By Steven Hill, The Guardian, January 22, 2012
Between Paul Krugman’s call for massive stimulus and the demands of the austerity hawks lies a third way: ‘aust-imulus’
Few subjects have so bitterly divided our insecure times than the double-edged sword of stimulus versus austerity. Consensus over which course will end the current economic malaise has eluded the duelling experts. Without clearer signals of success, many nations have tried a confused mix of both – let’s call it “aust-imulus”.
While I tend to lean Keynesian, the case for fiscal stimulus is hardly the slam dunk that its most strident proponents claim. Nobel prize-winning economist Paul Krugman bases much of his call for massive amounts of stimulus on the American experience during the Great Depression. In Krugman’s view, the policy intervention that finally lifted the sinking boats was an unprecedented amount of spending by the US government for its wartime effort.
But this viewpoint ignores a fairly obvious counterpoint. The United States emerged from the Second World War as the world’s conqueror with virtually every economic competitor destroyed. America was the big boy on the block, and our industries enjoyed numerous competitive advantages over international rivals. The dollar suddenly was the dominant global currency, and that granted Americans cheap money and influence.
In addition, we then launched the ambitious Marshall plan which not only rebuilt our former adversaries but also created international markets for US producers. One of the conditions for nations to receive Marshall plan funding was giving preferred access to American exporters. The Marshall plan years from 1948 to 1952 saw one of the fastest periods of growth in European history, and American businesses profited greatly from their privileged position in these fast emerging markets. Any huge stimulus plan today would not benefit from those advantages.
Krugman has rejected this critique, writing that “trade was a minor factor in the American economy both before and immediately after the war, with imports and exports a much smaller share of gross domestic product than they are now”. Krugman admits that there was an increase in US trade for a few years due to the Marshall plan, but its impact “was temporary”, he says.
But Krugman’s response is unconvincing. Here is a simple thought experiment to illustrate why. Imagine if America had not emerged as the dominant power from the Second World War; does anyone seriously believe that all of that wartime stimulus money would have resulted in anywhere near the postwar boom that the US experienced? Krugman is underestimating the advantages of being the world’s conqueror.
Certainly a large dose of fiscal stimulus right now would spur an increase in aggregate demand, but without a surging export sector that would probably result in more government jobs than private sector jobs, and ultimately would be unsustainable. There’s no guarantee that it would boost private sector growth since America’s struggling export and manufacturing base would face stiff competition from many upstart international rivals.
In addition, the scale of both wartime spending and the Marshall plan were astronomical. Krugman estimates that over the course of the war the federal government borrowed an amount equal to “roughly $30 trillion [£19tn] today”, four times the amount of President Barack Obama’s fiscal stimulus in 2009. Historian Niall Ferguson has estimated that the Marshall plan cost roughly 5.4% of US gross national product, or over $800bn (£500bn) in today’s currency. Both are staggering sums and politically untenable today, unless the Occupy Wall Street movement grows by a thousand-fold, which seems unlikely. Stimulus hawks might as well command the earth to spin backwards.
In short, the world is decidedly multipolar now, and even if it was possible to pass a massive stimulus plan through the US Congress, there’s simply no guarantee that it would have an equivalent positive impact without the favourable conditions that existed after the Second World War.
The stimulus hawk position also fails to recognise that a lot of stimulus spending already is occurring on a regular basis – courtesy of the hugely bloated US military budget. It is widely known that America spends as much money on its $700bn (£450bn) annual defence budget as the next 20 nations combined, and three times more than all conceivable enemies (and that figure doesn’t include trillions spent for war operations in Iraq, Afghanistan and Libya, nor huge expenditures by the CIA, homeland security and other federal agencies used for defence-related activities).
Yet not all of these military expenditures contribute much to national security, since vast sums are being spent on outmoded weapons systems such as 11 large aircraft-carrier battle groups and other obsolete military hardware which military experts say are “still geared to fight the imperial navy of Japan”. Even the Bush administration’s top intelligence analyst concluded that US military superiority will “be the least significant” asset in the epoch that is unfolding.
In reality, a substantial part of this “defence” spending is nothing more than a jobs programme, targeted to Congressional members’ home districts. The US economy has become hooked like an addict to an ongoing fiscal stimulus from military expenditures. Yet as a fiscal stimulus, it’s extremely inefficient. Many studies have shown that the economic “multiplier effect” that causes each dollar spent to ripple through an economy is much higher for spending on physical infrastructure – maintaining roads, bridges, airports and harbours, for which the US has fallen $2tn behind – than military spending.
So if Americans want more stimulus from their broke Treasury they will have to snatch it away from the military budget. It makes little sense to talk about more stimulus and running up more debt without making conversion of defence dollars to civilian needs a core priority. But even stimulus hawks like Paul Krugman have not been willing to touch that sacred cow.
The stimulus hawks also don’t bother to consider the environmental impact of their policies. The fact is, more stimulus spending = more consumption = more carbon pumped into the atmosphere. The recent economic crash has provided a big breather for the planet’s increasingly carbon-choked environment, which is especially important in America since, like the Bush administration, President Obama has done little to push Americans to rein in our carbon-belching ways (the average American still emits twice the carbon as the average European and four times the average Chinese). Yet the stimulus hawks say it is necessary to prioritise economic growth and job creation first before dealing with global warming.
Steering between the twin horns of austerity versus stimulus, the world must grope toward a third way that allows advanced economies to provide for their people without having roaring growth rates driven by asset bubbles, hyperactive consumption and carbon-belching activities. Simplistic arguments that pit stimulus against austerity are unhelpful, since each nation likely will need to strike its own blend of aust-imulus.
In Europe, once a critical number of member states have ratified stricter fiscal and budget rules – thus becoming more like America’s member states, which are each required to balance their state’s budget – look for the deployment of eurobonds or a debt assumption role for the ECB or some other form of debt sharing, as well as targeted stimulus of some kind for the struggling periphery. The final form may have to wait until the 2013 elections and a change in Germany’s government, but it surely is coming.