There were two posts yesterday. The first was “Worthwhile Canadian Comparison:”
I’m in Toronto, where I just received an honorary degree from the University of Toronto; and my thoughts have naturally turned, as they don’t do often enough, to matters Canadian. For it seems to me that Canada offers a useful test case for theories about what lies behind the Great Recession and the Not-So-Great Recovery.
In its early stages, the slump was widely seen as essentially a banking crisis. This view in turn led some people — unfortunately, I believe, including some senior people in the Obama administration — to believe that the economy would bounce back quickly once banking was stabilized. In fact, however, banking was stabilized pretty quickly, and most measures of financial disruption look like this:
That is, a period of severe disruption in 2008-9, but a return to relatively normal conditions thereafter. Yet the economy remained depressed. As a result, many economists — myself included — turned to a view that stressed nonbanking issues, especially the broader effects of the collapsed housing and the overhang of private debt.
Enter Canada. Famously, Canada’s old-fashioned, boring banking system avoided getting caught up in the global financial crisis. And for a while Canadian housing prices lagged those south of the border. Since then, however:
And Canadian household debt has kept rising even as the US level has declined:
So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.
I’m not exactly making a prediction here; but I guess I believe in the debt overhang story enough to be worried, and Canada is certainly an important test case.
The second post of the day was “Against Stupidity, The IMF Itself Contends In Vain:”
Yesterday the IMF chided the United States for spending too little and cutting its budget deficit too fast — and most people, if they heard about it, just shrugged. To be honest, that was my initial reaction too: we’ve come to accept the sheer stupidity of our current economic policies, and the fact that apparently nothing can be done about it, as part of the “new normal”.
Still, every once in a while we should step back and consider the awesomeness of the situation. Normally, we expect governments to have trouble containing demands that they spend more and/or tax less. Normally, we expect the IMF to be a fiscal scold, telling spendthrift governments to make tough choices; the old joke is that IMF stands for It’s Mostly Fiscal.
But now we’re in a situation — a liquidity trap — in which more government spending is a good thing, because it helps put unemployed resources to work; meanwhile, the cost in terms of future debt service is minimal, because interest rates are so low. Both ends of the intellectual case for austerity — the claim that spending cuts are actually expansionary and the claim that terrible things happen when debt rises even if interest rates are low — have collapsed. What could be easier, then, than for politicians to make constituents happy by spending more on things voters like?
So what happens? More austerity, because a party dedicated to the proposition that less government is always more blackmailed Obama into accepting the sequester, and now uses its blocking power to prevent any solution; and it’s true, Obama has chosen not to make this a central political issue. There are many ways to show how big the government shortfall is; here’s a comparison of the track of overall government spending (federal, state, and local) during the last recession and aftermath with the Great Recession and aftermath, just in dollar terms (if we did it in, say, real per capita terms you’d see that spending is falling fairly quickly):
If government spending had grown at normal rates since 2007, it would be hundreds of billions higher than it is — and the unemployment rate would probably be 6 percent or less. At this point austerity is the main reason we’re still in an inadequate recovery.
But there isn’t even a hint of significant movement on fiscal policy. It’s really amazing.