G20 members: Embarking on a great experiment - Macleans.ca
 

G20 members: Embarking on a great experiment

COYNE: The world leaders agreed on a broad economic plan. You’d have never seen this 20 years ago.


 

Canadian Press / Getty Images

Often the true significance of a political document lies not in what it says, but what it doesn’t say. That it will be vague and platitudinous is a given: it’s the choice of platitudes that’s the key.

Consider, then, what the G20 might have said after their weekend meeting, but didn’t. Suppose the final communiqué had been drafted by, say, the economist Paul Krugman. “We, the members of the G20,” it would have said, “commit ourselves to significant further injections of fiscal stimulus. We believe that the failure of economies to respond to previous rounds indicates only that we have not been bold enough. If financial markets are in turmoil, it is plainly out of fear that finance ministers will spend and borrow too little, not too much.” And so on, and so forth.

Or suppose Nicolas Sarkozy had been allowed to write the section on banks: “We continue to believe that large financial institutions should be preserved from failure, for fear of the economic dislocation that would otherwise result. To pay for future bank bailouts, we will tax the banks themselves, firmly convinced that this will not be passed on to consumers, workers or shareholders. We will insist that all member states levy such a tax, to prevent banks from shifting activity to the lowest tax jurisdictions.” Et ainsi de suite, et ainsi de suite.

But that is not what the G20 said—in the same way that the G8, in its own communiqué, did not single out Israel for criticism in the matter of the Gaza flotilla, or commit itself to more stringent targets reducing carbon emissions, among other choices it might have made. It’s easy to say the communiqués are waffly, that they leave plenty of wiggle room, that in many places they amount to each country agreeing to do what it had planned on doing anyway. And even where the commitments are less equivocal, it’s an obvious point that these can scarcely be binding: these are, after all, sovereign countries. But these are deviations around a trend line. And, especially in economic matters—now very much the province of the G20—the thrust was unmistakable.

To be sure, the communiqué encourages member states to “follow through on . . . existing stimulus plans.” (Emphasis added.) But by far the greater weight is given to “the importance of sustainable public finances and the need for . . . credible, properly phased and growth-friendly plans to deliver fiscal sustainability.” And while the document is careful to leave room for these to be “differentiated and tailored to national circumstances,” it also, remarkably for such a document, sets out specific targets for the desired “fiscal consolidation”: deficits “at least” halved by 2013, debt-to-GDP ratios on the downward path by 2016.

Similarly, the language on financial sector reform is particularly concerned with the dangers of “moral hazard,” and sends a clear signal that the days of “too big to fail” are over. “We are committed,” it reads, “to design and implement a system where we have the powers and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers ultimately bearing the burden.” And while it was agreed that “the financial sector should make a fair and substantial contribution” toward the cost of stabilizing the system, “we recognized that there are a range of policy approaches to this end. Some countries are pursuing a financial levy. Other countries are pursuing different approaches.” (Emphasis added.)

It can’t escape notice that, on both points, the G20 consensus was squarely in line with the policies of the Harper government—perhaps not surprisingly, given the urgent lobbying that went on before and during the meeting. Indeed, comb through both communiqués, and it’s hard to find a line that Stephen Harper would disagree with. Aside from the bank tax victory, the financial reform package the G20 is preparing—final agreement awaits this fall’s meeting in Seoul, Korea—looks a lot like the Canadian model generally: higher capital standards, lower leverage ratios, more “intensive” regulatory supervision. There’s a renewed commitment to free trade, including a no-exceptions promise, extending a pledge made at their 2008 meeting, to “refrain from raising barriers or imposing new barriers to investment or trade in goods and services, imposing new export restrictions or . . . measures to stimulate exports” that are not consistent with World Trade Organization rules.

The language on global warming, meanwhile, is quite Harper-like in its tepidity. The G20 limits itself to observing that “those of us who have associated with the Copenhagen accord reaffirm our support for it and its implementation and call on others to associate with it,” while the G8 briefly repeats the “goal” of developed countries to reduce their emissions of greenhouse gases by 80 per cent or more by 2050, “compared to 1990 or more recent years.” (Emphasis added.) True, there is also a shout-out to various reports and working groups looking at the possibilities and modalities of phasing out, over time and subject to national circumstances, certain “inefficient fossil fuel subsidies that encourage wasteful consumption.” But that is unlikely to trouble the Prime Minister unduly. Indeed, the old Harper would have welcomed it.

Whether this remarkable convergence on the Canadian agenda is a product of Harper’s leadership around the conference table, the moral standing accorded us owing to our fiscal and financial health, adroit diplomacy, or simply a happy coincidence, it’s again worth considering the alternative. Binding or not, a collective commitment to run bigger deficits for longer, or to impose a bank tax, would have left Harper in a ticklish place, not only with his fellow leaders, but with domestic voters: multilateralists to the last, Canadians don’t like to see their country offside with any international consensus. But as it is, Harper has been given ample cover for any austerity measures he might wish to impose. Meetings like this may not take historic decisions or set hard and fast rules, but they do help shape the climate of opinion.

About the only setback the Canadians could be said to have endured was on the maternal and child health initiative, intended as the centrepiece of the G8 meeting. But even this was a kind of victory. Yes, Harper’s fellow G8 leaders kicked in ridiculously small sums, less than $4 billion in all, for what one would think would be an unassailable priority—literally, putting food in the mouths of babies. But that only left Harper basking in unaccustomed praise from aid groups for his “leadership” in ponying up the other $1.1 billion, more than one-fifth of the total.

The other thing worth noting about this broad economic consensus, besides its pleasingly orthodox tone, is how unlikely it would have been from such a group 30, even 20 years ago. Balanced budgets, free trade, financial reforms with market disciplines at their core? You’d never have got the developed and developing worlds to agree on these in the past. Indeed, reading through the document, with its familiar-sounding declarations that monetary policy should be aimed at “price stability” and pledges to promote growth through supply-side “structural reforms,” the thought occurs that it is not so much the G8 the G20 is supplanting, as the Organization for Economic Co-operation and Development. China, India and the other emerging economies may have taken their place at the rich man’s table, but it is by embracing the policies that made the rich countries rich, and they know it.

That consensus will be put to the test in coming months. Striking the right balance on capital standards—tough enough to assure banks can survive a credit crunch, not so tough as to tip us into one—will be tricky. (Another nod to Canadian leadership: Mark Carney, governor of the Bank of Canada, has been tipped to head the committee of central bankers that will frame the rules.) And so far as the G20 do all tighten their belts at the same time, the conditions are in place for the kind of laboratory-bench experiment that is rare in economics: a chance to resolve the great fiscal-stimulus debate once and for all. Either the world will tip, as a despondent professor Krugman is now predicting, into another depression. Or, you know, it won’t.


 

G20 members: Embarking on a great experiment

  1. The 'agreement', such as it is ,comes about because of a globalizing world. It's the wrong thing to do, however, and they're all free to go their own way anyhow…so it's a tentative baby-step towards globalization.

    One can only hope they learn faster than this, and move in the right direction in Seoul in November.

    • Good point. The Harper sycophants in the media don't seem to realize this can be headed in another direction in November if it's not going well. It was weak and sloppy to start with and has no lasting significance. If you had to bet, bet Krugman is right Coyne wrong. And Obama had it all figured out and played along. There will be lots of rejigging with lots of face saving
      in Seoul.

  2. I've always been proud of most of my country's history, but I've seldom been proud of her deeds and global role during my lifetime. I sense that that is changing for the better.

    Harper hit a home run at the G8/G20 and on the MHI. Press the advantage, Mr. Harper.

    • Stock market sank, and the talk now is about an even worse crisis.

      If you want to credit Harper for that, be my guest.

      • There is no crisis in Canada, haven't you noticed.

        And as much as Harper would like to alter Obama's mistakes, Obama is not the type to listen. The US voters will have to right that wrong.

        • when the US sneezes, Canada gets a cold. Whatever happens there, happens here. In fact, Canada had it worse than the US in the first great depression.

          We are not an island – we are affected by the rest of the world, like it or not.

          • Absolutely right – we are very much affected by the rest of the world. That's why Harper's G20 deficit-cutting initiative was such a home run for Canada. Now let's hope it bears fruit. It should be an interesting experiment, as Coyne said.

          • Should we really call it an initiative at this stage? Should we even call it a policy? My understanding is that Harper's "plan" at this stage still amounts to hoping for strong enough private sector growth to pull Canada out of deficit in a completely pain free process. He has made committments to a combination of no new taxes, no slashing of programs i.e. he pledged government inaction to save the day. Of course, if it works fine… but it would seem to be more of a optimistic projection than a real plan, policy or initiative. This is especially true given the sensitivity of Canada's private sector economy to the policies and performance of the US economy (which don't look so good last I heard)

            In any case, at this point the belt tightening in Canada is all talk… we still have stimulus dollars that need spending. For a prediction of the post stimulus policy in Canada, should we look at the recent podium words of our PM, or his actions in the days leading up to the economic crisis, when Harper mounted his trusty dwarf and rode off to slay a surplus and nurture a deficit to life?

          • My understanding is that Harper's "plan" at this stage still amounts to hoping for strong enough private sector growth to pull Canada out of deficit in a completely pain free process.

            Indeed. And the "private sector growth" scenario seems more an more plausible. I think the federal government is already on target to get more revenue this year than anticipated. Canada is leading the G8 in economic fundamentals, so if any country can pull it off, we can. We shall see.

            Meanwhile, as long as we're in a minority government situation, I doubt very much that the government would have the cojones to implement painful spending cuts.

            when Harper mounted his trusty dwarf

            Trusty dwarf? Never mind the condescension towards short people – is that any way to refer to a man who has been described as the "envy of the political finance world", the man who won Euromoney magazine's Finance Minister of the Year award for 2009? ;-)

          • I was nice; I called him trusty!
            (Not many have been so kind since in the income trust thing)

            Besides I needed the mounting metaphor to draw attention to Harper's track record.

          • …the man who won Euromoney magazine's Finance Minister of the Year award for 2009?

            Heh. A European "finance-minister" award. Now, that's prestigious! I wonder how many Greeks are on the editorial board… ;)

          • If you're suggesting that Flaherty is too much of a tax/spend fiscal lefty, much like those in European social welfare states, then I agree. But I don't think it bolsters your main point.

          • He's not so much a tax-and-spender as he is a supporter of regulation and government intervention, as far as I can tell. He has no qualms about calling about bankers and CEOs and telling them what he wants to see.

          • The most damaging aspect of Diamond Jim is not his fiscal stance, he is simply fundamentally dishonest (sorry creative) in the way he does his accounting. Blarney can be charming… but not in your accountant.

          • Heh. True that. Flaherty didn't win the award until he started posting deficits. The Euros love him now.

          • So, you're trying to blame Harper for the mistakes made by Obama, and this is true even though the whole point of the article was to showcase Harper's success at convincing other countries to follow Canada's path (as much as Obama will likely make his own mistakes anyway)?

            Yes, it's true that when the US sneezes, Canada catches a cold. But you'll notice that the US has been in a full-blown disaster for the last two years while Canada has not. US unemployment and economic activity has been anemic compared to Canada's. So you'll have to make an exception for Canada this time. And you can thank Harper.

          • So you'll have to make an exception for Canada this time. And you can thank Harper.

            Sure, because the fiscal/banking regime put in place during the Chrétien/Martin era has nothing to do with Canada's current economic health.

            Remind me now. Who was it who wanted government to “get out of the way” and allow massive bank mergers and to loosen regulatory oversight over capital markets, in emulation of the doomed American status quo? Was it the Reform/Alliance/”Conservative” Party by any chance?

          • No amount of getting out of the way compares in any way to what occurred south of the border. As for bank mergers, Flaherty has not approved them either.

            Just as much as you'd like to credit former Liberal governments for all the good in Canada, I'd have to say it's getting a little old. We know what the Liberals wanted the last four years compared to what Harper wanted, and that's made most of the difference.

          • Just as much as you'd like to credit former Liberal governments for all the good in Canada…

            I'm not a Liberal supporter, so that's the very last thing I would want to do. I'm just throwing the cold water of reality on your Harper-inspired tumescence.

          • Unneeded visual award to Sir Francis!

          • I'm so grateful for this award, MYL. I worked really hard for it.

          • There's plenty of p**n on the internet. You're on the wrong site.

          • You're obviously unfamiliar with Mark Steyn's work.

            And "porn" is not an obscenity. It just refers to something obscene (so I'm told).

          • If you're stimulated by Steyn, then you really need to find yourself some real porn, you're a little bit trigger-happy.

          • Not stimulated. Disgusted.

          • So disgusted that you seem to enjoy mentioning his name quite a lot.

    • Thanks for weighing in Dmitri

  3. It appears that Coyne and Gaunilon are both auditioning for the part of Charles Brown and a chance to kick at the fiscal football the next time Lucy Harper holds the ball to the ground.

  4. Andrew, I think you would be more comfortable if you got up off your knees; Stepehen Harper is not going to knight you. Reading the international media reports, it seems to me that the balance of opinion is that there WAS NO CONSENSUS at the G20 summit. Every country was basically left to do their own thing. Some countries will institute a bank tax and some won't, mostly where few transactions occur. Some will restrain deficits and some won't.

    The most important part of your piece was "Harper has been given ample cover for any austerity measures he might wish to impose."

    So now the people of Canada must lose public services and social benefits to pay for the economic meltdown caused by the world's greatest capitalist institutions, while the world-wide race to lower corporate taxes and taxes on the very rich heats up.

    • Andrew, I think you would be more comfortable if you got up off your knees

      Runner Up for unneeded visual award to Sunshine Coaster.

      So now the people of Canada must lose public services and social benefits to pay for the economic meltdown caused by the world's greatest capitalist institutions

      No. The people of Canada must lose public servants and some of the sloth-encouraging excesses of social "benefits" because we Canadians have never agreed on a responsible mechanism to fund these fantasy gifts to ourselves. You two mustn't have met yet. How rude of me. National Debt, meet Sunshine Coaster. Sunshine Coaster, say hello to National Debt.

      • The introduction was unnecessary since Stephen Harper already introduced every Canadian to National Debt upon being elected to office. He also forced on Canadians introductions to National Debt's ancestors Irresponsible Tax Giveaways, Zero Contingency Budget, Wreckless Spending Increases and Untargetted Stimulus Spending. He refuses to even talk about their cousin Fair and Equitable Taxes, which is why you are forced to acknowledge Canadians have never agreed to a responsible mechanism for government revenues. Their distant cousin Bank Taxes came to visit Harper a few weeks ago and offered to pay for social benefits, but Harper refused to speak to him and slammed the door in his face. Their uncle Carbon Tax also offered to help, but he has been branded the lefty of the family and isn't allowed past the door. Instead the blackards of the family Ideologically Driven Programs and Uncontrolled Security Costs have been invited to manage the family inheritance.

        With all of these stange family members Harper keeps around, you can expect that National Debt will have a very long life and will be introduced to many younger Canadians long after Stephen Harper is just a bad memory.

        • Many of those Spending Increases were indeed Reckless. And a Wreck. But not Wreckless. So, tell us, which of these reckless increases that will soon need to be cut constitute the valuable "public services and social benefits" now to be lost to the poor suffering Canadian people? If it was reckless to spend in the first place, please elaborate on why it is now pure heartless evil to cut?

          And trust me, those of us who have had eyes open the last several DECADES have already been very well acquainted with National Debt. Perhaps it took Harper to introduce this creature to you.

          About those cousins Fair and Equitable, though — are they the ones who have just let themselves go and now need seatbelt extenders wherever they travel?

  5. Coyne is right in that it will be an interesting experiment. One where I dearly hope the results will prove me (and Krugman) wrong. I expect it won't happen, as the 30s were the first time we tried it and the results when you let off stimulus too early in the recovery I thought were made pretty clear that time around. Of course, some would prefer to blame the weather. That we don't learn from history seems to be the only thing we've managed to learn from our history.

    At any rate, it occurs that there are a number of very well-monied interests who have a significant stake in seeing that this course of action is proven to be correct. The last thing they want is people in general realizing that a supply-driven economy is essentially hollow, because switching to a demand driven economy would mean having the minority be rich and able to invest wouldn't be seen as nearly as important as having the majority be out of poverty and able to purchase.

    I wonder if they'll have the foresight to realize this, and take actions that are counter to the usual short-sighted views.. that is, will they take a hit to their own livelihoods in order to keep the system that enables them to have that livelihood at all? To me, that's the more interesting experiment we're undertaking here.

  6. "Part of the problem is the fact that Obama's stimulus plan was very poorly targeted." Right, he opted to get the "stimulus" out into the US economy quickly opposed to planning it more accurately and thus delaying it. I'm not saying I'm for or against stimulus, although I'm inclined to disagree with Krugman 99.9% of the time.

      • I agree that Krugman is often inconsistent, but the point here doesn't address his argument. It is true that welfare programs can create disincentives for people to find work. Do you honestly believe that the reason unemployment is presently ~10% in the US is because people aren't trying hard enough to find work?

        • Do you honestly believe that the reason unemployment is presently ~10% in the US is because people aren't trying hard enough to find work?

          Are there any want ads in the papers? Has it become easy enough to NOT work your tush off because you can now just walk away from your credit cards and mortgages instead? Is the US welcoming a SINGLE foreign worker to pick strawberries and cabbage and tomatoes?

          All three of my questions have the same answer as yours. Not that the US unemployment rate would be zero otherwise — only that it could be less than 10%.

          • Yes, there are jobs in the papers, as there always have been and always will be (well until the papers all go bankrupt). The problem is that there are fewer jobs than there are job-seekers, and by a very large margin. Prospective employers are getting far more applications than they ever had as more and more people are looking for jobs.

            If your solution is honestly that more Americans pick strawberries, then you are simply creating another problem of underemployment (a problem that exists and is very serious).

          • Actually, at the rate that governments worldwide are driving their populations off the cliffs, everybody had better start growing and picking their own strawberries.

          • Underemployment? Are you kidding me? You think it's better for people to watch Oprah waiting for their benefits check than it is to pick strawberries? There is a saying that goes like this "all work is honorable". Either you can get a job within a reasonable amount of time, like a few months, or you act like a twit and sit on your ass for a year or two because you don't have the balls to pick strawberries.

            If you happen to be the conscientious or careful type, then you have money in the bank to tie you over for a long time, in which case you can feel free to take all the time you like. But then, of course, you never needed the insurance in the first place.

            The federal government is overspending by about $5000 per year per citizen in the US, and you think it's beneath the unemployed to pick strawberries? I gotta say, if everyone thinks like you, the US is in a lot of trouble.

          • It is truly amazing that there are people out there that find these points contentious. Yes, it is an economic problem when somebody WITH THE SKILLS TO DO A MORE IMPORTANT JOB to pick strawberries. Strawberry pickers create very little value-added relative to say, engineers. That has negative implications for economic output as a whole, and for the deficit.

          • Oh really. If they had a more important job, they wouldn't be sitting at home collecting their extended unemployment benefits that you wish to hand over.

            Wasn't that the whole point of what you said? That they don't have a more important job, but they are such important people that we should pay them to watch Oprah in style?

            Please, a little consistency. If these people have such incredibly valuable skills, then why the heck are they unemployed for so darn long?

            I mean, you seem to be saying, they have a really important job to do, but we expect that they will have no job at all for so long we should be paying them to do nothing for even longer than the usual long benefits period, even though the whole time they have some really important engineering job to do because they have such important skills, skills that come in handy watching Oprah….

            …trying to make sense of what you're saying…

          • Unlike what the libertarian handbook would have you believe, when one loses their job, their life is not suddenly a clean slate.

            Let's say you're a reasonably intelligent person, doing a reasonably skilled position, getting paid a decent wage for it. It's a stretch in this case, I realize, but just go with me on it.

            Now, odds are you have some bills and debts that are reasonable at your level of pay. You're able to make them and maybe put a little aside each month into a retirement account or something.

            Now let's say you get fired. Funny thing, those debts don't vanish as well.

            Is your preferred course of action to run out and get a strawberry picking job, even though that job won't support your debts and will keep you from having the time/energy to be able to run around and apply/interview at positions that better match your skill-set and desired wage? Remember, we're assuming you're a reasonably intelligent person here.

        • Talk about constructing a giant strawman. Where on earth did I say that all unemployment is caused by unemployment insurance?

          The fact is, unemployment insurance does contribute to unemployment, but of course it's not the only cause, it just makes it worse. It makes it worse because people sit around and let their benefits run out without any intention of getting a job, starting their own business, or taking any other action to improve their economic well-being.

          I've seen it with my own eyes. I worked at a factory where it was standard practice – get hired for a contract, get laid off, get your benefits, wait til they run out, then take the next contract. In the maritimes it's become a way of life. The fact that people continue to question this is absurd. Unemployment benefits is literally an industry in the maritimes.

          No doubt it's not easy to be unemployed, but there is always some form of work people can do to make their situation better, but if that work would cut into your benefits, then nobody even bothers to try. Eventually people have to get out there and create jobs one way or the other. Extending benefits ensures this process of recovery takes much longer than it needs to.

          • You were citing an article that "caught" Krugman being inconsistent for suggesting that unemployment benefits may discourage people from seeking work in his textbook while also supporting unemployment relief as a means of reducing unemployment.

            I agree that unemployment insurance can cause perverse incentives, but you are talking about two different kinds of unemployment here. There is transitional (short-term) unemployment, tied to the business cycle and structural (long-term) unemployment tied to the structure of the economy, incentives, etc.

            Unemployment insurance is useful for dealing with transitional unemployment because:
            1. it is counter-cyclical (it ensures increased spending in recessions to help counteract them)
            2. it allows people with skills to focus on job searches commensurate with their own skill levels, rather than taking jobs requiring fewer skills (and in turn displacing less skilled workers).

            Unemployment insurance can create perverse incentives in some situations, but it is possible to design EI programs in such a way that they limit such incentives namely by keeping the duration of EI payments relatively low. Remember, we are talking about EI not welfare. This is a program that workers pay into, and isn't simply a free money giveaway.

            More to the point, given the nature of the crisis we are talking about today it should be pretty obvious that the perverse incentives caused by EI are NOT the problem. The problem is that there aren't enough jobs, not that an insufficient number of people are seeking jobs.

          • This is a program that workers pay into, and isn't simply a free money giveaway

            And we'd all be better off if we just put that money in the bank and saved it ourselves. Oh, but then it could not be used as a wealth redistribution scheme.

            The problem is that there aren't enough jobs, not that an insufficient number of people are seeking jobs.

            There is more to the problem that a single one-liner. You state that the problem is that there are not enough jobs. Case closed. But wait! Could there be more to the story? The phrase "not enough jobs" is not the be-all and end-all of economics?! No! It cannot be!

            One way to get more jobs is to encourage people to get off their duff and start creating them, rather than paying them to sit around and hope that things are better when their benefits dry up. Yes, it's true, jobs don't fall out of trees. Most of them are created by small business. Not trees.

            Seriously, your simplicity is astounding. Consider the fact that there will be a recovery. Whose to say the recovery should not be tomorrow, but it must be a year from now? The fact is, the recovery will be spurred on by reinvestment, and much of that reinvestment must come from the ranks of the unemployed! Most new jobs are created by small business! So to say that people should just sit around waiting for better times is absurd, which is exactly what you're saying when you suggest we should just be subsidizing their unemployment even more than we do already.

          • Ah, so the problem is that all these people watching Oprah aren't creating enough jobs. Because of course if banks love one thing, it is giving capital to unemployed people with dreams.

            The lack of jobs is the problem – of course there are more complex reasons for it (I find it amazing that somebody whose view of economics appears to come from Horatio Alger novels accuses me of simplicity).

            As to the recovery, recoveries generally are automatic in a market economy – recessions and unemployment drive down wages, prices and so on creating the conditions for a recovery. However there are exceptions, and those exceptions are financial crises.

            Before the crisis there were a mix of different borrowing firms – some had enough of a margin to cover interest payments and pay down principal, while others didn't. After the crash, things have tightened considerably. Firms that were just making interest payments no longer can, while formerly solvent firms have been rendered insolvent by the capital crunch. Absent government intervention the result would have been further bank failures followed by yet more tightening.

            We have had government intervention, but only just enough to prevent a collapse of the system. Japan's lost decade stands as an example of what happens when one faces a severe financial crisis and does not address the underlying problems of a liquidity trap. We cannot count on a recovery (or rather the US cannot count on a recovery) in the way we might have after the 1990 recession or the 1982 recession.

          • My economics are a lot more nuanced than your Dr Seuss say-anything economics. Your comments about Japan are an example. One thing is for sure, Japan's problems were not caused by a liquidity trap, after a gazillion dollars of stimulus that failed to produce any meaningful results. When a bubble bursts, you don't solve anything by trying to inflate it again. If Japan proved anything, it's that government will make the problem worse when they intervene in the financial markets and the real-estate markets.
            The Japanese recession, and all others, are primarily caused by the misallocation of capital.

  7. I actually think Krugman is right that we're going to enter a depression (or at least I think the US will) but not for the reasons he does. I'd blame out-of-control debt, coupled with rising social welfare costs and a dwindling population of workers to pay them for a growing population of retirees.

    As such, the stimulus was part of the problem, not part of the solution.

    • What is the mechanism by which debt -> depression?

      • Fortunately, teams of Japanese researchers are exploring this mechanism as we speak. They're trying to figure out if truly massive national debt, combined with unfavourable demographics, will eventually trigger an economic catastrophe.

        • I think it's how they handle it that will be the catastrophe.

          Either you can assume the creditors get paid, in which case the government must either (a) eradicate half the public sector, or (b) they decide to print money and impoverish everyone. Option b particularly punishes the innocent savers of society by inflating their savings because government couldn't manage a budget properly.

          If the creditors don't get paid, then (c) the creditors are impoverished, with their bonds and treasury bills vanishing into nothingness.

          No matter what, a very large group of people will be half as wealthy as they thought they were.

          Now, if they also manage to wreck a large number of existing businesses at the same time with bankruptcies and foreclosures (which would happen with options b and c), then you would end up with hyperinflation and depression, government caused catastrophe.

          Unfortunately, governments tend to opt for options b and c, because the last thing they'd want to do is bear the brunt of their own mistakes.

          Sooner or later, one of these options must be taken. If the government doesn't do it, they will eventually be forced into it. There is likely a point of no return after which there is literally no way for a government to reduce its debts, their debts can only grow as interest payments eradicate government's ability to manage the problem.

          If the government is not yet at the point of no return, they could try a Canada-style austerity program which retards growth for a decade or two, by penalizing all citizens to varying degrees with high taxes and low services in return, but at least disaster is averted. There is less wealth to go around as citizens pay off past debts, and people must work harder. But disaster is averted.

          That's my take.

          I think the Japanese are past the point of no return.

        • I must get my eyes checked. Did the frog type fortunately?

          • Indeed. Just think how lucky economists are to have a useful case study like Japan! It's quite the experiment.

          • You are one twisted little slimy amphibian, Crit…

          • He's a tadpole-itical, but not a bad sort overall.

          • I'm also tad-polish! (One of my great-grandmothers was born in Poland.)

          • No Japanese relatives, it would seem.

      • (1) Interest payments eat into the budget.
        (2) The government faces a choice between cutting spending, raising taxes, or printing money.
        (3) The government refuses to cut spending as drastically as is required, or even worse: the government opts to spend more money in an attempt to "stimulate" the economy. This leaves options
        (a) a tax increase. The tax increase siphons money out of the economy since it is going towards interest payments to (largely external) creditors
        (b) printing more money, causing rampant inflation.

        Rampant inflation and burdensome taxes which funnel money directly out of the economy to pay interest leads to consumers who can't afford to buy as much product, and companies that can't afford to hire as many workers. Unemployment rises. People then buy even less. Companies then have even less profit, causing more unemployment and lower tax income. Vicious circle ensues. Bingo: depression.

        Essentially it's the same thing that happens to individuals who incur huge debt and keep on spending without paying it off…. except that it has the added problems of the spender being able to devalue their own money, and the budget maker not being the one who suffers when his decisions turn out to be foolish.

        Tell me I'm wrong. I'd love to discover that I am, because this is exactly how I see a Democrat President and Congress playing their cards for the next several years based on the experience of the past year.

        • Tell me I'm wrong. I'd love to discover that I am, because this is exactly how I see a Democrat President and Congress playing their cards for the next several years based on the experience of the past year.

          B-b-b-b-but, they'll have Canadian-inspired health care by then, so it'll be all right, right? Won't it be all right, G? Please, G, tell me it'll be all right!

          • Sorry M. As delightful as doctor shortages and massive wait times are, I don't think they'll solve this particular problem.

        • Well there are a few problems with your argument.

          Firstly, your crisis is not imminent, while the present economic trouble (10% unemployment, a banking system on the fritz, and possibly some bubbles that have yet to pop) is.

          Secondly, it is not always clear that spending cuts actually reduce the deficit (such as when they worsen unemployment). If the US were to get back to full employment, its deficit would be 4% of GDP – not exactly the highest level of all time. You can look at Hoover's attempt to balance the budget (or FDR's in '37/'38) for a good example of this in principle.

          Thirdly, you have left out an important option available to the government. Run a deficit in the short term and subsequently raise spending slower than growth in revenues. Deficit reduction has to happen, but it is a long-term need for the economy. Doing it too fast risks catastrophe for very marginal gains.

          Fourthly and finally, interest rates are presently at zero. Quantitative easing has created trillions of dollars. The US has put out its stimulus and many other economies have followed suit. Despite all this inflation is low. In fact, since the Fed stopped quantitative easing in March, the US consumer price index has been FALLING. There may be some degree of stimulus that would cause hyperinflation, but we are simply not there. If anything the problem is deflation.

          • (1) Not here, granted. As to whether it is imminent, that is debatable. Krugman seems to think it is, and I'm inclined to agree with him albeit for different reasons.

            (2) We differ here. In my view government does not create wealth, and government jobs also do not create wealth. They merely redistribute it. Since the government gets all its money from the economy, reducing government spending can't possibly reduce money in the economy. It can cause loss of jobs, but only by leaving more money in the hands of citizens and companies….who will then spend it and hire people, so no net loss.

            (3) This is a state function as they say in physics. You can take the pain now or later, but you have to take the pain. Leaving it until later means you will have less control and freedom in deciding how to address it: i.e. it will be more painful.

            (4) I'm not attributing inflation to stimulus; I'm attributing it to the printing of money in order to ease interest/debt payments.

            Perhaps I'm oversimplifying – it wouldn't be the first time – but when an individual racks up debt to the point where they are only paying interest on it, yet keeps spending themselves into more debt, we can all see that there will be a lot of pain in their future. Somehow people think this doesn't apply to nations. I don't see why it shouldn't.

          • To your 2nd point, I would disagree. Government jobs certainly can create wealth, they are no less valid than any other sort of job for creating wealth, as they both do the same thing — get money to a person who doesn't have much.

            Reducing spending leaves more money in the economy, but if that money is hoarded by those with no need to stimulate demand themselves, for instance, as they wait for stock prices to tumble further before deciding to invest, then we're really not creating any wealth.

            Furthermore, if reducing gov't spending takes money away from those who are most likely to spend it — ie, those at the bottom of the rungs who are in need, and instead leaves it in the hands of those who are not likely to spend it, or worse, to spend it on things that don't provide real value perhaps such as credit derivitive swap arrangements — then our economy will get worse even so.

            The difference between nations and invidivduals is that nations can tell creditors to take the pain, while when individuals try to do such a thing, the creditors can get the nation to back up their claims.

    • If the US goes into depression, so will Canada. Of course, this will somehow be Harper's fault.

      • Only indirectly. Primarily it will be Bush's fault. Everyone knows that.

        • You forget the Harper = Bush corollary of the lefty theory of politics.

        • If it were not for Obama, unemployment would be 50% by now. And it would be Bush's fault. Everyone knows that.

          Unless of course unemployment reaches 50%. At which we'd praise Obama that it's not 100%. If it were 100%, that would be Bush's fault, of course.

          • And if only Congress would let The One carry on and present a budget that represents 125% of the annual US economic output, why, things would be super-duper peachy! Bloody Republicans controlling the House of Representatives and — oh, check that. Bloody Republicans controlling the Senate with its majority — oh, wait…

  8. So no one agreed to anything other than run off a cliff and it's all of Harper's doing?

    Sorry I just don't see it. I don't think the summit was a waste of time, but there needs to be balance between "Harper sure told them!" and "what a collosal waste of time and money this was" point of views. For a second there I thought I was reading Steyn!

    • Whoops!
      NOT run off a cliff. My bad.

    • For a second there I thought I was reading Steyn!

      Me too. I realised it was Coyne, though, when I finished the piece without having read that the G20's commitment to let each member state cut its deficit (if and when it felt like it) was a stunning victory against Islamofascism.

  9. The Obama Admin may actually see a modest export boom as a result of the deal with China on floating the yuan.

    • At least until the China bubble pops.

  10. Andrew, doesn't every G20 country essentially have a veto on the communique since it is unanimous? If you only look at what is missing, every country could declare "victory". Surely, China is the big winner since there were no comments regarding Tibet or Tiwan.

  11. Coyne is going on vacation/scrum with those rich guys who suck up to the government. It should be interesting to read what he has to say about that. Hope you and your friend Jim have a nice time but as a Canadian I don't take you that seriously anyhow.