A Return to What?
Megan McArdle has a deft post up critiquing the Democratic rush to fiscal stimulus which is well worth your time. In a nutshell, there’s precious little evidence to suggest that any kind of politically feasible government spending can get us out of something as grave as the Great Depression.
What we’ve got, since Japan really never did emerge from its lost decade, is basically one fact: America entered World War II in a depression, and emerged from World War II without one. Hopefully, the relevant variable was the massive, massive amount of spending, rather than any of the other explanations one can plausibly build about the effect of Total War on depressions–like the slaughter of some of your excess labor force, or the substitution of more immediate fears of being killed for panic about the financial future.
Indeed.
But I’ve got a broader question I’m hoping someone with a better econ background than mine (like Megan) can answer for me: Isn’t part of what caused the current mess that American consumers were overspending and undersaving? That the global financial system has set itself up on the back of American consumption? And that this was an unsustainable arrangement? If any of those premises are true, isn’t resuscitating American consumption/demand a pretty foolish thing to do?
I’ve got Ben Bernanke’s much-derided-at-the-time “Global Savings Glut” analysis in mind.
Here’s an oversimplified, almost caricatured summary for those unwilling to plough through Bernanke’s rather lucid (but lengthy) exposition: Asian economies, burned by the financial crises of the late 90s, instead of encouraging net inflows of capital as they had before, decided to channel their domestic savings into international capital markets. These funds found a productive home in the advanced American economy, where they heated up the housing and equity markets and generally allowed Americans to live way beyond their means. Americans spent what they experienced as their newfound wealth in part on the exports of these developing economies, which ploughed even more of their money back into our system, further perpetuating and exacerbating the situation.
Bernanke didn’t predict that things would unravel the way they did. Like most economists at the time, he worried about Asian central bankers turning off the spigot of capital flows as they began to wonder about America’s ability to repay its mounting debts. This would lead to interest rates going up in the United States, which would lead to the much-feared “hard landing” for the economy. He didn’t count on the bottom falling out of American consumer demand like it has.
But what’s changed since it’s happened? The Chinese haven’t changed their spending habits, and there’s little to suggest that they will. By insisting we repair American consumer demand by fiscal stimulus, aren’t we trying to turn the clock back to something like 2003—a situation that even then was clearly unsustainable in the long run?