Stimulate or Decimate? A post-summit briefing note for the G20 leadership

By Robert Presser on July 22, 2010

Dear G20 leaders,

First of all, congratulations are in order for emerging with anything resembling a commitment to fiscal restraint at all, given the differing economic environments you are all facing.  The message was simple and direct: cut deficits in half by 2013 and stabilize debt to GDP ratios by 2016.  Boy, are you lucky that the majority of populist journalists ran to file the story before they read the fine print, because otherwise the solidarity you displayed in the group photo would look more like Swiss cheese.  Japan gets an exemption from the debt level targets because they are still fighting deflation leftover from the last recession, and the US federal government is busy spending more, not less, to compensate for state budgets that are being slashed to the bone.  Other nations like the UK and Spain are going to cut faster and more deeply than other G20 members because the world’s financiers have decided that they are not good credit risks anymore, and their governments must show some backbone.  But no matter, many among the broader public are financially illiterate or disinterested, and you had the advantage of most of the world focusing on the impending World Cup Soccer matches in South Africa.  Hey, in politics, timing is everything.  The world read the first four lines of the G20 summary on the website and moved on.

Some of you might be upset that Canadian politicians swarmed the summit extolling the virtues of the Canadian banking system (see, boring is good!), how the “Canadian model” should be emulated by other G20 members and not to listen to those Europeans when they promote their nasty bank tax.  G20 members should be reminded that the world loves Canada at the moment for its natural resources like oil, mineral deposits and heavily subsidized high technology planes and trains, but regular Canadian manufacturing is not a role model for the world.  It was too bad that G20 leaders could not leave their downtown Toronto cocoon to drive the QEW towards Hamilton and Niagara and tour all the factories on four-day workweeks or the shuttered auto plants.  Brazil, take note – if you are still the country of the future, then maybe you should not give away your riches so easily the way Canada did as it ramped up its development after WWII.

Now you are all at home and are wondering how to put what you discussed into practice.  Your cabinet members are all looking at you waiting for your orders – spend and stimulate or cut and retrench.  Don’t worry; it’s not really your decision.  Your bankers will decide for you.  Mr. Obama, call the Chinese and see if they still plan to buy your treasury bills until 2016 – if they say yes, then just continue to spend until the Chinese or the Republicans in Congress make you stop.  Depending on how the mid-term elections go, the Republicans may end the party before the Chinese do.  Mr. Obama, you need to find a way to wean your population away from low taxes, low interest rates, an oil-based economy and a federal government that doesn’t know how to say no to lobbyists and special-interest bailouts.  Unless you do a better job at meeting your promises from the 2008 campaign, your country’s influence among the G20 and the broader world will continue to shrink.

For you continental Europeans in trouble, you all need to say thank you to the Germans for putting together a Euro rescue package with the European Central Bank and the International Monetary Fund.  We all used to think that size matters – well, Greece was a little country with an immaterial GDP figure that set off the current Euro crisis and knocked its value down by 20% or more against a basket of foreign currencies.  There is no choice for the bunch of you but to cut, and face the protests at home, for if your Euro-buddy bailout runs out of money then you too will have to make a deal with the Chinese, and they will be far more demanding than the Bundesbank.  Can you imagine the Chinese buying into, say, Renault?  Remember, the Indian company Tata Motors already owns Jaguar and Rover, and the British didn’t utter a peep of protest.  If you like protecting your labour markets, national industries and complex business governance structures that dissuade foreign investment then you need to start getting your debt down immediately.  Look over your shoulders at the cuts Romania is being forced to make in order to gets its next IMF stabilization payment or the pressure on Hungary’s new government.  This could also happen to you.

Some of you may want to review PM David Cameron’s great start in the UK – of course, he had the advantage of being newly elected and could blame the previous government for all the ills he is facing, but he is not wasting his window of opportunity to make drastic spending cuts and compressing the timeframe for their implementation.  Indeed, a recent study by the OECD agrees with this approach, concluding that the quicker the restructuring is implemented the more rapidly that growth returns and the better financial markets perform.  A lot of what the OECD publishes is really for academics and backroom policy wonks, but this is one that you should read yourselves – at least the first four lines of the executive summary.

You will face the temptation to listen to progressive economists like Paul Krugman who are arguing that the world is on the cusp of a third depression because world governments are cutting spending and raising taxes when they should really be borrowing and spending even more to ward off they real threat of deflation and massive unemployment.  Well, don’t be so scared by Mr. Krugman – he is an intelligent man who is ignoring some important changes since the last time the US tipped back into economic contraction in 1937 after FDR imposed austerity measures.  First of all, the US is no longer the economic motor of the world, throwing off cash profits to fund worldwide economic activity.  That job is now filled by China and to a lesser extent by the petroleum producing nations who take in, and invest, hundreds of billions of dollars annually.  If China and the OPEC nations choose to spread their wealth – and they do – then the burden of world economic growth does not rest with the US.  Secondly, world trade had collapsed by 1937 due to protectionism that started in the US and quickly spread around the world.  In 2010, world trade has almost rebounded to pre-recession levels and trade is an excellent distributor of wealth and opportunity.  Following his logic, Mr. Krugman would be hard pressed to explain how South Korea, Malaysia, Singapore, Viet Nam and other lesser Asian Tigers continue to grow and prosper while Japan stagnates for its second decade in a row.  If the US is headed for a “double-dip” recession, don’t assume that your country is fated to do the same – as a world leader, you have the power to make your own economic course by integrating yourself with an economic trading block that is growing, creating jobs and income.  Indeed, it is your responsibility to seek out these opportunities for your nation.  The G20 is no longer US-centric, and neither is the world economy.

Oh, and whatever decisions you make, communicate them clearly, and spell out the consequences.  Your bankers appreciate honesty and transparency – and coincidentally, so do your voters.


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