As Global Economy Sags, Political Leaders Are AWOLClive Crook
Oct. 17 (Bloomberg) -- I keep reading that politics right now is all about the economy -- in the U.S., in Europe, in China, in India, wherever. The U.S. presidential election is focused so fiercely on the economy, in fact, that actual policy making has been shut down for months. Apparently it’s not possible to worry about the economy and do something about it at the same time.
Here’s an odd thing, though. Despite the apparent concentration on economic affairs, an important fact about global economic conditions appears to have been missed: Things are getting worse.
In the U.S., analysts sift through tentative signs of improvement in the labor market, leveling house prices and higher consumer confidence. Maybe the recovery is picking up. Alarm in Europe over the imminent collapse of the currency system has subsided since governments and the European Central Bank said they’d never let that happen -- a promise they seem unsure how to keep, but still. The condition of the world economy, you might think, is serious but stable.
Actually, it continues to deteriorate.
The International Monetary Fund has just released new forecasts. Global growth this year, fourth quarter over fourth quarter, is expected to be just 3.0 percent -- less than last year’s 3.2 percent, and cut from the already puny 3.7 percent the IMF’s economists were predicting for 2012 last spring. They’ve cut the forecast for growth in the U.S. by 0.3 percentage points, and they now expect the U.S. economy to expand even more slowly this year (1.7 percent) than it did in 2011 (2.0 percent).
Japan’s prospects have been downgraded too. So have Britain’s -- and how. Six months ago the IMF predicted UK growth of 1.5 percent in 2012; now the forecast is for zero growth. Projected growth in smaller advanced economies is down from 3.6 percent to 2.3 percent (compared with 2.4 percent in 2011). For emerging and developing economies it has fallen from 6.3 percent to 5.5 percent (compared with 5.7 percent in 2011).
According to the forecasts, 2013 will be a better year than 2012, but not by much -- global growth of just 4 percent. And again, for the U.S. and especially for the euro area and Britain, the prospects look worse than they did six months ago.
Why? Because of epic political incompetence.
Admittedly, the Great Recession confronted governments everywhere with almost unprecedented challenges. (Policy errors explain why the Great Recession happened in the first place, of course, but put this aside.) Even allowing for this, the response has been feeble in every domain but monetary policy. I shudder to think how bad things would be if the Federal Reserve and other central banks hadn’t acted so forcefully, resorting to quantitative easing and other measures that would have seemed reckless just a few years ago.
Compare this with fiscal policy, the realm of elected leaders. It’s in shambles both in the U.S. and Europe, albeit in different ways. What governments ought to do is conceptually simple: Maintain fiscal support for lower-than-normal economic activity in the short term, while announcing plans -- detailed, credible plans -- to strengthen public finances over the longer term. It hasn’t happened.
Fiscal policy is paralyzed in the U.S. by the mutual enmity of the two political tribes. Mitt Romney and the Republicans are simply wrong about the fiscal stimulus of 2009: It was necessary and it should have been bigger. But the Obama administration’s failure to explain how it would restore the government’s long-term finances -- not to mention its desire for a permanently larger government, regardless of the business cycle -- has strengthened the opposition’s case in the minds of many voters. The idea of further short-term stimulus, which the economy sorely needs, has become so politically toxic that the Democrats dare not advance it.
Meanwhile the U.S. economy heads for the “fiscal cliff,” a previously legislated doomsday scenario of tax increases and spending cuts designed to be so stupid it would force the two sides to agree -- as it turns out, they still can’t. Could you make this up? What’s next? Maybe the world’s biggest debtor will threaten to default.
Europe’s fiscal problem is more difficult, because it raises far-reaching constitutional issues, but it’s nonetheless soluble. Collectively, the euro area still has enough fiscal space to support demand and ease the pain of economic adjustment in countries where public borrowing ran wildly out of control (as in Greece) or where private credit fueled an asset-price bubble and cost inflation (as in Spain). Without that support, the adjustment probably won’t happen: The domestic political stress is too great. But mobilizing this collective response is proving impossible because the EU’s stronger economies, led by Germany, are reluctant to subsidize their weaker neighbors any more than they already have.
That may seem reasonable, but in fact it’s Washington-grade political malfeasance -- because it’s in Germany’s own interests, and that of the euro area’s other strong economies, to hold the euro system together and avoid the EU-wide financial catastrophe that would otherwise ensue.
I’m not denying it’s hard. In Europe the right balance must be struck, country by country, not only between short-term fiscal support and medium-term fiscal consolidation but also between each euro member’s rights and responsibilities within a reconstituted economic and monetary union. This would be a tough constitutional challenge even if the EU economy were in good health. It’s shameful, nonetheless, that with the region’s economy crashing around them, Europe’s politicians are still so far from rising to it.
The world economy isn’t healing. It’s getting sicker. Let’s be clear who’s to blame. Europe and America stand betrayed not just by their leaders of the day, but by their entire political class.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
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