What’s in Play at Pittsburgh?

The London G-20 summit last fall may go down history as the meeting that saved the world. That’s a huge exaggeration of course, but leaders did agree to a program of co-ordinated monetary and fiscal stimulus which may have arrested an economic free-fall, and they agreed to an agenda for financial re-regulation with a view to making sure that it never happened again. At a minimum, the G-20 process provided cover for governments to temporarily deviate from the imprisoning economic orthodoxies of sound finance and balanced budgets which tipped the world into the Great Depression of the 1930s, and it opened a space for serious discussion about a “new architecture” for global economic governance.

Several months on, the debate before the G-20 Pittsburgh summit which takes place later this month is about the need for “exit strategies” and, still, about the need for financial re-regulation.

There are now clear signs that the global economy has bottomed out (at least temporarily) in terms of the sharp contraction of industrial production, trade and GDP which began last October.  Some governments, such as Germany and France and,  probably, Canada as well as the OECD  want to at least set a time line or agenda for withdrawing massive monetary stimulus before provoking inflation, and returning to fiscal balance before public debt rises too sharply. That translates into an agenda for medium – term spending cuts. Pittsburgh is likely to see the development of a broad framework for a return to normal. At the same time, the IMF, the OECD and most governments do recognize that the recovery is extraordinarily fragile and narrowly based on the stimulus that has been and will be injected this year and next. It is widely recognized that downturns which are globally synchronized and those that follow financial crises tend to be followed by very slow recoveries, and this crisis scores very high on both counts. Any premature tightening could easily tip the world back into a double-dip recession. Like the young Saint Augustine who prayed to God to make him chaste, but not just yet, the dominant line among governments appears to be that they should stay the stimulative course through this year and next, and only gradually raise interest rates and return budgets to balance.

The main problem with this view is that it is assumed that stimulus will eventually, indeed sooner rather than later,  return the world to something like normal.  However, it is far from clear what will lead to renewed global growth as stimulus is withdrawn given that the old engine – debt fueled household spending in the US and elsewhere – is not about to resume anytime soon given the huge loss of housing wealth, uncertainty about jobs, and increased savings rates.  Moreover, there is a very real risk that the crisis will continue to deepen as unemployment and underemployment continue to increase. Unemployment is conventionally seen as a “lagging indicator”, meaning that job growth will follow the return of output growth as night follows day, but output growth must be more than slow and tepid to have any impact on jobs. There is a real danger that a still intensifying  jobs crisis could further depress household spending and choke off any “nascent recovery.” In the US (and Canada),  high unemployment and a shift into part-time jobs and self-employment risk producing a generalized fall in wages long before the economy can get back on its feet. In some European countries, especially Germany, unemployment has been held in check by subsidized work-sharing schemes, but the risk is that there will be huge layoffs before any recovery really gets off the ground.

A note prepared by the US Treasury for G-20 governments (G-20 Strategies for Promoting Global Growth) notes candidly that “the source of private demand capable of powering the global economy without dependence on unsustainable consumer spending or un-remunerative (and in some cases subsidized) residential and corporate investment remains uncertain.” In this context, governments should heed the call of the labour movement and others to maintain  stimulus packages so long as is needed.  This is especially true for those governments which can well afford to do so. There are limits to the ability of the US in particular to run huge fiscal deficits and large trade deficits at the same time without risking either a collapse of the dollar or a counter-productive increase in interest rates. The UK government is also running a huge fiscal deficit. The onus for increasing stimulus  efforts should mainly rest with others,  notably China which has done a lot but is still running a large trade surplus and has huge fiscal resources – but also countries like Germany and Japan which have large trade surpluses and could do more to boost spending at home.  In the medium-term, as the US note again argues,  medium term global growth will depend not just upon continued co-ordination of macro-economic policies, but also upon bringing trade balances (especially between the US and developing Asia) into much closer balance.

What is also largely absent from the G-20 discussion is the question of how to make current and future fiscal stimulus policies more effective. The largest impact on jobs comes from public investment in infrastructure and green jobs and from income support for unemployed workers, but the G-20 has left it to individual countries to put together their own packages. Many (including Canada) have relied  too much on unproductive tax cuts, and the effort that has gone into environmental investment has been quite disappointing.   What is needed is not just “stimulus” but major medium-term investments which will take time to develop and implement. And some countries – the US and Canada in particular – provide very limited income support to unemployed workers, many of whom will soon run out of benefits if they got them at all. The International Labour Organization – which has been invited to Pittsburgh – has, through the global jobs pact, called for improved unemployment benefits, maintaining a wage floor and increasing spending on job creation, training and other active labour market policies. But these themes are not at the centre of the discussions between the finance ministers who largely set the G-20 agenda.  Hopefully they will be brought forward by relatively labour-friendly governments such as Brazil, South Africa and Australia.

The other large set of issues in play at Pittsburgh will be financial re-regulation.  With the exception of clamping down on offshore financial centres, governments have largely failed to deliver on the London G-20 promises to much more closely control the exotic financial products and shadow banking system which got us into the mess. Key issues were handed off to the shadowy Financial Stability Board which consists mainly of central banks and financial regulators and has been slow to bring forward binding new rules, at least to date. In fairness, most of the regulatory action will remain national and the US and others are overhauling existing regimes to some degree.

The big issue that has arisen pre Pittsburgh is the drive by Germany, France and most of the EU to limit financial sector bonuses, not just though loose rules, but also through hard caps.  The US and the UK approve linking bonuses to multi year performance and holding back part of them to counter very risk short-term bets, but the idea of binding limits is being strongly resisted.  While governments are broadly agreed on the need to regulate more closely at home and to cooperate more to promote “systemic stability”, there are clearly deep underlying differences over how much to intrude into the actual day to day behaviour of financial institutions.  The reticence of the US and UK is difficult to justify given the eye-popping bonuses recently being awarded to the same financial players who were being bailed out by equally eye-popping bailout packages only a few months ago.

The Pittsburgh summit must also move forward the agenda of  increasing the clout of developing countries at the IMF and World Bank through a reallocation of voting rights, and will have to set the stage for any successful new global agreement on climate change.

(These reflections follow on from discussions of  the trade union statement to the G-20 which will be released next week.)


  • If personal debt is the central problem why not argue that consumer creditors take an across the board haircut. That is the kind of stimulus which would bail-out workers without increasing the tax burden in the future and it would punish creditors for making less than prudential loans.

  • I agree with US & UK. The issue of bonuses/salaries, while easy for people to get upset about, does not fix the problems. That comes from strong regulation of lending practices, bringing the shadow banking system into the regular banking system.

    I also agree with the above comment on consumer credit lending practices. We need to make it harder for people to get into too much credit card debt. Increasing minimum monthly payments and decreasing credit card Interest rates should do the trick. Yes, that will mean that less people qualify for credit cards and that those who qualify will have lower credit limits That’s the point. That’s how we make sure they do not get overextended, like they are now. The market has failed to provide a solution to this problem, so now government needs to step in and provide the regulation.

    The same goes for other consumer debt as well. Lines of credit and mortgages need to be tightened up.

  • The question I have and Andrew gets to the root, if we aim policy to get us back to a similar trail as the “previous normal” then I am not sure how tightening and regulating consumer credit will work with those goals.

    Like I have argued, credit capitalism is the way forward for most of the status quo cheerleaders within the financial sectors.

    Funky as this sounds and bear with me here, we all know that a project to transform actually existing capitalism, in manner that would benefit those that actually do the work, is yet to get serious debate. (However my friend Leo Panitch made the Toronto star today on labour day, so there is room for optimism.) So without a serious ready made- plug and play solution, we may just need to keep some level of overzealous consumer credit on the books. Nothing short of Mr. Obama passing some sort of wage bill that gives a serious raise to those workers in the lower end of the pay spectrum, then I just don’t see how tightening credit will help us here, as mentioned in the last two comments.

    Similarly for private and public institutions, we need them all to spend and spend lots, and with a manner that is targeting innovative socially sustainable development.

    The inflation wall is still a long way off and to here some of the inflationary arguments after coming so close to systemic deflationary forces is just plain old bias for money lenders.

    I guess the question is, how does one get to transformation without pain. I would like to think change economically is responsive to carrots, but given some of the sustainability issues, maybe double dipping with the stick is the only to get change.



  • Travis – I fear rolling back debt would tip us back into a financial crisis – which is far from being averted. However, I strongly favour a financial transactions tax which would limit speculative financial activity and generate revenues which could be used for a range of redistributive actions. This seems to be back on the agenda now.

  • “I fear rolling back debt would tip us back into a financial crisis.”

    Agreed. But it is good political marker of just how powerful the financial community has become. Traditionally they have justified their interest rate spreads (and profits) by costs of operating plus a risk premium. If governments are now explicitly backing all or most of the risk what then accounts for interest rates above operating costs? Risk is supposed to be capital that is put at risk of default.

    I guess there still remains the option of personal bankruptcy for consumers. And here we could demand easier terms for and access to personal bankruptcy as another potential source of shifting risk back onto creditors.

  • “I agree with US & UK. The issue of bonuses/salaries, while easy for people to get upset about, does not fix the problems.”

    Perhaps you shouldn’t underestimate the importance of bonuses. The problem isn’t the money given out as a bonus. The problem is the bonus makes people do things that cause long term damage to companies, and even nations, to earn the bonus from a short-term gain.

  • “problem is the bonus makes people do things…”

    Then regulate the things out of existence. We have a pretty good idea of what kinds of things cause problems.

  • “rolling back debt”

    Won’t increased regulation result in “rolling back debt” as well?

    Less credit/debt is an inevitable result of the crash, one way or another. Strong consumer credit regulation just makes sure that the available credit goes to those most able to afford it.

    Increased wages (or decreased prices) -while a great idea- will not protect people from making unwise financial decisions, so I doubt it would work.

  • I find this article very one sided toward deflation and normally I would be a deflantionist.

    But this is & Why, I will differ because the more you are right now in the near term in other words if it is predicted that the S&P will drop to 500 and that the whole global economy collapses in a deflationary spiral then the deficit will actually expand more and more. Also what you would have is more and more monetization because that’s the policy of central bankers that they have shown in the past and Mr Bernanke has written about this.

    He has given speeches about this , so what then happens is government debt explodes , now take the case that one day in the future that can be in 3 , 5 , 10 years whatever it is the economy recovers and interest rates should go up because of inflationary pressures & to maintain price stability. The Federal reserve will be very reluctant to increase interest rates because in the meantime the government debt will be that larger thanks to Obama and other politicians that were not able to tighten their belt a year ago and interest payments on government debt which today are slightly below 500 billion dollars annually in the United States could easily double to a trillion dollar annually and so you get into a debt spiral that is very difficult to solve.

    The Federal Reserve by keeping their interest rates artificially low would lead to more and more inflation there is another problem for the US and that is besides from the existing fiscal deficit health care expenditures will soar very dramatically especially in the next 8 years because of the aging of the population , it takes much more money to take care of someone who is 70 years old than of someone who is 20 years old , and so these expenditures will balloon and I just do not see how the US will solve its debt problem

    Consider this: It appears to me that the country’s top quintile of wage-earners — the folks with the most assets — are experiencing deflation as their home prices have collapsed, their retirement plans globally, are substantially below where they were in October 2007, their bonuses have been “whacked,” and the list goes on. Meanwhile, the lower-income households are experiencing inflation with their heath-care costs rising, food prices escalating, insurance premiums climbing, etc. Even here in the Tampa Bay area, Where Im currently visiting, electric rates were recently increased by 7.5%.

    My bet is that the inflationary forces will eventually win out since there is no limit to the money supply like which was set by the Gold Standard naturally, which both Canada and the Us got rid of has an outdated system. When Fractional Reserve Lending has been around a lot longer.

  • The Us is a sinkingship, if they come back great for them but Canada should do everything in its power to move away from the US, & those that tie their bets with the states will be the first to have a synchronized bust. Their is just no way for the states to follow other developed and emerging nations in interest rates hikes ensuring their own economic demise, America has had 0%-1-5% interest rate for the last decade, they cant do this for another decade, and the interest on that debt would explode. I like the Euro or the Yuan if you ask me right now for a single alternative but in reality their wont be an alternative to the USd. But we must seek more trade with all nations to fill the ap from the states which will only increase from now. Lets not peg our currency to a currency that has been on a long term depreciating trend over the years.

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