The Need for Global Coordination
To me, I think the scariest part of the current recession is its inherently global nature. For all the sturm und drang of our domestic political debate, there’s no way for us to get back to economic health without other people reviving their economies and consuming more. Given our massive pre-crash trade deficit, it’s just impossible to see adequate demand coming from the U.S. consumer. It needs to come from the countries that, pre-crash, were running big surpluses. Rich surplus countries like Japan and Germany need to, instead, run at least modest deficits. And a poor high-growth countries like China ought to running big deficits as foreign capital finances its development. That’s the way it’s supposed to work. But instead before the crash capital was basically flowing uphill.
Unfortunately, to do this right means you need actual international coordination of stimulus measures, the subject of my new TAP piece. There was some initial talk of this when it looked like Germany wasn’t going to do any stimulus at all. Then folks got sucked into our congressional debate, and Germany agreed to a modest stimulus. But that’s probably not good enough. They need to do a stimulus that’s really big relative to their GDP, and that needs to be part of a larger global coordination that has all the non-trivial players pulling in the same direction. There’s no precedent for that kind of thing. But the alternatives that there are precedent for—the Long Depression of the late-19th century and the disastrous war that ended the Great Depression—are really terrible.
39 Responses to “The Need for Global Coordination”
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February 19th, 2009 at 5:03 pm
They don’t want to do a stimulus–they want to freeload off our stimulus by getting a piece of the contracting. That’s why they are wailing so loudly about the implied buy-Americanism.
February 19th, 2009 at 5:06 pm
I suspect you don’t your posts after first writing them, but if you do, for the sake of clarity you ought to distinguish between fiscal deficits and trade deficits. Japan, for example, has a trade surplus, but has government debt equal to ~190% of its GDP from running fiscal deficits.
Regarding fiscal stimulus in Germany, the Germans recently implemented an idea that was proposed by an American pundit last summer (I forget which one): offering a tax credit or transfer payment to people with cars older than X years if they junk them.
February 19th, 2009 at 5:14 pm
Email me when everybody gets together and sings “Kumbayah”, Matt.
February 19th, 2009 at 5:26 pm
What would Millard Fillmore do? Sent (another) carrier battle group to Japan and force them to buy Ford Tauruses?
February 19th, 2009 at 5:27 pm
The global crisis is the banking problem. Banks are international.
February 19th, 2009 at 5:36 pm
I don’t think he his posts after writing them too. I bet no one who reads this blog thinks he his posts.
February 19th, 2009 at 5:40 pm
the Long Depression of the late-19th century
This ended without catastrophe – heck, without anyone understanding that they had been in it – and the deflation associated with it enabled the rise of a middle class that created the Progressive movement in america and similar ‘3rd way’ movements in Europe.
February 19th, 2009 at 5:45 pm
Oh, the ironing!
February 19th, 2009 at 5:57 pm
The premise of the TAP piece is incorrect.
The international coordination needs to be in regard to financial corrections-not trade.
The average American needs to reduce his debt load, but that can come internally, it doesn’t have to come from a better trade balance. The best way to improve the consumer debt burden would be to transfer massive quantities of cash from the wealthy to the middle class.
Foreign countries do need to stimulate their economies, but they can spend it internally. The important thing is that everybody does stimulate right now.
The mess in financial markets is international and the “toxic waste” needs to be disolved everywhere and in a coordinated fashion.
February 19th, 2009 at 6:33 pm
On the positive side, global cooperation on the coverup of war crimes seems quite robust.
I’ve been reading you for a long time, Matt, and I have to wonder when you’re going to address Obama’s so-far abysmal record on civil liberties & the rule of law.
February 19th, 2009 at 7:29 pm
This ended without catastrophe – heck, without anyone understanding that they had been in it
From Wiki:
Of the country’s 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876…Wage cuts and poor working conditions among American railroad workers resulted in the Great Railroad Strike of 1877, preventing the trains from moving, especially in Pennsylvania and the great railway hub of Chicago. President Rutherford B. Hayes sent in federal troops in an attempt to stop the strikes. Fights between strikers and troops killed more than 100 and left many more injured. Further trouble came in July 1877 in the form of a crash in the market for lumber, resulting in the bankruptcy of several leading Michigan lumbering concerns
Yep, everyone was blissfully unawares.
Oh, and also, the contraction led to northerners agitating against the costly occupation of the South. Hence the post 1876 election abandonment of reconstruction. I hear that worked out just peachy for southern blacks. Nope, no catastrophes here.
February 19th, 2009 at 7:38 pm
matt, if every developed country goes on a spending binge, who is going to buying all this debt? and what’s that going to do to the bond market?
February 19th, 2009 at 8:38 pm
I used to laugh at Paul Krugman when he would wonder why the downturn seems synchronous, then a few columns later he is calling for global coordination.
February 19th, 2009 at 9:41 pm
JR – I understand the interest rate on federal bonds is about as low as it can go, but given the stock market it has become an investment of first resort simply because it is backed by the full faith and credit of the government. In the long term there are obvious problems to high deficit spending, but in the short term the same market failures that got us into this mess mean we’re getting a good deal on the borrowing to finance stimulus. Eventually there will be a reaction in the bond market, but the fact that we’re borrowing so much and at such a rate I think means that for much of the last few months and maybe up through today that it is the problems of the other markets that should worry us, not the bond market.
I’m wondering if the fed’s actions to guarantee housing debt and inject liquidity — which should all be quite inflationary — are also relatively less risky and perhaps even advisable as policy because there seems to be deflation.
February 19th, 2009 at 10:40 pm
mkd-
The long depression is larger than the panic of 1873 and the ensuing recession. The near three decade deflationary period had at least two major bank panics, and countless instances of industrial labor unrest (it was a relatively new thing after all, and so mistakes were made). But also overall rising living standards.
February 19th, 2009 at 10:45 pm
Tell me again how globalization and NAFTA are awesome Matt.
February 19th, 2009 at 10:45 pm
Compare the long depression, which resulted in a progressive president named Roosevelt, with the Great Depression, which resulted in a progressive president named Roosevelt.
Wait a sec.
Seriously, the end of the long depression was marked by the Gay 90’s, the end of the Great Depression was marked by the not so gay 40’s.
February 19th, 2009 at 10:54 pm
Kolohe,
During this time period, Germany and other European countries came up pension fund in response to the cyclical nature of capitalism. During booming times, capitalism is great but during times of bust not so much. It causes too much displacement. The government programs that you see operate as stabilizers. Thank god we have Social Security, unemployment, food stamps, etc so people can ride out this economy.
February 19th, 2009 at 10:55 pm
Gay 90s was the Gilded Age so I don’t how grand that time period was. Besides a lot of what happened in that time period led to WWI.
February 19th, 2009 at 11:23 pm
Besides a lot of what happened in that time period led to WWI.
A dutch slave ship landing in Hampton Roads in 1619 led to the US Civil War. Yes the seeds of WW1 were sewn a generation before, but it’s not nearly the proximate cause that the Depression was for WW2. (also as an aside, ww1 was an emminently avoidable war – it was much more about the individuals involved than the ‘clash of civilizations’ type – and somewhat an echo of what has transpired in Mesopotamia lately)
Also, a lot of the same Bismarkian welfare state stuff happened in the US too, starting in the 1890’s, but only at the state level, most notably New York. But even on the national level, the large number of veterans in the late 19th century created a modestly wide but not deep safety net (and which was alternatively enhanced and withdrawn). Of course, this didn’t help recent immigrants who made up a good chunck of the poor.
February 20th, 2009 at 12:11 am
In America, a lot of the Bismarkian programs came about during Roosevelt’s time. This also explains why machine politcs had declined. Before the New Deal, immigrants relied on the Democratic machine for social safety net.
As for the causes of WWI , please go back and read some history books to understand it. Imperialism and capitalism were intertwined.
February 20th, 2009 at 12:50 am
If you think the Progressive Era started in 1932, that’s your prerogative. If you think WW1 is an inevitable result of the economics of the late 19th century, your Marxism is also your prerogative.
February 20th, 2009 at 12:51 am
benton,
my worry isn’t about the bond market itself, but rather a legitimate question about who is going to be buying this debt. and what incentive do they have to go along with matt’s global coordinated effort? are the chinese going to keep buying our debt, but stop exporting to our markets?
and if the bond market is the market of first resort, how does any stimulus of the real economy happen? the governments of the developed world start flooding the economy with cash, but they’re simultaneously flooding the debt market with government bonds. what happens if people don’t all of a sudden decide to start spending and investing? then all that liquidity just goes right back into the money market.
February 20th, 2009 at 3:06 am
They need to do a stimulus that’s really big relative to their GDP, and that needs to be part of a larger global coordination that has all the non-trivial players pulling in the same direction.
Considering the history and the causes of the current crisis, I think the US is really in no position to give advice to or demand anything from Germany.
February 20th, 2009 at 6:28 am
“Considering the history and the causes of the current crisis, I think the US is really in no position to give advice to or demand anything from Germany.”
Well, sure, but this isn’t just any damn fool American giving Germany economic advice, this is a Harvard philosophy major giving them economic advice, so the Germans better listen up.
February 20th, 2009 at 8:49 am
Kolohe,
We all understand that things get better when recessions and depressions end. That doesn’t mean depressions aren’t bad things, or without consequences for the people who have to live through them.
I’ll tell you, if tax policy caused economic growth to disappear, tens of thousands of businesses to close, and 1/4 of the nation’s depositors to get wiped out, I don’t think you’d be telling us how harmless it was, and how nobody really noticed.
February 20th, 2009 at 10:16 am
the Great Depression, which resulted in a progressive president named Roosevelt.
The Great Depression also resulted in a certain dictator running on a platform of scapegoating an unpopular minority for Germany’s economic problems.
Put that together with the anti-Muslim rhetoric already circulating in certain parts of the U.S. and Europe and you can make a really ugly picture of what the Even Greater Depression could lead to.
February 20th, 2009 at 11:57 am
Kolohe,
I know the “Long Depression” lasted longer than the initial severe recession of 1873-1879, but those years were a part of the “Long Depression” right? And it least through that period people knew something really bad was going on, right? What about the 1893-1898 period which saw 13-15% unemployment? I’m pretty sure people knew the economy was in the crapper then, too. So what we’re boiling down to is the 1880s, which have been classified by economic historians as a part of the “Long Depression”, but which actually saw pretty substantial growth. We call this period the Gilded Age. You don’t think people noticed that an alliance of government and monopoly capitalists were crushing the urban worker and evicting the rural farmer? This was not a good time for the average American worker and they knew it. If you have any data showing anything other than a concentration of wealth at the top of the economic pyramid and the violent labor reaction it sparked I’d like to see it.
The near three decade deflationary period had at least two major bank panics, and countless instances of industrial labor unrest (it was a relatively new thing after all, and so mistakes were made
“Oh sorry I’m new to all this. So what you’re saying is I shouldn’t lock children in factories and make them work for pennies a day in completely unsafe conditions? Oh OK, I’ll do better next time. And by better next time, I mean move my factories to China.” Corporations did not run slave factores because they didn’t know any better, they did it because it was cheap and they could get away with it. And they’re still getting away with it.
March 3rd, 2009 at 10:14 am
Matthew,
Good points about the need for global coordination.
What we are seeing presently is the inevitable fall-out from a global economy that, as yet, has not developed any coordinated international governance to correct market failures. Global problems – whether they’re financial or environmental – will only continue to get worse until global coordination is achieved.
Although our politicians, especially UK Prime Minister Gordon Brown, are beginning to realise that global coordination is needed, they have no clue of how to go about it. But happily citizens are beginning to take the lead on this via the Simultaneous Policy (Simpol) initiative. Anyone interested might want to take a look at http://www.simpol.org
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