Please see this piece from today's Financial Times Economics Editor.
Outright panic for more stimulus, both fiscal and monetary, and the US stock market is still up on the year!
Apologies – we need a toxic rethink on the economy
By Robin Harding
Published: June 3 2011 22:36 | Last updated: June 3 2011 22:36
The subject of this article has become taboo. I apologise for raising it on customarily polite pages – and on a Saturday – but sometimes nice people find themselves in nasty situations – such as monthly job growth of only 54,000 two years into a recovery – and a certain flexibility is needed.
That is why I want to talk about economic stimulus: stimulus, billions of dollars of it, fiscal and monetary. If that does not make you sick to the sacrum then we can talk about bail-outs as well. After the deficit spending and quantitative easing used to revive the economies of the advanced world in recent years these topics are toxic. But yesterday’s jobs report was toxic as well. Almost every sector of the economy was weak, and the unemployment rate rose to 9.1 per cent. It points to a stumble in the US recovery – and where the US goes the world follows.
The revulsion caused by talk of stimulus is understandable. The tax cuts, spending increases and bank bail-outs used to fight the recession of 2007-09 have left behind huge budget deficits and sovereign debt crises in countries such as Ireland; in the US, UK and Japan interest rates are still at or close to zero. People want to fix these problems and get back to normal, not take more crisis measures.
But to rule out all further stimulus would be extremely dangerous. The US economy has run into another “soft patch” with slower growth and a renewed fall in house prices, while the eurozone will soon have to decide on further help for Greece.
These problems should not be too serious but crisis fatigue is making them worse. Fear that angry Finns or Germans will block a rescue for Greece, or angry Greeks will refuse the austerity that angry Finns and Germans require, is encouraging market attacks on other vulnerable eurozone countries. Fear that Congress or the Federal Reserve will not step in if things get bad in the US risks creating the pessimism that turns a “soft patch” into a swamp.
It may be that the best way to avoid further bail-outs and stimulus is to be willing to consider them.
The US economy is still unlikely to need any further help despite yesterday’s news that it created a mere 54,000 jobs in May. Growth in the first quarter came in at only 1.8 per cent. House prices went below the low they hit in 2009 and have now fallen by 33 per cent from their peak – a larger fall than in the Great Depression.
That is bad but not yet terrible. Some temporary factors are in play such as disruption to manufacturing supply chains in the wake of Japan’s terrible tsunami. Oil prices have fallen back somewhat. Housing and construction have already fallen so far and so hard that the damage they can do is limited.
In 2008 the financial crisis was the accelerant that turned a small recession into a horror. It is harder to identify a similar risk today. The most likely outcome is that growth will bounce back to its (far from impressive) post-recession trend of about 3 per cent.
There was a similar slowdown in US growth last summer amid the first round of Greece’s sovereign debt crisis. That eventually led to the Fed’s $600bn, “QE2” programme of asset purchases and to a fiscal deal between Congress and President Barack Obama that cut social security payroll taxes by 2 percentage points in 2011, but this year, a similar policy response would be less likely.
A promise of deficit cuts helped Republicans to triumph in last November’s midterm elections, and with the Republican presidential primary season taking shape, US politicians are more likely to burn the flag live on Fox News than support anything that smells like a stimulus.
On the other side of the Atlantic, any advocates of a loose fiscal policy risk finding themselves in a windowless cell under the European Central Bank, for International Monetary Fund re-education on the dangers of sovereign debt crises.
The hurdles to a monetary stimulus are also higher than last year. The Fed’s leaders would probably be willing to face down political opposition to further asset purchases if they saw the need, despite the backlash against QE2 last November. But the Fed has already expanded its balance sheet by $600bn and made clear the risks increase with every extra dollar.
Even more important, inflation was falling last autumn, and now it is rising. Keeping policy steady in the face of rising food and fuel prices is one thing; loosening it is another. The European Central Bank has already raised interest rates once this year to head off inflation and it may soon do so again.
Greece’s debt problem should also not pose a serious risk to the global economy. Greece is small, the situation is not new, and while there is no easy answer, any orderly solution should limit the economic fallout for the rest of Europe and for the rest of the world.
The danger is that either austerity fatigue overwhelms Greece, and it chooses a unilateral default, or else bail-out fatigue overcomes the northern European states and they refuse to provide the loans that Greece will continue to need even if it eventually opts for some kind of restructuring of its debt.
Either version would lead to renewed trouble for every other European state with a large debt or a large deficit including, possibly, Italy and Spain. Once again, the only real danger to the world economy is that people are too fed up to deal with the danger.
The rich world’s recovery from the Great Recession began two years ago. It is dispiriting that we still face sovereign debt crises and soft patches. But just as a war is more likely to be lost from a collapse in morale than a defeat on the battlefield, the only way that the world economy is likely to succumb to another recession is if policymakers lose the will to fight it.
Let us hope that no more stimulus is needed. But that option cannot be taboo.
The writer is the FT’s US Economics Editor