New Year's Recovery Resolutions
In 2011, America should resolve to ignore politicians calling for austerity.
Economically speaking, 2010 was a nightmare on both sides of the Atlantic. The crises in Ireland and Greece called into question the euro's viability and raised the prospect of a debt default. In Europe and the United States, unemployment remained stubbornly high, at around 10 percent. Even though 10 percent of U.S. households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing—or would have, were not it not for legal snafus that raised doubts about America's vaunted "rule of law."
Unfortunately, the New Year's resolutions made in Europe and America were the wrong ones. The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity. The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels. There will also be a decline in competitiveness. While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.
It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice—the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain. But the increasingly skewed income distribution gives clear guidance as to whom this should be: Approximately a quarter of all income in the United States now goes to the top 1 percent, while most Americans' income is lower today than it was a dozen years ago. Simply put, most Americans didn't share in what many called the Great Moderation, but was really the Mother of All Bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?
Europe and America have the same talented people, the same resources, and the same capital that they had before the recession. They may have overvalued some of these assets. But the assets are, by and large, still there. Private financial markets misallocated capital on a massive scale in the years before the crisis, and the waste resulting from underutilization of resources has been even greater since the crisis began. The question is, how do we get these resources back to work?
Debt restructuring—writing down the debts of homeowners and, in some cases, governments—will be key. It will eventually happen. But delay is verycostly—and largely unnecessary.
Banks never wanted to admit to their bad loans, and now they don't want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs. The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment, and high social distress—and even when it is a consequence of their own mistakes in lending.
But, as we know from experience, there is life after debt restructuring. No one would wish the trauma that Argentina went through in 1999-2002 on any other country. But the country also suffered in the years before the crisis—years of IMF bailouts and austerity—from high unemployment and poverty rates, and low and negative growth.
Since the debt restructuring and currency devaluation, Argentina has had years of extraordinarily rapid GDP growth, with the annual rate averaging nearly 9 percent from 2003 to 2007. By 2009, national income was twice what it was at the nadir of the crisis, in 2002, and more than 75 percent above its pre-crisis peak.
Watch Ben Smith of Politico and David Weigel of Slate discuss the coming austerity showdown:
Likewise, Argentina's poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the United States did—unemployment is high, but still only around 8 percent. We could only conjecture what would have happened if it had not postponed the day of reckoning for so long—or if it had tried to put it off further.
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. The paperback version of his latest book, Freefall: Free Markets and the Sinking of the Global Economy,with a new afterword, was published in October.
Photograph by Aris Messinis/AFP/Getty Images.