While Brad de Long (and everyone else) beats up on Will, let me say what Will would have said had he not been wasting his time watching soccer games that fail to produce either goals or victors.
Paul Krugman took a break from his bicycle tour to voice concern about the direction of global economic policy and the global economic recovery. His post raises three distinct issues:
- The nascent global recovery is stalling.
(the EU generally) is playing a beggar-thy-neighbor (BTN) strategy, counting on US as consumer of last resort to offset the negative impulse of fiscal consolidation. Germany is playing a BTN strategy by manipulating its currency. China
Krugman suggests that the
- This policy is more likely to generate an outcome we do not want than an outcome we do want.
- Would following through on the threat make the
worse off or better off than the status quo? A world in which the United States protects and everyone else contracts is the 1930s. This seems worse than the status quo. US
- Would the
USthreat to impose AD duties be credible, given that implementing the threat would make the worse off than the status quo? I think the answer here is “No.” US
- If the threat is not credible, would
Germanyand change policy in response? No, they would not change policy in response (see point 3 below for elaboration). China
- Do we want the
USto follow through on its threat, thereby worsening an already bad situation when it fails to induce policy change in Germanyand ? I do not want this. China
- Thus, a threat to impose protection seems unlikely to generate a good outcome and quite likely to generate a bad outcome. Hence, I don’t think this is a good policy option.
- Although it is not a good option, it may still be the best option. So, does a better option exist?
- Can the
ease the magnitude of the slowdown in the EU’s economic recovery by acting as consumer of last resort? Why yes, it can. US
USconsumption from the EU help sustain economic recovery in the ? I believe the logic of circular flow would suggest that it does. Maybe I am mistaken. United States
- If exports generate growth, would EU governments become more or less concerned about their fiscal position? I believe they would be less concerned.
- Does playing consumer of last resort cost the
anything? The interest rate on the debt from the marginal current account deficit. Maybe there are other costs? Perhaps we lose jobs that might otherwise have been created in a world in which US Germanyexpands and revalues. But that world does not exist and cannot be brought into existence (see “1” above) and thus isn’t a relevant point of comparison. We lose the opportunity to establish a commitment to no longer be the consumer of last resort? China
- Why do German politics generate an obsession with austerity that makes it highly unlikely that threats will induce policy change?
- History—hyperinflation, great depression, political instability, Hitler.
- Postwar success rested on the single-minded focus on what is right for
Germany(see 1978/79 (Bonn Summit); macroeconomic policy coordination during the late 1980s (remember October 1987?); the 1991-92 EMScrisis; etc.). These episodes have revealed to be quite skeptical of American policy coordination initiatives. Germany risked its postwar achievements by pooling monetary authority and is now discovering that legal prohibitions on fiscal bailouts in EMU are not credible. Germany
- Recognizing that
Germany’s implied fiscal burden is Greece+ Spain+ Portugal+ Italy+ + …. Ireland
- Given this, what is the probability that
changes its mind in response to the threat to impose AD duties? Zero. Germany
Would it be nice to have a coordinated global fiscal stimulus? Sure, but trying to bring this about by threatening to blow up the world and then being put into a position where you have to choose between actually blowing up the world and backing down seems ill-considered.