Thursday, September 29, 2011

Killing the Recovery


How far are we from another Depression?
The world has barely dug out of recession and the global economy is again slowing dangerously. Most leaders seem eager to make things even worse.

Instead of looking for ways to reignite growth, Europe’s leaders — and Republicans on Capitol Hill — are determined to slash public spending. Europe’s fixation on austerity is also compounding its debt crisis, bringing the Continent even closer to the brink. Meanwhile, China’s government, which is struggling to contain inflation without letting its currency rise, has been trying to slow domestic demand, allowing its trade surplus to balloon.

Each of these policies is wrong. In combination, they are likely to tip the world into a deep recession.

The International Monetary Fund has cut its forecast for global growth this year to 4 percent, from the 4.3 percent it had forecast in April. It expects rich countries to grow by only 1.6 percent. That may be too optimistic.

The I.M.F. forecasts that the United States will grow by 1.5 percent this year and 1.9 percent in 2012. But that assumes Congress will continue payroll tax cuts and extended unemployment insurance, as President Obama has called for. Mark Zandi of Moody’ warns that if Congress fails to do so, the country will probably slip into recession.

Europe is in even worse shape. Rich nations that could afford to spend more to increase growth, like Germany and Britain, are instead slashing spending. Germany and its rich neighbors are also insisting that Greece, Portugal and other debtor countries accept even stiffer doses of austerity to regain the confidence of investors. Sending these economies into near collapse means that they will never be able to dig out or pay off their creditors.
While the German Parliament is expected to approve a new $600 billion bailout fund on Thursday, many European leaders already admit it is too small to deal with turmoil that now also threatens Spain and Italy.

It is true that many countries do not have the money to pay for policies to promote employment and growth. The United States, Britain, Germany and China could boost global demand by spending more at home and buying more from weaker countries that cannot stimulate their own economies.

The United States government must cut its budget deficit, but the economy must recover first. According to Mr. Zandi, President Obama’s $450 billion jobs plan could add 1.9 million jobs in 2012 and cut the unemployment rate by a percentage point. With interest rates so low, the government could easily pay for a bigger program.

The British government has similar room to maneuver. And its stubborn insistence on fiscal austerity is already causing havoc. But the countries that could do most to assist global growth are China and Germany.

China today makes 14 percent of the world’s economic product but consumes only 6 percent of it. Allowing its currency to rise would help combat inflation by lowering the domestic price of imports, while increasing the spending power of the Chinese people.

Germany’s export model is also failing, producing little growth while sucking demand from its neighbors. Germany could easily raise money at low cost to stimulate its own consumption. Yet not only has it refused stimulus spending, it is imposing austerity on the rest of Europe — forcing weak countries to contract their economies in exchange for its aid.

Economic policy makers have made similar mistakes before. That is what caused the Great Depression. There is not a lot of time left to get this right.

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