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YES WE CAN!! have a global depression if we really continue to work at it…


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Peter Brookes - The Times - 5 February

Peter Brookes - The Times - 5 February

Willem Buiter writes at the Financial Times YES WE CAN!! have a global depression if we really continue to work at it…. This lengthy post is both stimulating and provocative as is usual with Buiter.

It provides a lot to think about.

Adam’s extracts focus on some comments about protectionism, because they cover an area which concerns Adam greatly given the impact that the growth in protectionism has upon free trade, world economy and the NZ economy. Yet we need to recognize that the cries for protectionism will oil the slide from recession to depression.

Buiter writes:-

I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression.  Now I’m not so sure.

I used to believe that the unavoidable protectionist and mercantilist rhetoric would not be matched by protectionist and mercantilist deeds.  Protectionism was one of the factors that turned a US financial crisis into a global depression in the 1930s.  Protectionism imposes large-scale structural sectoral dislocation, as exporters are ejected from their foreign markets and domestic producers that depend on cheap imported imports suddenly find themselves to no longer be competitive, on top of the global effective demand failure we are already suffering from.

More and more we seem to be seeing politicians clutching at economic nationalism as a life saver. Yet the problem is that based on this commentator’s reading of history and his limited understanding of economics the actions proposed by many politicians are more likely to engender an economic whirlwind bringing down on the collective heads of us all that which they seek to avoid.

On protectionism specifically Buiter notes:-

The odious US House of Representatives has tagged a Buy American clause onto the Obama administration’s $819 bn (or more) fiscal stimulus bill.  If this were to become law, US federal spending would, wherever possible, be restricted to goods and services produced by US companies.  The main promotor of this act of global economic vandalism was the US steel industry, but other import-competing industries have lobbied also.  It is quite likely that the Buy American net will be cast even more widely when the Senate gets its turn at the fiscal stimulus act.

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world.  The response of the assembled non-US finance ministers in Davos made this clear.  Retaliation from the EU countries and the rest of the world would follow swiftly.  Because this disastrous US Congressional actions follows so closely on Treasury Secretary Geithner’s declaration that China is manipulating its currency, it is essential that the Obama administration draw a clear line in the sand.  If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it.  The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause.  If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House.  If such is the case, God help us all.

Adam has posted on this topic previously, most recently in a post entitled Obama provoking trade war? This leads him to think it likely that Obama will be seen to be a wuss. Anti-Dismal in commenting on Buiter’s post came to the same conclusion.

The Economist writes in a leader on economic nationalism:-

Once again, the task of saving the world economy falls to America. Mr Obama must show that he is ready for it. If he is, he should kill any “Buy American” provisions. If he isn’t, America and the rest of the world are in deep trouble.

Unfortunately, Adam’s suspicion is that Mr Obama is not ready.

Further at the meeting in December of the G20 the attendees called for all nations to refrain from embracing protectionist actions. Yet it is G20 countries such as the USA and France which have led the protectionist pack, as Buiter notes:-

The US is not alone in moving down the protectionist track.  Since the last G20 meeting (with its unanimously endorsed call to avoid protectionism), virtually all the emerging market member nations of the G20 have introduced or announced  protectionist measures.

He omits the French here for some reason, yet as is so often the case they are amongst the protectionist frontrunners.

In the latest Economist there is a leading article on economic nationalism which makes 3 points which align with Buiter:-

Three arguments are raised in defence of economic nationalism: that it is justified commercially; that it is justified politically; and that it won’t get very far. On the first point, some damaged banks may feel safer retreating to their home markets, where they understand the risks and benefit from scale; but that is a trend which governments should seek to counteract, not to encourage. On the second point, it is reasonable for politicians to want to spend taxpayers’ money at home—so long as the costs of doing so are not unacceptably high.

In this case, however, the costs could be enormous. For the third argument—that protectionism will not get very far—is dangerously complacent. True, everybody sensible scoffs at Reed Smoot and Willis Hawley, the lawmakers who in 1930 exacerbated the Depression by raising American tariffs. But reasonable people opposed them at the time, and failed to stop them: 1,028 economists petitioned against their bill. Certainly, global supply-chains are more complex and harder to pick apart than in those days. But when nationalism is on the march, even commercial logic gets trampled underfoot.

Buiter deals as well with jobs protectionism, writing:-

In the UK, prime minister Gordon Brown is reaping the protectionist storm he sowed

Peter Brookes - The Times - 3 February

Peter Brookes - The Times - 3 February

with his infamous protectionist and xenophobic call for “British jobs for British workers”.  What was he thinking?  Follow the logic: ‘British jobs for British workers’,’Scottish jobs for Scottish workers’ (along with ‘It’s Scotland’s oil’), ‘Welsh jobs for Welsh workers’ and ‘English jobs for English workers’.  Why not London jobs for London Workers, or London jobs for native-born London workers, or even London jobs for white Christian native-born London workers?

Yet we see shades of this in NZ with the furore over Telecom and ANZ off-shoring some jobs. Note also Buiter’s comments on the UK educational system. These comments have some parallels here in Adam’s opinion.

Buiter makes another very good point on the ability of governments to fight the recession with fiscal stimuli:-

Effective fiscal stimuli involving increased government deficits can only be provided by governments with fiscal credibility, that is, governments that can cut taxes and increase public spending now and credibly commit themselves to future tax increases and public spending cuts of equal magnitude.

It would appear that John Key recognizes this fact even if Phil Goff does not. Adam is not certain if Kevin Rudd does, but Australia had a stronger economy. Key is talking about the need for balance. Others, especially Labour and the Greens, seem to think that stimulation does not have to be paid for, that there is an inexhaustible supply of economic Viagra which can be administered without any consequences.

This means that the contribution of fiscal policy to the recovery of global demand will (a) be limited and (b) have to be modulated according to national fiscal spare capacity.  That means little if any fiscal stimulus in the USA and the UK and a large fiscal stimulus in Germany and China.  Germany is being dragged, reluctantly, towards the Halls of Reason.  The US and the UK seem intent on expansionary fiscal actions that are likely to more than exhaust their government’s credibility capital.

It is here where we begin to see, or at least Adam thinks so, the impact of Clark and Cullen’s failures of the last 9 years. The failure to increase productivity; plus the soaking up of national wealth on poor quality government spending. Thus effectively limiting the ability to provide fiscal stimulus.

In this regard it is perhaps pertinent to note that Key’s April tax cuts are to a large extent financed by cutting Kiwisaver incentives, which would have been non-stimulatory in nature and switching them to a hip pocket benefit, which has a greater probablity of being stimulatory.

Buiter concludes:-

We can go down in history as the generation that created the Great Depression of the Noughties.  Just keep on beating the protectionist drums.  Keep on the footdragging that prevents effective qualitative and quantitative monetary policy easing in the Eurozone and the UK.  And go ahead with unsustainable fiscal stimuli in the US, the UK and elsewhere that will spook markets, push up long-term interest rates and raise the spectre of sovereign default by countries not belonging to the group of usual suspects.  Yes we can!  I hope we won’t.

Adam is with Professor Buiter in that hope.

Otherwise it really will be a case of  YES WE CAN!! have a global depression if we really continue to work at it…

  1. adamsmith1922 permalink*
    09/02/2009 13:32

    Actually the US could spark as trade war by the nature of their protectionist moves.

    The US $ is weak against the yen. It was some years ago 140 yen to 1 US $ now is is 92 yen to 1US$ hardly a weakening yen

    Further the US has outsourced much production to Mexico, China, Thailand, Indonesia, Singapore and India. It was not Japan that de-industrialised the USA
    I think you have some of your facts wrong


  2. igneous permalink
    09/02/2009 00:47

    America is already in a trade war and has been for a long time.

    Japan has been purposely weakening its currency to gain trade advantage and in the process the US has been deindustrialised.

    What the hell do you think the Carry trade is about. Cheap loans means lots of yen. Lots of yen mean yen cheap and therefore goods on western shelfs cheap too.
    China is doing the same thing but with cheap labour. Russia and Germany too put tarrifs on stuff to protect their industries.

    Oh no the US could spark a trade war. Oh no!!.



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