Spending and saving: they're different no matter what the G20 says - Macleans.ca

Spending and saving: they’re different no matter what the G20 says

No amount of verbiage can make austerity the same as stimulus


The most interesting factor in these back-to-back G8 and G20 summits is the widely debated tension between the push from Washington to keep pumping up the world economy with government spending and the pull from European capitals to begin reining in deficits.

This polarization of the economic debate threatens the tenet held most dear by the mandarins who lay the groundwork for summits of this sort: let there be no messy, public disagreements, certainly not on the fundamentals.

And so it’s not surprising that efforts are well underway to manage, massage, and if need be, mangle the summit language to prevent the clear divergence from being evident in the way the G20 leaders talk about their talks here in Toronto.

Listen to José Manuel Barroso, the president of the European Council, bury the division in syllables at his news conference this afternoon. Asked how the leaders can agree to simultaneously keep up stimulus spending and impose restraint, he said this about the way the conversation went when the G8 leaders discussed the matter on Friday in Muskoka:

“Yesterday we started our discussion with economic recovery. On this point all leaders converged on how to recover from the economic crisis. There is no contradiction between gradual growth-friendly differentiated fiscal consolidation and economic growth.”

What is “gradual growth-friendly differentiated fiscal consolidation”? I’m not at all sure. But I’m going to take a guess that few would use this mouthful of mush to describe, say, German Chancellor Angela Merkel’s plan to save $80 billion or British Prime Minister David Cameron’s emergency budget cuts averaging 25 per cent for most government departments.

Measures like those are austerity. No amount of verbiage can make them they same as stimulus. But that won’t stop many behind the scenes and in front of the microphones at the G20 from trying. Indeed, the main challenge in drafting tomorrow’s communiqué is surely trying to find prose that makes the two thrusts seem fully compatible, or even identical.


Spending and saving: they’re different no matter what the G20 says

  1. "gradual growth-friendly differentiated fiscal consolidation and economic growth"

    This is what these billion dollar+ political fiascos come up with?

  2. The president of the European Council stated that he was concerned that if the world's consumers thought that governments were handling their debts and deficits improperly that they would start to save money and that saving would lead to a financial crisis.

    Here I thought the crisis was related to debt the last time. It seems that no matter what we do, save or spend, it will lead to the next crisis. That pretty much says it all about the state of the world's economy.

    Maybe China and India have it right, their central banks have been loading up with thousands of tonnes of gold.


    • The price of gold is very very high right now, which might mean that it is overvalued.

      • Or that smart people see it going far higher still in the coming years. See you in 2015 and we'll see what will have panned out.

  3. It's so easy for the lazy media to focus on a tiny fraction of protesters who engage in vandalism while ignoring the legitimate reasons the rest have for exercising their rights against government-supported programs and policies promoting profit and growth rather than protecting the environment and human rights — across the G-8 and the G-20.
    The media's primary responsibility, it seems, is to maintain things the way they are internationally while making their stories appear interesting enough to sell more advertising that promote consumer goods that nobody actually needs.
    Victoria, BC

  4. I don't see why governments need to be on the same page here. Countries like Canada that are having robust employment growth can withdraw stimulus, countries like the United States need to wait. Taking into account the previous deficit/debt levels.

    • Countries like the USA have got to smarten up, that another trillion of debt for the sake of whatever handful of jobs now is an immoral drain on the economy of the future.

      • But putting people back to work (to some extent) does increase revenues and help reduce the deficit. Now, the US spent its stimulus money badly – more should have gone into places like infrastructure, which have both long-term benefits and a high multiplier effect.

  5. It won't matter whether they spend or cut, the result will be the same.

    Until these countries unite to fix the basics of a global economy, and put a solid foundation under it, they're just whistling in the wind doing minor local stuff.

  6. There is a tightrope walk between addressing short-term problems (unemployment and tight credit markets) and long term ones (the deficit, financial reform). The problem is that dealing with the one – to some extent – can negatively influence the other. Europe and the United States have different problems. Europe needs fiscal austerity more than the US does. I would think that the ideal situation would be for the US (and China) to keep spending, and Europe to engage in fiscal austerity. US spending will drive up the dollar, and allow European export markets to counter the negative short term effects of austerity.

    When everybody commits to austerity, you get some problems. It means that nobody devalues because everybody is engaged in roughly the same policy. Therefore the countries in the weakest situations have no cover and may face an austerity-driven crisis as unemployment rises.

    • US spending will drive up the dollar

      How do you figure flooding the zone with fantasy dollars that should not exist actually drives up the value of the US dollar?

      • Expansionary fiscal policy drives up interest rates, resulting in an influx of portfolio investment (people that basically buy bonds internationally, looking for high interest rates). For instance Japan launched into a fiscal expansion in 1995 driving the yen from 102/USD to 93/USD (while the US was reducing its deficit). Later attempts to balance the budget drove the yen back down again. Alternately you may recall that in Canada the loonie's value plumetted as we reduced our deficit.

        Stimulus spending does not flood the market with fantasty dollars (a monetary expansion – ie. a drop in interest rates – does). Rather stimulus spending is financed by people willing to loan the government money – some domestic (eg. people's grandparents buying bonds), or internationally (the Chinese). As this pool of available finance is drawn upon, interest rates climb up (the crowding out effect).

  7. Mangle the message? Well then, they have the right man in Harper.

  8. It's more than just a matter of exposing discord between member states. It's a matter of culpability and loss of face. Most of these states have gone down the "stimulus" path, spending themselves further into debt in response to a crisis spawned by spending too far into debt.

    Now they are realizing the massive error they've made and are trying to reverse course (well, except for Obama who is trying to plunge further down the same path for ideological reasons) but would like to save face. Hence the effort to make "cut spending" indistinguishable from "spend wildly" – no one wants to admit the original mistake and take blame for the additional damage caused.

    That the original mistake was obvious to anyone with an ounce of common sense and the willingness to put aside socialist ideology only compounds the urge.

    • In what sense was this crisis spawned by "spending too far into debt"? In many countries, such as Spain and Ireland, deficits were relatively low, and debt was falling before the crisis. This crisis was caused by loose financial regulation and loose monetary policy.

      A bunch of people were sold loans that they were likely to default on. This was partly because those loans were "securitized" by third party backers, alongside other financial instruments (like credit default swaps). Thus bad investments could be rated as AAA, so long as those backing the assets were AAA institutions. Conflicts of interest among credit ratings agencies (which get money from the folks that they insure) proved an obstacle to accurate ratings of securities (pulling some pretty conservative investors – like the Harvard endowment fund – into some dubious investments). Since the major deregulation of the late 90s you had a shadow banking sector that faced very little oversight (for instance Fannie Mae and Freddie Mac were not monitored by the SEC).

      • These problems were amplified by a fed policy of loose money that continued long after the 2000/2001 tech crash, driving irrational exuberance in the housing market. Part of the problem is that the fed has redefined its role as an inflation-fighter since the 80's. Inflation didn't spike, so interest rates remained low longer than they should have (part of the reason for this was a savings glut originating in China).

        Finally, since the Savings and Loan crisis the doctrine of too big to fail had been firmly established. Ailing financial institutions believed they would be bailed out (and with very few exceptions, they were correct). Interbank lending and other complex linkages ensured that the government would be unlikely to let any banks fail.

        In other words financial institutions had little incentive (due to bailouts), nor ability (due to poor information) to manage risk appropriately. Cheap credit from the fed drove excessive leverage. When productivity began to fall, and when people started defaulting on subprime loans the entire edifice collapsed.

        • Government debt had very little to do with this story. Lets take US debt levels – they stood at an unremarkable 61% of GDP (see here for a historical comparison: http://static.seekingalpha.com/uploads/2008/9/15/…. In fact, by 2007 the US deficit was virtually balanced. If debt was the problem, you should have seen problems around the early 90s or after WWII. Greece, Spain and Italy may indeed be different stories, but the major economies of the world do not have impending debt crises.

          • Don't get me wrong, deficits are unsustainable and a fiscal retrenchment will be necessary at some point (although ensuring productivity growth, not balancing the budget, is probably the bigger long-term concern). However, premature austerity can have very dire consequences. If you try to balance the budget while unemployment is at historic highs you will raise unemployment further – reducing economic growth and, incidentally, will fail to balance the budget. You CAN get around that if you experience currency devaluation (as Canada did in the 90s) or compensate with a cut in interest rates. The problem is that the whole world can't devalue at the same time, since exchange rates are relative. Similarly, most major economies have near-zero interest rates already, and can't cut further.

  9. Governments should be allowed to do both at the same time. On the one hand, spend enough money to ensure that there is full employment always, no matter what shape the stock markets are in. On the other hand, maintain restraint so that the country does not spend one more cent on imports than it receives from the sale of exports, so that the country is not plunged into debt.

    It used to be that countries could do that, because each country was free to decide on its own tariff policies. But first we had GATT, and now the WTO, so countries have no way to avoid plunging into debt except by throwing people out of work. This is why it isn't possible to have a depression, and yet for no one to really care very much except those who play the stock market, or those who are in charge of large corporations.