Pop Politico: “Happy New Year?”

Written by Current Events, Political Culture

The optimistic adage that a rising tide floats all boats is less sanguine when one contemplates the obverse. As the Great Recession of 2008 spills over to 2009 with what some are predicting is going to be far worse than what we experienced in 2008, the tools government has at its disposal to address global economic crises may not be strong enough to combat the ills that ail us.  In the United States, the housing bust that affected the financial markets — and is now affecting the retail sector — has global consequences. No one knows this more than people who spend their entire careers watching, examining, analyzing and writing about economic issues.

Just this weekend, a throng of such folk met San Francisco for the annual American Economics Association conference. And while I’m sure there were many dry and arcane recitations of scholarly papers that very few in the world can understand, there was one academic paper I read that suggests individual countries will have a difficult time recovering from this financial crisis by using what are thought of as tried and (mostly) true tools of the trade.  As Carmen Reinhart and Kenneth Rogoff wrote in the conclusion of their paper “The Aftermath of Financial Crises:”

Since the onset of the current crisis, asset prices have tumbled in the United States and elsewhere along the tracks lain down by historical precedent.The analysis of the post-crisis outcomes in this paper for unemployment, output and government debt provide sobering benchmark numbers for how the crisis will continue to unfold.  Indeed, these historical comparisons were based on episodes that, with the notable exception of the Great Depression in the United States, were individual or regional in nature.  The global nature of the crisis will make it far more difficult for many countries to grow their way out through higher exports, or to smooth the consumption effects through foreign borrowing.  In such circumstances, the recent lull in sovereign defaults is likely to come to an end.  As Reinhart and Rogoff (2008b) highlight, defaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises.

In other words, because of the banking crises (which generally take a long time to recover from), the large amount of debt governments are going to assume to loosen up credit, spend on New Deal-type jobs programs (like what Obama is proposing), stanch the number of mortgage defaults, and get the economy headed into positive numbers is clearly premised on the availability of money.  Alas, in the U.S., foreign credit comes mainly from sources who aren’t really allies (i.e., China, Russia and OPEC countries). If that money dries up due to a sharp decline in oil and product consumption, we may be headed deeper into the financial abyss.

Right now, Obama and his advisers are meeting with members of Congress to craft an economic stimulus package that is reportedly sporting a trillion-dollar price tag.  Add to that the amount spent on bailing out the financial sector, the auto industry, and the two wars we’re currently fighting, and the costs are astronomical.  However, without a coordinated effort on a global policy scale (something that would take an incredible amount of political skill), the risk is that the regional prescriptions for ailing economies won’t be enough to lift all the boats that are roped together in the same body of water.

“From the Air,” Laurie Anderson (download)