The Economic Paralysis

The Economic Paralysis

By Robert Samuelson

WASHINGTON -- The Bank for International Settlements in Switzerland has just published its annual report, and it is a dour document. The BIS (as it's known) was created in 1930 to handle post-World War I reparation payments from Germany to Britain and France. The Great Depression ended reparations, and now the BIS provides -- among other things -- sober commentary on the global economy. Its latest report oozes foreboding.

Consider:

-- On government debt: "The market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy."

-- On the need for higher interest rates: "Our attempts to cushion the blow from the last crisis must not sow the seeds of the next one."

-- On inflation: "Inflation risks have been driven up by ... dwindling economic slack and increases in the prices of food, energy and other commodities."

By the BIS report, you'd hardly know that there are almost 45 million unemployed in the advanced countries, up 50 percent from 2007. But can governments do anything about it? The BIS has no answer. Economic policy seems paralyzed. There's an almost palpable sense of helplessness, whether reading the BIS report or listening to Federal Reserve Chairman Ben Bernanke at his recent news conference. Economics seems to have emptied its toolbox. Patience and prayer are what's left: Last week's release of oil stocks, for example, was a desperate prayer for lower gasoline prices.

To be fair, some Keynesian economists (after the English economist John Maynard Keynes) argue that the problem is timidity, not impotence. Governments could do more; they just aren't. They could spend more or cut taxes more; budget deficits -- at least in the United States -- don't matter much at the moment. The Fed could have a QE3, buying more bonds to try to lower long-term interest rates.

Perhaps the Keynesians are right. But they have not prevailed because there are plausible reasons -- though not conclusive -- that they are wrong. Economists argue furiously over "multiplier" effects of larger government deficits: how much bang you get for every buck. One study concluded that the effect is much greater during recessions than during recoveries. This seems sensible and suggests that President Obama's 2009 stimulus helped but that a new stimulus would do less.

It might prompt neutralizing actions. Suppose consumers interpret it as a sign of fear and lose confidence. If they raised their savings rate by one percentage point, that would offset $120 billion of extra government spending. Or investors might react to higher government borrowing by boosting interest rates, though that hasn't happened yet. (Rates on 10-year Treasury bonds are 3 percent.)

1 | 2 | Next Page››