The Coming Economic Crisis
This week Paul Krugman's column drew attention to a recent paper by Reinhardt and Rogoff, both of whom are distinguished economists with wideand deep practical experience in the real world of policy making. Once he'd posted the blogosphere (i.e. two my favorite econ/finance blogs) proceeded to go to town on the topic. Here's what Prof. Krugman had to say, which needs no further embellishment from me. The point YOU need to take from this is that the next President will be facing severe economic pressures that result from an accumulation of dodged problems that will HAVE to be dealt with. As you weigh candidates and issues we suggest, therefore, that you put the economic situation rather high on your priority list. In addition to Krugman's column we also point to some other concerns, e.g. another column by Ken Rogoff about the fragilities in China which could have even more severe consequences.
A Long Story It’s still not a certainty that we’re headed into recession, but the odds are growing greater. The economic news has been fairly dire this week. The credit crunch is getting worse, and a widely watched indicator of trends in the service sector — which is most of the economy — has fallen off a cliff. It’s still not a certainty that we’re headed into recession, but the odds are growing greater. And if past experience is any guide, the troubles will persist for a long time — say, into the middle of 2010. The problems now facing the U.S. economy look a lot like the problems that caused the last two recessions — but this time in combination. On one side, the bursting of the housing bubble is playing the role that the bursting of the dot-com bubble played in 2001. On the other, the subprime crisis is creating a credit crunch reminiscent of the crunch after the savings-and-loan crisis of the late 1980s, which led to recession in 1990. Now, you may have heard that those recessions were short. And it’s true that the last two recessions both officially ended after only eight months. But the official end dates for those recessions are deeply misleading, at least as far as most peoples’ experience is concerned. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures. In particular, now would be a good time to think about the possibility of going beyond tax cuts and rebate checks, and stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure. But we won’t get any innovative action to help the economy unless the next president has a couple of key attributes. First, he or she has to be free of the ideological blinders that make the current administration and its allies fiercely oppose the idea that the government can do anything positive aside from cutting taxes. Second, he or she has to be knowledgeable about and interested in economic policy. Presidents don’t have to be their own chief economists, but they do need to know enough to take the right advice.
- Is the Current Financial Crisis So Different?
- 5 Historical Economic Crises and the U.S.
- Global Financial Crises, Part II: Norway 1987
China may yet be economy to lose sleep over Given the highly vulnerable state of the US and European economies, what would happen to global growth if the Chinese juggernaut also started sputtering? Few investors or policymakers seem to be seriously contemplating this scenario. China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging. With all due respect to the extraordinary recent performance of China’s managers, the country faces economic, financial, social and political landmines just like any other emerging market, with epic environmental problems to boot. And, throughout history, no emerging market has escaped bouts of crisis indefinitely. Inflation of more than 6 per cent is the immediate problem. The authorities must stuff the inflation genie back in the bottle. It is not going to be easy in an economy where highly controlled financial markets render normal instruments of monetary control relatively ineffective. Until now, China has avoided this problem, as millions of idle farm workers moved to the cities, keeping wages in check. But as many of the most able workers have already migrated, the challenge of filling China’s burgeoning factories is intensifying. Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.