“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States—that is, prosperity.”—Herbert Hoover, at the annual dinner of the Chamber of Commerce of the United States, October 2, 1930.
The G-20 meeting broke this week with a mixed bag of results for Friedmaniacs (Hayekanistas?) and Keynesians to ponder. Responding to perhaps no more than a perception that it would be electorally wisest just now to favor austerity measures to deflect national deficits, the world’s politicians, while paying lip service to the need for recovery from a two-year global slump (as if a non-recovery from same were an option), have veered toward deficit-reduction over stimulus-aimed deficit spending. Some nations—Greece, Spain, Portugal, Ireland—have little choice in the matter and must raise taxes and reduce government spending despite the at times ferocious response of their citizens. No one is lining up to lend them any more cash to get over this crisis.
Other nations are making a pre-emptive strike toward austerity apparently believing it is preferable to take their fiscal lumps now with the expectation the suffering will be worth it if it means a stronger foundation for future growth. Despite President Obama’s exhortation to the G-20, and indirectly to Congress, to stay the course on deficit spending to better propel what has been by all measures a fragile economic recovery, the United States seems likewise drifting toward deficit reduction as national policy. It would be more reassuring if that policy drift seemed propelled by clear economic thinking than by political projections of the voting mood going into 2012.
The muddled results of the G-20 meeting suggest that while we may still all be Keynesians now, Hayek harkens, and many politicians think they can have it both ways, alternating between a hands-off approach (although not spending money is a kind of intervention of its own) and bursts of market-adjustments via government spending, a confidence that government policy can fine tune the recovery as we go along. If so, we could be witnessing the beginning of a third path toward recession recovery that attempts to thread between Keynes and Hayek.
Or we could just be witnessing history repeating itself. Poor Herbert Hoover gets much of the blame for the Great Depression which followed on the worn-out heels of the Crash of ’29, but he likewise seemed to tinker with government intervention and deficit avoidance in the years before the worst of the Depression. Complicit with Congress, Hoover may have raised taxes (actually rolled back previous cuts) and tariff barriers in an attempt to contain the emerging depression, but he also initiated government interventions meant to spur housing construction, reduce foreclosures and create jobs. Sound familiar?
The N.Y. Times’ Paul Krugman worries that a populist-inspired reawakening to the need for deficit discipline—a discipline that had been abandoned without controversy as the nation wheeled between two unfunded wars and advanced tax cuts that obliterated a fiscal surplus curve—is most likely to produce a third depression at this delicate stage in the nation's recovery. This one may not be as materially brutal as the Great Depression, but it could be realized as a long-term period of reduced economic activity, persistent unemployment and a progressively diminishing position for the nation’s most vulnerable citizens. Casualties have already been produced by the renewed interest in deficit reduction. Although the House managed to pass an extension of unemployment benefits for approximately 1.2 million Americans, the Senate was unable to similarly respond as a united block of Republican senators and one Democrat, Bob Nelson of Nebraska, allowed unemployment benefits to expire despite the persisting malaise in the U.S. private employment market. The newly empowered British Conservatives are targeting the U.K.’s welfare benefits in their first foray into austerity land.
The months ahead will be precarious indeed. Early signs are mixed: austerity measures in Ireland have threatened to thoroughly vanquish the Celtic Tiger, but data released today record a 2.7 percent growth quarterly growth, the first after eight quarters of sharp declines. New leaders like Britain’s PM David Cameron seem aware of the dangers before them but coolly confident they can adjust as the challenges present themselves. Let’s hope that confidence is not misplaced. I’d hate to see Cameron endure, like poor Herbert before him, an unanticipated early retirement.