The New Economic Paradigm Emerges

G20 drops support for fiscal stimulus - CNN.com

(FT) -- 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 meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.

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.

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Proponents of free-markets have been saying as much for quite some time now. Government stimulus and expansionary monetary policy cannot facilitate the creation of wealth or prosperity; they only provide short-term relief to long-term problems, the equivalent of more drugs for a drug addict; they'll feel better temporarily, but the underlying malady remains and festers.

The previous article offers a convenient segue for a WSJ editorial written by Arthur Laffer:

Arthur Laffer: Tax Hikes and the 2011 Economic Collapse - WSJ.com

By ARTHUR LAFFER

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.

...

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The free-market is being stifled by government interference, and free-market capitalism is being replaced by increasingly centralized economic and monetary tendencies. When will the ivory tower academics and elites learn the lessons of history, and when will they learn to keep their hands off the market?

The economic paradigm is shifting. Big government, big debt, and the centralized allocation of money and resources have proven to be historic and contemporary failures. Low taxes, minimal government, and the invisible hand will put us on the road to recovery and sustained prosperity.

Government is the problem, not the solution.

The just-concluded meeting of the Finance Ministers and Central Bank Governors of the G-20 did not repudiate fiscal stimulus. Instead, the meeting noted that events have moved beyond the crisis/collapse in macroeconomic activity that made fiscal stimulus necessary. Given the current macroeconomic situation, the G-20 ministers noted that attention should now shift to fiscal consolidation. That call echoes the IMF's conclusion that the time for fiscal stimulus is passing and the time for credible fiscal consolidation is imminent.

If one reads the June 5, 2010 communiqué one finds that, in part, it reads:

The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions. However, the recent volatility in financial markets reminds us that significant challenges remain and underscorse the importance of international cooperation. The G20's strong policy response to the crisis has played a pivotal role in restoring growth and we stand ready to safeguard recovery and strengthen prospects for growth and jobs...

What was the policy response cited? One can go back to earlier documents e.g., the April 2, 2009 Leaders Statement, which declared, among other things:

We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 percent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth... Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times...

In short, far from repudiating fiscal stimulus measures, the latest communiqué hails the success of the fiscal and monetary policy stimulus measures that were undertaken during the financial crisis/severe recession.

An excellent post.
However teaching the blind to see has up till now proven to be impossible.

I find it incredible that Marxists and others who propose this by now outdated, outmoded method of running an economy do not look at the abject failure of those nations who have adopted such and who now strongly advise any other nation from adopting such.

Command Economies do not work.

donsutherland1 said:

The just-concluded meeting of the Finance Ministers and Central Bank Governors of the G-20 did not repudiate fiscal stimulus. Instead, the meeting noted that events have moved beyond the crisis/collapse in macroeconomic activity that made fiscal stimulus necessary. Given the current macroeconomic situation, the G-20 ministers noted that attention should now shift to fiscal consolidation. That call echoes the IMF's conclusion that the time for fiscal stimulus is passing and the time for credible fiscal consolidation is imminent.

If one reads the June 5, 2010 communiqué one finds that, in part, it reads:

The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions. However, the recent volatility in financial markets reminds us that significant challenges remain and underscorse the importance of international cooperation. The G20's strong policy response to the crisis has played a pivotal role in restoring growth and we stand ready to safeguard recovery and strengthen prospects for growth and jobs...

What was the policy response cited? One can go back to earlier documents e.g., the April 2, 2009 Leaders Statement, which declared, among other things:

We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 percent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth... Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times...

In short, far from repudiating fiscal stimulus measures, the latest communiqué hails the success of the fiscal and monetary policy stimulus measures that were undertaken during the financial crisis/severe recession.

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Don,

Thank you for your thoughtful reply. It does seem the CNN article (and my analysis of it) were somewhat inaccurate.

However, I would note that current concerns over sovereign debt and fiscal sustainability stem, in part, from the same stimulus the G-20 hails as a success; it seems they are patting themselves on the back while trying to solve a problem they helped create.

jujuman13 said:

An excellent post.
However teaching the blind to see has up till now proven to be impossible.

I find it incredible that Marxists and others who propose this by now outdated, outmoded method of running an economy do not look at the abject failure of those nations who have adopted such and who now strongly advise any other nation from adopting such.

Command Economies do not work.

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The empirical evidence is clear about the failure of the command model.

However, one has to be careful not to confuse fiscal stimulus (one of many economic tools that should be used appropriately) with a command economy. Increased fiscal stimulus can be an appropriate remedy when an economy has suffered a substantial demand shock, aggregate demand is collapsing, and a nation is not debt intolerant (doesn't have debt to an extent that additional debt would lead to a drying up of access to capital). It is not meant to be permanent e.g. remain in place once the economy has recovered (a major policy bias). Of course, constraints exist for other tools, as well. For example, the supply-side remedy could be ideal for an environment characterized by stagflation. However, when a nation is highly-indebted, supply side remedies could exacerbate sovereign debt risks.

alms said:

However, I would note that current concerns over sovereign debt and fiscal sustainability stem, in part, from the same stimulus the G-20 hails as a success; it seems they are patting themselves on the back while trying to solve a problem they helped create.

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The G-20 believed that inaction would have been worse than a temporary buildup in debt e.g., risk of global Depression. At the same time, the debt buildup was intended to be temporary. Even during the financial crisis/bottom of the recession, the G-20 was calling for credible exit strategies to address fiscal sustainability and monetary policy sustainability afterward.

donsutherland1 said:

The G-20 believed that inaction would have been worse than a temporary buildup in debt e.g., risk of global Depression. At the same time, the debt buildup was intended to be temporary. Even during the financial crisis/bottom of the recession, the G-20 was calling for credible exit strategies to address fiscal sustainability and monetary policy sustainability afterward.

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I believe you are correct, that the G20 feels that the economy has stabilized enough that fiscal stimulus can be pulled back.

On the debt buildup, you may agree that we have at least two buckets. The first is the debt that the developed world, especially America has been building up. In the U.S. the buildup goes back at least 30 years. The second bucket, fiscal stimulus to break the back of the recession is the bucket the G-20 is talking about.

The problem for the developed world is that both buckets may have pushed them past an important " tipping point". That is their debt to GDP ratios have gotten so high in many nations that they will have to forgo long to growth and undertack asteriety measures to rein in debt.

We have to hope that because the U.S. is the reserve currency for the world that we get some extra rope. We get to print money, Greece doesn't. The question is will we squander this breathing room and get our house in order or will we wait and have to face a bunch of bad choices.

donsutherland1 said:

The G-20 believed that inaction would have been worse than a temporary buildup in debt e.g., risk of global Depression.

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Whether or not they were right remains to be seen, since a double-dip recession remains a distinct possibility.

Furthermore, it seems the TARP was far more instrumental in staving off a worldwide depression than the ARRA. Both the cost ($787 billion versus $89 billion) and return of these programs are exceedingly disparate.

At the same time, the debt buildup was intended to be temporary. Even during the financial crisis/bottom of the recession, the G-20 was calling for credible exit strategies to address fiscal sustainability and monetary policy sustainability afterward.

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I'll wait to see the long-term results of their policy actions before I hail them as a success.