A Year of Living on the Brink
Ebola, ISIS, Ukraine, a stock-market wipeout—there’s nowhere to hide.
By Daniel Henninger
Oct. 15, 2014
History will mark down 2014 as the year predicted 49 years ago by Martha and the Vandellas. In 1965 the group recorded a Motown classic, “Nowhere to Run, Nowhere to Hide.” We’re there, at the brink.
Liberia, ISIS, Ukraine, Hong Kong, a hospital fighting Ebola infections in Dallas, the year’s stock-market gains obliterated, and I almost forgot—just last week Secretary of State John Kerry warned that climate change could end life as we know it.
Then this week the clouds parted and the year’s best news arrived: Led by Europe’s sinking economies, global economic growth is falling, taking stocks and bonds with it, and the world’s central bankers say they have run out of ideas on doing anything about it. [That took long enough.]
How this is good news requires explanation.
The annual meetings of the International Monetary Fund concluded in Washington last weekend. This gathering of the world’s finance ministers, central bankers and international financial organizations sets the tone for the direction of the world’s economic prospects.
As the meetings ended Sunday, a WSJ.com headline summarized the consensus: “Governments, central bankers have fewer tools left to revive economies after years of sluggish growth.” European officials are now talking about a “lost decade.” The IMF calls the economic policies in the years after the 2008 financial crisis a succession of “serial disappointments.”
Let’s begin with the first and most significant policy disappointment. The central economic event of the past six years, both as policy and symbol, was the Obama administration’s $834 billion stimulus bill in 2009, the American Recovery and Reinvestment Act. Its explicit purpose was to revive the U.S. economy. How was nearly $1 trillion of additional federal spending supposed to do that? [Here we call that a Crapshoot with OPM (other peoples’ money).]
Proponents of the stimulus bill’s theoretical underpinnings, which date to the 1930s and a famous economist with three names, have argued for 80 years that by injecting large quantities of money into a weak economy (public spending), the population will use the unexpected money to make purchases, and this stimulated consumption in turn will cause private companies to hire more workers to produce goods to meet—the key idea—demand.
Beyond this textbook, Depression-based effort at economic stimulus, the only other significant initiative taken by the Obama presidency (not counting the indirect effects of Dodd-Frank, ObamaCare, shutting down power plants, putting bankers under house arrest and whatnot) has been to transfer responsibility for economic growth to the Federal Reserve Bank. The Fed produced three rounds of quantitative easing, a monetary policy that created so-called zero-bound interest rates in the U.S. from late 2008 until now. The Bank of England followed. Early last month, the European Central Bank adopted its own version of quantitative easing. It’s been the greatest monetary experiment since the creation of coins around 700 B.C.
It is essentially the prescriptive promise of this 2009 to 2014 policy mix that was repudiated by officials at the IMF meetings in Washington the past week. Recognizing the real need, IMF Managing Director Christine Lagarde said, “There is too little economic risk-taking, and too much financial risk-taking.” [Here we call that Casino Capitalism.]
The U.S. and Europe have paid a high price for six years of stimulus that didn’t stimulate, programmed consumption that fell short, regulatory expansion that froze private producers, and high tax-rate regimes that benefited the public-spending class and beggared everyone else, especially young people and the working poor scrambling for jobs.
No one should underestimate the political dangers of persisting with a Keynesian economic model that looks depleted.
Several months ago this newspaper described how younger Europeans who are unemployed or underemployed have become bitter at their parents’ generation for wallowing in a system whose labor protections suppress the creation of new jobs. Economic anxiety in turn has fueled the rise of extremist political movements in France, Germany, England, Hungary and elsewhere.
Sustained, seemingly irreversible, weak economic growth in Europe or the U.S. is a political risk to national stability.
There is an alternative economic policy set to this failure. It would be based on the best policies that produced strong growth and jobs in major, formerly moribund Western economics.
Those successes include the German labor-market reforms initiated by Chancellor Gerhard Schröder in 2003; the structural public-spending reductions begun in Canada in 1995 by Liberal Finance Minister Paul Martin and sustained by current Conservative Prime Minister Stephen Harper (Harvard economist Alberto Alesina has documented the pro-growth payoff from permanent spending reductions); Poland’s remarkable post-Soviet revival from the 1989-91 pro-market reforms of Leszek Balcerowicz ; and of course the primary model—the U.S.’s tax-rate reductions and regulatory reforms in Ronald Reagan ’s presidency.
The key element in reviving the West isn’t economics, though that matters. It is political courage. Each example of high-growth success required a political leader willing to stand against finance ministries and a financial media that will ride demonstrably failed models off another cliff.
Given the admission of generalized policy collapse at the IMF meetings, what we are talking about is the courage of one leader: the next American president.