Wednesday, December 30, 2009


In an article published in the FT this week, Arvind Subramanian of the Peterson Institute for International Economics, argues that economics has redeemed itself by rescuing the world economy from the crisis. I agree, but only up to a point. Many economists argued that the measures were unnecessary, or even harmful. Moreover, these extraordinary interventions have not returned the patient to health. They have merely prevented him from dying. We now must heal five chronic conditions, instead of survive last year’s brutal heart attack.
First, we have the ongoing force of the balance-sheet recession in the US, UK and a number of other significant high-income countries. It is overwhelmingly likely that the highly indebted parts of the private sectors of these countries will seek to lower their indebtedness and raise savings over an extended period.
Second, we have, quite rightly, substituted public sector borrowing for
private sector borrowing, on an unprecedented scale, for peacetime. This can continue for some time, but not forever, as the US and UK come to look like Italy, but without Italy’s healthier private sector finances.
Third, despite modest – and, quite possibly, temporary – reductions, the US, UK, Spain and other erstwhile bubble economies continue to have large structural current account deficits, with substantial offsetting
surpluses in China, Germany, Japan, the oil exporters and several other countries. Yet, so long as these external deficits continue, the countries concerned must be running ongoing financial deficits in either the public sector, or the private sector, or both. In other words, the domestic balance-sheet problem is likely to become not better, but worse, without global rebalancing.
Fourth, the surplus countries –
China, most openly – show little or no interest in making the needed policy changes. Instead, they continue to argue as if it were possible for the Earth to run a surplus with Mars. Somehow a way must be found – ideally, co-operatively – to wean the surplus countries from their addiction.
Finally, the financial system remains damaged. Not only does it still own vast quantities of the “toxic assets” its “talented” employees created, but the world is not addressing the structural causes of the crisis. In some ways, the oligopolistic banking system that has emerged from the crisis is riskier than the one that went into it.
The underpinnings of our global economy and so of our globalised civilisation remain dangerously fragile
. Instead of patting ourselves on the back for a job well done, now that a limited recovery has begun, we need to sustain the effort to return the world economy to vigorous health. That will require much co-operative intellectual and policymaking effort. But, first, we must eschew perilous complacency.

No comments: