Gloomy Days Ahead?
I attended an interesting forum on the economic outlook yesterday afternoon. Organized by Canada 2020, the speakers were noted US economist Brad DeLong (UCal Berkley, former senior Treasury official under Clinton, and Paul Krugman soul mate on macro issues at least), and our own David Dodge (who needs no intro.).
De Long’s main focus was on the US, and his key point was that – to his consternation and surprise -Â continued very high unemployment and an economy operating well below potential are now failing to prompt an appropriate textbook macro-economic response. The original stimulus package was too small, and further stimulus is not on the table as the US focus turns to fiscal austerity. Meanwhile central banks are desperately seeking exit strategies from extraordinary monetary policy measures which helped save the day after the financial crisis.Â Ditto in Europe. That adds up to continued stagnation for most of the advanced industrial world.
Dodge did not directly challenge this rather gloomy outlook. He did, however, argue that fiscal restraint todayÂ – while perhaps a bad idea in macro terms – is needed to restore confidence that there will be restraint in place down the road. He conceded, however,Â that the US will not get the help that Canada got in the 1990s in the form of falling interest rates and rising exports which helped offset the macro impacts of deep spending cuts.
DeLong and Dodge agreed that the current global economic situation remains extremely fragile, noting that the big crisis they had both expected before the Great Recession – a possible financial crisis precipitated by global financial imbalances and the huge US current account deficitÂ – could yet take place. If there is hope on that front, it is that China will see the need to shift to at least some degree to domestic demand driven growth, and will see currency appreciation as a tool to fight a growing inflation problem. Absent that, and rebalancing will have to be via sharp cuts to US consumption which will sink the recovery.
In some brief remarks on Canada, DeLong pointed to our obvious symptoms of Dutch Disease and counseled us to stave off the loss of manufacturing capacity by sequestering high resource rents in a sovereign wealth fund invested outside the country on the Norwegian model.
Needless to say, Dodge dodged that one.