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G-20 Cancels Fiscal Expansionism: Hooverism on a Global Scale

The G-20 nations over the weekend basically held up a “Let Them Eat Cake” sign for the rest of the planet’s citizens to read. And a white flag to the bond market vigilantes, to boot.

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction […]

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

Not in this country or abroad has the private sector stepped up to drive the recovery. And yet, the deficit scolds have won. There will be no more fiscal stimulus, generally speaking, for most of the world. And that’s true despite mass unemployment in America and rising joblessness in Europe. This is precisely the kind of thinking that turned a jarring stock market crash into a worldwide depression in the 1930s.

Paul Krugman despairs of a lost decade (and will almost certainly do so in the print edition tomorrow):

But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP […]

Yet the conventional wisdom now is that these countries must nonetheless cut — not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) sometime in the future.

Utter folly posing as wisdom. Incredible.

The FT article does point out that Tim Geithner, of all people, was the most concerned about budget austerity and the implications for economic growth. But the policies of the Administration in the near term – a discretionary spending freeze in the budget, the fiscal commission, continued failed efforts at additional stimulus – don’t match this rhetoric. It seems Geithner wanted other countries to increase demand – Chinese revaluation, German domestic demand boosts – to create a free stimulus for the US.

That isn’t going to happen. And with even liberals like Eliot Spitzer calling for shared sacrifice (he’s asking more from the rich, but the language is unmistakable), clearly the mood has turned sharply in the direction of Hooverism. Digby writes that the elites have their targets set on the ordinary worker:

I think it’s easy to over think this. The world economy is unstable for myriad reasons. But the reasons for insisting on austerity are fairly obvious. The question is whether or not people will see through this or not. Disaster capitalism depends upon the people being confused and stressed for its success. (In that sense, rioting in the streets may actually help them.) And all over the world right now, with the rapid change from globalization and resistance to modernity in general, there is a tremendous amount of social stress and cultural upheaval on top of this economic downturn. It’s the perfect time to strike.

The only question is if their actions will be met with such a furious reaction that they’ll have to back down on their goals. That asks a lot of people just trying to keep their homes and feed their families.

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David Dayen

David Dayen