♠ Posted by Emmanuel in Credit Crisis,Europe
at 3/11/2009 09:11:00 AM
I almost forgot to post about this too-precious moment: Larry Summers has been a magnet for controversy in each of his high-profile jobs--World Bank chief economist, US secretary of Treasury, and president of Harvard. In the first instance, he circulated what he says was an ironic memo supporting dumping more waste in Africa; in the second he castigated Japan's efforts to shield Southeast Asia from the brunt of harsh IMF policies at the height of the Washington Consensus era; and in the third he made comments to the effect that women were not suited for certain jobs. Say what you will about Summers, but he is not a dull chap due to his tin ear for diplomacy.It now seems that Summers is not wasting time rubbing others the wrong way in his new job as head of Obama's National Economic Council. It's all of a piece with my recurrent criticism of hypocrisy in international organizations. When Summers was at the controls at the World Bank and US Treasury, it was all about "structural adjustment," "living within one's means," and "belt tightening" for wayward LDCs. However, when the world's largest debtor country and spendthrift extraordinaire the US into trouble, Summers all of a sudden switches into stimulus-all-around mode to suit the US agenda. Again, the Washington Consensus held for everyone except Washington itself. From the Financial Times:
Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession. In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.Someone Summers should be familiar with, Milton Friedman, once said "there is nothing as permanent as a temporary government program." Indeed, Uncle Sam seems to be having trouble dissociating himself from bailing out any and all takers--airlines, automakers, banks, etc. Moving to the other side of the Atlantic, response to Summers' plea for stimulus mania appears to have fallen on deaf ears, hence the post's title. Again from the FT:
The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said. His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.
“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers. “There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.” While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now. “The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.
Widely seen as being among the most pro-market voices in the White House, having been Bill Clinton’s last Treasury secretary in the 1990s, Mr Summers said the view that the market was inherently self-stabilising had been “dealt a fatal blow”. At a time when the Republican critique of Washington’s aggressive response to the crisis is growing more trenchant, Mr Summers made an unapologetic case for government intervention.
“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times . . . there’s a need for extraordinary public action at those times...”
European ministers said yesterday they had no plans to add to recent fiscal stimulus packages despite calls from the US for radical expansions in government action to boost ailing economies. Meeting in Brussels, finance ministers from the countries in the eurozone said they wanted first to see the effect of stimulus packages that had been passed. Peer Steinbrück, the German finance minister, said: "We are not debating any additional measures." He said that Germany had recently passed a second stimulus package worth €50bn ($63bn, £46bn) and was also counting on the automatic fiscal stabilisers that increase government spending in a downturn.The EU offers sensible points. Is it not prudent to see if various stimuli work? Also, the broader panoply of social supports in continental European countries means a lot of what the Anglo-Saxon US would consider stimulus has already kicked in. Old EU observers will mention the so-called Stability and Growth Pact which proscribes member states from running fiscal deficits larger than 3% of GDP lest they incur sanctions from the EU. It is true that this proviso has been honored more in the breach than in the observance. Moreover, the EU has never, ever punished any member state over it being breached. Perhaps it's time to consider it more seriously lest the EU degenerate into American-style stimulus mania. Future generations of Europeans, and holder of the euro (like myself), will appreciate it.
Jean-Claude Juncker, chair of the "eurogroup" of ministers, said: "The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking."
Lawrence Summers, senior economic adviser to Barack Obama, US president, told the Financial Times recently that the Group of 20 countries should agree to boost government demand. Yesterday Christina Romer, chair of the White House Council of Economic Advisers, said: "The more that countries throughout the world can move toward monetary and fiscal expansion, the better off we will all be."
But European ministers are concerned that building up more government debt would threaten the stability of the eurozone and say that they want to assess the effects of spending boosts that have already been passed before considering more. The US Treasury declined to comment on their remarks yesterday...
A recent assessment by the International Monetary Fund said that the US had enacted new discretionary economic stimulus equal to 2 per cent of gross domestic product for 2009, compared with 1.5 per cent for Germany, 1.4 per cent for the UK and just 0.7 per cent for France. But the IMF said that automatic stabilisers were worth 2 per cent of GDP for the UK and France, which have relatively large welfare states, compared with 1.5 per cent for the US.
As for Summers' current affliction with stimulus mania, I suggest that he look up "Yerkes-Dodson." In this world, you will not make many friends setting double standards far more favorable to your interests. Perhaps even he can be rehabilitated, though I'm not putting money on it.
UPDATE: Also see TIME on this point.
