As I read the analysis of the global economic crisis and prescriptions for turning the situation around written by Daniel Alpert, Robert Hockett and Nouriel Roubini (hat tip: Marc Schulman), my hopes were first raised and then dashed. Many of the things the authors had to say about how we got into the mess we’re in and the contours of the necessary remedies, e.g. the long term structural character of the downturn and the global factors involved, are things I’ve been harping on here for a long time. Unfortunately, like so many other commentaries, their analysis of how we got here is significantly better than their prescriptions for digging ourselves out of the hole.
Their proposals consist of three basic “pillars”:
Pillar 1
A $1.2 trillion targeting high return investment in energy, transportation, education, research and technology development, and water treatment infrastructure
I won’t nitpick this. However, I take great exception to this statement:
We also emphasize the substantial element of “self-financing” that such a program would enjoy by virtue of (a) massively current idle hence low-priced capacity, (b) significant multiplier effects, and (c) historically low government borrowing costs.
The authors are apparently unaware of Davis-Bacon wage requirements which entirely negate point (a), (b) is a matter of some controversy with no dispositive empirical proof, and (c) will not remain true forever while the debt which would be incurred will be on the books forever. We’re still paying interest on the debt we incurred during World War II. We’ve just grown and inflated to the point that it’s not particularly significant any more. I do not believe we can expect the rate of growth we experienced for the twenty years following the war again. Do the authors expect high inflation?
Pillar 2
Debt restructuring and regulatory capital loss absorption
This “pillar” is discussed at greatest length, see especially the appendix. I find two basic problems with this. First, I think the authors are underestimating how much of the debt is actually on the part of the highest decile of income earners. Forgiving that will require Olympic gold medal caliber rationalization. Second, don’t the banks that hold the debt need to acknowledge that they’re insolvent in order to effect the second component? And isn’t the banks’ refusal to acknowledge that insolvency what has caused the failure of each of the several past debt restructuring measures? There’s a time inconsistency problem here.
Pillar 3
Global rebalancing—a new G-20 commitment to currency realignment, domestic demand growth and reduction of current account surpluses, and IMF and G-20 coordinated recycling of East Asian and petro-dollar surpluses to support economic recovery in Europe and the Middle East
The short version of this is that Germany and China need to let wages and personal consumption to rise and China needs to implement a social safety net to reduce “rainy day” saving. There are no prospects whatever for either of these things happening, at least not on a timetable that will produce near term economic recovery in Europe or the U. S. It’s like a 12-step program. The beginning or recovery is acknowledging that you have a problem and neither Germany nor China believe they have a problem. In addition the Chinese oligarchy would need to choose the good of China and the world over lining their own pockets and those of their family members. Ain’t gonna happen.
Nonetheless the article is highly recommended. Read it and weep.
