, so is the possibility of tax increases on the most affluent North Americans and Europeans. Austerity will be felt heaviest by those without jobs and the marginally employed, on pensioners, folks struggling with skyrocketing healthcare and tuition costs, and single-parent households.
Common sense argues that under-investing in people holds back a nation. But against the current moral vacancy in our leadership class, common sense is no match.
< http://www.thestar.com/business/article/833659–olive-short-term-pain-for-long-term-pain >