In early 2009, not long after Barack Obama was elected president of the United States, Newsweek published a special edition, “How to Fix the World.” It included commentary from an impressive group of analysts and politicians, all eager to advise the new president on economic and foreign policy.
Four years, Barack Obama is starting his second term. Let’s see how many of the global elite’s hopes turned out.
Fareed Zakaria, then editor of Newsweek‘s international edition, provided the introduction to the issue in which he wrote, “The world needs smart management” to crises that traverse national boundaries. Specifically, he praised the newly erected G20 as a forum that “could actually do some of the policy coordination needed to begin to solve the crisis.”
The G20 has since fallen into disuse with Europe trying to solve its own problems and large emerging markets like Brazil vehemently criticizing American monetary policy. China and the United States are similarly locked in disputes over currency manipulation and trade policy. There has hardly been a concentrated effort on the part of the Group of 20 to solve the ongoing economic turmoil.
Zakaria was optimistic about the United States’ economic prospects. “As bad as it looks,” he wrote, “the current financial crisis will end.”
I don’t know when or how but the combination of government interventions will eventually work. Why do I say this? Because governments are more powerful than markets. They can close markets down, nationalize firms and write new rules. And Washington has one other, unique power: it can print money.
Zakaria must have been delighted to see the new president and the Federal Reserve do just that: nationalize automakers, “write new rules” and flood the market with cheap money. Except it has done very little to boost the American recovery. The unemployment rate is exactly the same as when Barack Obama took office in January 2009. The United States even dipped into negative growth in the fourth and final quarter of last year.
It was also before markets brought European governments like Italy’s and Spain’s to their knees. It turned out, government fantasies of unlimited borrowing and spending aren’t more powerful than the cold realities of the market. Who would have guessed?
Next up, economist Joseph Stiglitz whose denunciation of capitalism and globalization gave this blog its name. In the article “Markets Can’t Rule Themselves,” he lamented the “many interdependencies” of the international banking industry and argued, “Better regulation would have helped prevent” the crisis. Unfortunately, he volunteered no prove to back up that statement.
Stiglitz called for “internationally coordinated stimulus programs to help jumpstart growth” as well as “a global financial regulatory body” to keep watch on the banks. Specifically, he wanted to limit bonus pay worldwide and “restrict excessive leverage and other risky behavior.”
Such measures have been taken. Banks must now have more capital at hand which has had the side effect — who could have seen it coming? — of inhibiting their ability to loan to businesses. “Risky behavior” has been restricted in the United States with the Dodd-Frank financial reform act. It has increased the cost of doing business.
Virtually all developed nations embarked on an effort to try to “jumpstart” their economies although not in international coordination. The huge debts that governments incurred in the years following the 2007 financial crisis, it turned out, set the stage for the next crisis: a sovereign debt crisis in Europe. One will inevitably come to the United States as well unless lawmakers there reverse course in the next few years, away from stimulus, toward fiscal consolidation.
Stiglitz didn’t foresee that either. He did fall into the trap of thinking that government interventionism can simply “jumpstart” growth whereas, in fact, it has done the very opposite. It has exasperated the situation in Western economies. The notion that policymakers can push a few buttons and pull a lever to magically “jumpstart” growth is one that should be laid to rest now permanently.
It is the mentality of statists like Zakaria and Stiglitz, who look to government whenever they see a problem, that has proven to be perhaps the greatest impediment to economic recovery in the last four years. The proposals they put forth in Newsweek amounted to central planning: the theory that “experts” are not only able to oversee the enormous complexities of a global economy but better able to make decisions for the hundreds of millions of consumers and producers who participate in it than those very consumers and producers themselves. It is a theory that was tested for seventy years in a place called Soviet Russia and it failed miserably there as it has failed miserably in the West of the Obama era.