The BBC and several other media report continuing Franco-German opposition to the calls by the US administration, the president of the World Bank, and many others, for the coordinated global fiscal expansion that would seem to be essential at this time. Irish auditors will however be interested in the following from Larry Summers:
“There are some for whom it would be imprudent,” he said, noting that the crisis-hit countries in eastern Europe – which have large foreign currency debts – could not increase spending. “But for a very large majority of the world economy, [a fiscal expansion] is appropriate.”
The BBC further reports:
But European governments have indicated they are unlikely to strain their finances by agreeing to much more spending until they have seen some results from the first round of stimulus programmes already launched, says our correspondent.
Now, if accurate, this report raises some fascinating questions. Given the lags involved with macroeconomic policy, how long a wait would this imply, even if the fiscal stimuli worked according to a Keynesian textbook plan? And what would such a wait then imply for the health of the economy? And, given that the stimuli are small, and that the contraction in the economy is enormous, what sort of ‘results’ is it realistic to expect? I would have thought that the results will be purely counterfactual — the economy will shrink less than would otherwise be the case. In that case the ‘results’ would have to be guaged with reference to the predictions of some model of the economy. Is that what is meant here? Or, are the governments concerned hoping that the stimuli will lead to an actual increase in GDP? And if so, are they implicitly ruling out further fiscal stimuli unless the economy stops shrinking?
Now, that would be an interesting policy stance.
Oh, and a happy St Patrick’s Day weekend to everyone.
3 replies on “More G-20 bickering”
Kevin,
Further to the conversation last week regarding the G20 and coordinating fiscal stimuli, I wanted to draw your attention to a very interesting article on China in this month’s Atlantic by Jim Fallows*, an excellent journalist and a someone with deep knowledge of China. I strongly recommend this article to all readers of the blog.
His overall thesis will not be news to you but it is that China is like the U.S. in the 1930s, having just run a major surplus with the rest of the world. However China’s dependence on foreign trade is far greater than America’s was at the time. As a result:
“The real counterpart to Smoot-Hawley would be Chinese protectionism—or rather, any effort by China to defend its huge trade surpluses, as the U.S. once did. China’s government is unlikely to rely on outright Smoot-Hawley–style tariffs. Instead it could increase subsidies to exporters; it could try to push the RMB’s value back down, after three years of letting the currency rise; it could encourage manufacturers to restrain wages; it could impose indirect barriers to imports, as with its recent pressure on China’s airlines to cancel outstanding orders for Boeing and Airbus airplanes. By early this year, China’s government was in fact doing every one of these things. As a result its global trade surplus, instead of shrinking as expected when the world economy deteriorated, grew dramatically. Exports fell, but imports fell much more: in January, exports declined by 17 percent and imports by more than twice as much—by 43 percent. This is an economic problem for other countries. But it could be an even more serious political provocation, if China is seen as forcing its share of unemployment problems onto everyone else. And thus, to bring this scenario to a close, the best China can expect from today’s shocks might be unemployment rates higher than America’s in the ’30s. The worst would be for China to start a trade war that makes things even harder for itself.”
Fallows goes on to posit that a new, more innovative China could emerge from what follows this crisis, which is also an interesting point.
* http://www.theatlantic.com/doc/200904/chinese-innovation
Thanks for the reference Mick.
[…] Kevin has raised the issue of differing attitudes in Europe and the US about the need for expansionary fiscal policy, with the Germans being particularly reluctant to adopt expansionary policies. This piece in today’s FT shows that some of the difference in attitudes reflects German concerns about US monetary policy. […]