Reboot the World, not just America

I have argued to my students in São Paulo since early 2009 that if the US government and the European Union did not make a serious commitment to stimulus, the Great Recession could continue to plague the entire world for a full decade. I have been increasingly dismayed about the trend towards deficit reduction in Europe and the US that could trigger just the kind of ongoing recession that that I feared. Now, the Daily Beast has published a manifesto by prominent economists, called Reboot America, that calls for a continuation and expansion of economic stimulus as the key to bringing the world economy out of its lethargy.

This lethargy is dominated by the very slow recovery in employment in the United States and Europe. As well, although we have had major corrections in the hyperactivity in the domestic real estate and financial markets in these regions, there are still enormous bubbles in the personal finance sector (credit cards, etc.). The housing sector in the US continues precarious with more than 10% of domestic mortgages in some degree of default. (Sorry, I lost the reference to this.)

A year ago, we were all Keynesians. Europeans and Americans were united in following his dicta in planning their recovery from the market meltdown and the crash in demand and employment. Now, however, both sides of the North Atlantic are fearful of the budget deficits they are running. The US deficit exceeds $1 trillion, a lot of money by any accounting. But, if we are going to follow Keynes' policies for recovery, we need to follow them until we have recovered. As the Reboot American economists put it, "Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s." Indeed, we are making the same error that President Franklin Roosevelt made in 1936, with the recovery just starting. He began to focus on cutting expenses and deficits, with the obvious targets being the recovery programs that his administration created in 1933 and 1934. As a result, the Great Depression continued until World War II.

Republicans in the US do not want to accept the longer-term burden of paying for the recovery through taxes. Likewise, Germany and other conservative forces in Europe are scared that European national economies, like those of Spain and Greece for example, will be unable to pay off their obligations. As has been shown in the past, future growth will be able to pay off these obligations of recovery. The most recent US example of this was the deficit reduction during the Clinton Administration that put the budget in surplus after decades of hand-wringing about deficit reduction.

Why am I, in Brazil, interested in this question (beyond my being an American citizen)? Because of a set of well-structured financial market controls, Brazil largely avoided the Great Recession. Our recovery, both in financial markets and on Main Street, was relatively rapid. Today, our problem seems to be an excess of growth that could spark anew our typically Latin bugbear, inflation. We are concerned here because the US and Europe have traditionally represented our largest export markets. Now, China is displacing our traditional trade partners. However, this trade is focused on minerals and other raw materials. With the US and Europe, our trade is more balanced and allow us to develop our industrial and service sectors more than our extraction and agricultural sectors. Brazil's future depends on transforming our economy to one that demands that we bring our public education system to an acceptable standard and that we invest in technology and infrastructure. We are currently benefitting from world demand for the kinds of extractive resources in which the country abounds, but it is still the same type of economy that Brazil has lived with for at least three hundred of its five hundred year history.

So, if we believe that Keynes provided a correct description of how to emerge from a recession, then we need to remain committed to it until it works. When we are told by our doctors to take antibiotics to cure an infection, they always tell us to take the entire course of medicine and not to cut it off in the middle even if our symptoms of infection fade away. The same good advice holds here.