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The Great Malaise Continues
The Great Malaise Continues
NEW YORK – The year 2015 was a hard one all around. Brazil fell into recession. China’s economy experienced its first serious bumps after almost four decades of breakneck growth. The eurozone managed to avoid a meltdown over Greece, but its near-stagnation has continued, contributing to what surely will be viewed as a lost decade. For the United States, 2015 was supposed to be the year that finally closed the book on the Great Recession that began back in 2008; instead, the US recovery has been middling.
Indeed, Christine Lagarde, Managing Director of the International Monetary Fund, has declared the current state of the global economy the New Mediocre. Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.
In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise. Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.
The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.
At the same time, the US suffers from a milder form of the fiscal austerity prevailing in Europe. Indeed, some 500,000 fewer people are employed by the public sector in the US than before the crisis. With normal expansion in government employment since 2008, there would have been two million more.
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Austrians vs. The World On Canadian Fiscal Austerity
Austrians vs. The World On Canadian Fiscal Austerity
I don’t know whether this is something the average Canadian discusses over coffee, but the sharp fiscal turnaround in the mid-1990s is still providing fodder for today’s economists to argue. In September 2014, I summarized the Canadian budget triumph, in which the federal government turned its deficit into a surplus largely through spending cuts, with the economy suffering no ill effects.
But I also explained that it’s crucial for Keynesians like Paul Krugman to explain away the success of this so-called austerity by pointing to falling interest rates. Thus, Krugman argued, it’s not that cutting government spending actually helps an economy, but rather it’s that looser monetary policy can pick up the gaping hole in Aggregate Demand.
In my first Mises CA post and then a follow-up, I gave various arguments and evidence to say that the Bank of Canada did not appear to have loosened policy. For example, the growth in the Bank of Canada’s assets almost came to a halt in 1996, and it was no higher in subsequent years than it had been earlier in the decade. Furthermore, CPI inflation showed no signs of heating up during the period when Krugman must claim that monetary policy loosened.
The one metric that lines up with Krugman’s story is that Canadian interest rates fell. But, I pointed out that this is exactly what we would expect to happen naturally, as the federal government greatly reduced its borrowing and fears of a bond crisis evaporated. After all, this was just the mirror image of what happens in a situation of high government deficits, when “crowding out” and fears of a default go hand in hand with high interest rates.
The debate flared up once again last month, prompted by another Krugman post in which he (again) said that the Canadian experience in the 1990s showed the importance of loose money to offset budget cuts. This time, Market Monetarist David Beckworth jumped into the fray, taking the Keynesian position.
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