Saturday, March 5, 2016

Barry Eichengreen Worries About the year 2020 (and the Next President)


Andrew McCreath interviews Barry Eichengreen
(two short ads first--sorry) 

Today the government released a favorable jobs report. Unemployment is down to 4.9 percent and the labor participation rate is up slightly (the overall share of Americans in the labor force is 62.9 percent) even if wages remain depressed. Yet storm clouds are on the horizon.

There is reason to worry about the global economy over the next few years. One key worry is what happens if China is not able to manage a soft landing to its current economic troubles, or its growing debt problem. If China can't steer clear of its iceberg, it is possible that the next president will face an economic crisis greater than Obama. What policy tools will he or she have in the tool box to deal with such an economic crisis? Will he or she be prepared to use the tools that are available? Will he or she have a team with skill and authority to use those tools?

Barry Eichengreen was interviewed earlier today by Andrew McCreath of the Business News Network (Canada's Business and Financial News Channel).  Eichengreen is an expert on the Great Depression and he has done research and published widely on the history and current operation of the international monetary and financial system. In the interview he worried about China's ongoing economic slowdown, the Chinese response, and the lack of tools (fiscal and monetary) that will likely be available to American policy makers if there is another recession in the next presidential term.

Interest rates for this year will likely remain close to the zero lower bound, meaning (if a recession comes) the central bank will not be able to stimulate growth by lowering interest rates. There will be few monetary tools available. And in the United States, there has been, and will likely continue to be fierce GOP partisan opposition to stimulating the economy through government spending (fiscal policy).  What's left in the toolbox?

China's central bank recently released $25 billion dollars and is making these funds available to commercial and policy banks in order to help them maintain liquidity. This injection of liquidity will lower the value of China's currency (the Remnimbi), says Eichengreen. This will exacerbate our trade deficit with China, but to the extent this helps China sail the rough waters of its current economic slowdown, that benefits everyone, says Eichengreen. However, this infusion of liquidity adds to China's long term debt problem, which is a concern. China's debt problems is looming out there, like a huge iceberg.

China's economy has grown to the point that a serious depression in China could swamp all boats. In such an event, the next president of the United States may find that he or she lacks sufficient policy tools to right the ship.

Watch out for the year 2020 says Eichengreen in the video, above:
[By 2020] Central banks will not have been able to normalize the level of interest rates. They haven't been able to do anything. And fiscal policy is really gridlocked as well. So for the first time in 50 or more years I think we will see what a recession looks like when there is no available policy response and I think the picture won't be pretty.... We would be set up for a much more serious, deeper and more prolonged recession than we've seen post World War II. 
This is sobering to consider as we watch the unreality and immaturity on display among Republican contenders for President.

When Eichengreen says "And fiscal policy is really gridlocked as well," I don't believe he's talking about tax rates: I think he's referring to  GOP opposition to government investing in things like roads, bridges, parks, high-speed rail, new forms of energy, etc. in order to stimulate a depressed economy. In short, he's referring to intransigent GOP opposition to fiscal policy in the form of government spending.

We recall Mitt Romney's opposition to the government assisting the automobile industry in 2009. Only 32 Republicans in the House of Representatives voted for the bill to extend loans to Chrysler and GM.

We remember that 65% of Republican members in the House of Representatives voted against the Troubled Asset Relief Program needed to rescue banks in the wake of the mortgage crisis. And this was after Hank Paulson and Ben Bernanke "sketched out a dire scenario for senators" warning them that if they did not act neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.

We remember that Republicans in the House unanimously opposed the American Recovery and Reinvestment Act of 2009, and all but three Republicans opposed this legislation in the Senate.

And we look at the current crop of Republican candidates for president and we see that Ted Cruz is advocating for a balanced budget amendment, which would take off the table any fiscal response to an economic crisis.  And we see Ted Cruz advocating for the Gold standard, a truly nutty idea. We see Marco Rubio advocating that we should freeze all spending, except military spending, at 2008 levels. We listen to him rail in opposition to our use of the tool of fiscal stimulus in response to the deep 2008/2009 recession.  We see Ohio governor John Kasich being no friend of ARRA. He gutted Ohio's website that tracked stimulus projects.  His website crows: "The weak economic growth of the past several years isn’t because Washington failed to do enough, but because Washington succeeded in doing too much." He too is for a balanced budget amendment.  And Donald Trump: ....who knows where Trump stands on anything?

It's like these GOP candidates are running for captain of the Titanic, advocating to leave the life boats behind. Barry Eichengreen looks sober and worried. We should be worried too.

Better revisit where Hillary Clinton stands on these issues. And tell your friends to vote. 

You can follow me on Twitter @RolandNikles.

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