Nobel-Prize Winner Stiglitz; a Massive New Stimulus; and Consequent Potential Problems
Nobel prize winner Joseph Stiglitz argues that the US should/must inject a massive new stimulus to the flailing US economy in order to spur growth and bring down the totally unacceptable unemployment rate. Using the post-WW II period as an example of how a massive war debt was successfully reduced by the buoyant post-war economic growth of the US economy. Stiglitz contends that a new stimulus, although it would add to an already massive multi-trillion dollar US deficit, can also be significantly reduced by a subsequent period of rapid economic growth induced by a new stimulus.
What Stiglitz is leaving out of his analysis, arguably, is the economic/historical context that allowed the US to pay down its huge WWII deficits; and the current economic/historical context that makes a massive debt reduction much more problematic.
In 1945, the US was the only major economy in the world that was functioning. The rest of the industrialized countries were more or less completely destroyed.
So, on the one hand, you had virtually an entire world to rebuild; and, on the other hand, you had the US with the capacity to rebuild the world, and do it with no competition. From 1945-1965, the US had hegemony in the economic, political, military, and social spheres.
In 2010, there is a qualitatively different world in which the US operates. Today, the US has many competitors; competitors who are running massive balance-of-trade surpluses; at the same time as the US is running huge balance-of-trade deficits.
So, in the unlikely event that there is a massive new stimulus by the US to increase growth and reduce unemployment, there are potentially as many negative consequences as there are positive ones, as a result of this stimulus-induced growth.
If, for example, following the trajectory of other post-war business cycles, an inflationary situation arose in the mid-to-latter parts of a business cycle expansion in the US:
1) US goods and services would be increasingly even more uncompetitive on the world markets.
2) A good deal of the stimulus would go to buying foreign goods, machinery, technology, etc. (unless the US abrogated its commitments to free trade; to the WTO; to NAFTA; etc.).
3) The Federal Reserve Board would raise interest rates to try to slow down the economy in order to bring down prices.
4) The latter would happen in the context of a potentially steep fall in the value of the dollar.
5) A fall in the value of the dollar that would cause foreign buyers of US debt securities to potentially sell off their existing US securities (already in the trillions of dollars).
6)There would be a reluctance/unwillingness to buy the further US debt that was fueling the stimulus.
7) The position of the dollar as the world’s most important reserve currency, already somewhat precarious, would be further endangered.
8) Concomitantly, the power and influence of the US as the world’s most powerful country would be increasingly challenged/endangered by new competitors like China, India, etc., and even, possibly, by the European Union (if they don’t fall apart themselves).
The world in 2010 and beyond is/will be a qualitatively different world from the world the US found itself leading in 1945.
In spite of the above, I’m still in favor of a new stimulus to try to further jump start the sluggish US economy.
For a greater or lesser period of time, with a large stimulus, inflation would probably be held in check due to the current low capacity utilization of US industries, and the high unemployment rate. But at a certain point, as industrial production increases, and more and more workers are employed – leading to an expansion in the consumer market, inflationary pressure inevitably start building up, and increasing – if the Fed can resist intervening until the unemployment rate falls significantly.
But if the Fed waits too long to increase interest rates, it risks some or all of the above negative consequences. But if the Fed raises interest rates at the first signs of inflation, then the expansion and employment could be prematurely quashed, with unemployment still at historically high rates, as the Fed induces a new recession.
So in sum, my argument is that a major new stimulus, though needed, is not without its own negative repercussions – as it seeks to grow the US economy enough to significantly reduce a totally unacceptable unemployment rate.