Atlas shrugged

["Ian Murray" <seamus2001@xxxxxxxx>]

[NYT]
AUG 31, 2001
Greenspan Stands Alone
By PAUL KRUGMAN

There are three great economic powers in today's world - the United
States, Europe and Japan. In principle, each of these has two potent
recession-fighting tools at its disposal. One is monetary policy: the
central bank can print money and drive down interest rates. The other
is fiscal policy: the government can try to support a flagging economy
by cutting taxes and increasing spending.

In practice, however, almost the entire burden of fighting what has
become a global slowdown is being borne by U.S. monetary policy. And
you have to wonder whether the Federal Reserve, acting on its own, can
really do the job.

Why does the Fed stand alone? Start with Europe. In terms of sheer
purchasing power, Europe is America's equal; now that most European
countries have adopted a common currency, managed by a single central
bank, you might expect Europe and the United States to be twin pillars
of global economic stability.

But the institutions of Europe's Economic and Monetary Union were
designed to fight the last war - they constitute a Maginot Line
protecting the Continent from inflation, but make it almost impossible
to respond to economic threats that come from a different direction.
In particular, the charter of the European Central Bank requires it to
defend price stability - full stop, end of sentence. And bank
officials have disavowed any responsibility for growth and employment.

What about fiscal policy? European countries don't have much room for
maneuver, given large public debts and the looming burdens of an aging
population. And whatever room for maneuver they might have had was
taken away by Europe's Economic Stability and Growth Pact, which
prevents even temporary deficit spending. Hesitant suggestions by some
finance ministers that these rules be relaxed have been harshly
criticized by the central bankers; so European fiscal action to fight
a slump is pretty much out of the question.

Then there's Japan. After years of immense spending on public works,
Japan has a debt of 130 percent of G.D.P. - and it, too, has an aging
population. So it can do no more by way of fiscal policy; in fact,
retrenchment is the order of the day.

At the same time, conventional monetary policy has reached its limit
in Japan, since short-term interest rates are already zero. The Bank
of Japan could do more, if it was willing to adopt unconventional
measures, like targeting a positive rate of inflation - a course of
action supported by some of Prime Minister Junichiro Koizumi's
advisers. But Japan's central bank has refused to make any significant
moves in that direction. And Mr. Koizumi's own finance minister has
denounced calls for radical monetary policy, warning of runaway
inflation even as his country slips into a deflationary spiral.

And then there's us. What are we doing to fight the slowdown?

America does, of course, have its tax cut. But the peculiar
"back-loaded" timing of that cut makes it a very poor
recession-fighting measure. The rebate checks are not much more than
pocket change - $40 billion, or 0.4 percent of G.D.P. The big tax
cuts, which will eventually rise to almost 2 percent of G.D.P., won't
come until the middle of the decade. And the decision to lock in
trillions of dollars in future tax cuts actually depresses the economy
now, since those future cuts do little to encourage current consumer
spending but do raise long-term interest rates.

Can we pump up the economy with additional tax cuts or temporary
public spending? Not safely; those huge future tax cuts have created a
grim long-term financial outlook, and any further tax cuts would make
the outlook even grimmer. Of course, the administration might do the
responsible thing, making room for additional tax cuts now by
canceling some of those big tax cuts scheduled for 2004 and later. And
pigs might fly.

It's a dismal picture: a combination of intellectual confusion,
narrow-minded officials and sheer fiscal folly has removed most of the
tools that the world's major economies might be able to use to help us
get through these troubled times. The only institution that isn't
paralyzed is the Fed, which keeps on cutting rates, hoping that it
will finally accomplish something. Or to change metaphors a bit, the
whole burden of avoiding a global recession now rests on Alan
Greenspan's shoulders.

Presumably Atlas won't shrug. But what if the task is beyond his
powers?