It’s always tough to know when to say when.
A year after the collapse of Lehman Brothers triggered the worst economic crisis in 70 years, global leaders, including President Obama, are wrestling over the whether, and for how long, to maintain their massive governmental economic stimulus programs.
Next Stimulus Dose Will Be Stronger
As the G-20 nations get set to convene in Pittsburgh this week, this debate will top the agenda.
Ahead of the G-20 summit, several world leaders, including British Prime Minister Gordon Brown, have weighed in on this topic.
At a press briefing before departing for Steel Town, Brown dismissed suggestions that his government was planning to ratchet back stimulus spending despite the mounting evidence that the U.K. is facing record debt levels and the re-emergence of hyper-inflation.
Singling out the German and U.S. plans as ones that will likely increase, Brown maintained that “the stimulus that we have still got to give the world economy is greater than the stimulus we have already had.”
Recognizing that President Obama’s political plate may be full, Brown pitched a plan he will present to the G-20 for a global compact of big economies that would map out coordinated economic actions such as exiting stimulus, in what he said would be a “new way of governing the world economy.”
Although it’s gotten little press, President Obama is set to unveil his own plan, called the “Framework for Sustainable and Balanced Growth.” It would commit the U.S., Europe and China to make big changes in national economic policies. So far, both Brown and President Obama are long on the big concepts but short on the details, in particular, how to get the Chinese to play ball.
Lost in the rancor over healthcare reform, the President also has been laying the foundation for a potential second round of stimulus spending.
In her first official assessment of the $787 billion stimulus, Christina Romer, Chair of the President's Council of Economic Advisers, concluded that the package of tax cuts and government spending — the largest dose of economic medicine in U.S. history — has poured about $150 billion into the economy since its passage in February. This has boosted the overall economic output by about 2.3 percent during the quarter that ended in June.
In her 48-page analysis, Romer cited an array of independent estimates that back up the administration's claims. For example, Mark Zandi, chief economist for Moody's Economy.com, projects that the stimulus will have created about 1 million jobs by the end of September, while the nonpartisan Congressional Budget Office concluded that the number could be as high as 1.5 million.
Inflation? What Inflation?
The Fed, which started its two-day meeting of the Federal Open Market Committee (FOMC) today will also be looking at the impact of it own financial stimulus programs, including more than a trillion dollars in guarantees to banks and interest rates that effectively remain at zero.
Despite the recent sharp increases in commodity and energy prices, the Fed apparently is unconcerned that its stimulus programs will re-ignite the type of inflation seen last fall. With unemployment still rising and manufacturing capacity still slack, Bernanke and the Fed have concluded that concerns over inflation runs a distant second to safeguarding the current recovery.
For policymakers like Bernanke, Romer and Treasury Secretary Tim Geithner, the proof is in the more than 56 percent recovery in share prices seen since the stock market hit record lows in March. While critics on the conservative side of the aisle have been quick to dismiss the positive impacts of Mr. Obama’s stimulus package, most are reluctant to rock the boat.
An example of their quiet support can be seen in the kid glove treatment accorded to troubled insurance giant AIG.
Early on, strident free market advocates were quick to condemn the administration’s continued support for AIG. But with the recent upswing in the insurers’ stock values, even the more conservative members of the House are considering easing terms of the company’s $182.5 billion bailout.
Three times in the past year, the provisions of AIG’s rescue have been revised to reduce pressure on the firm to sell assets when potential buyers are hobbled by the recession. Now several members on both sides of the political spectrum are supporting a proposal to trim the interest rate on loans to give the New York-based firm more time to repay its debt.
Based on a recent assessment by the International Monetary Fund (IMF), Germany, France and Japan all posted positive growth numbers at the end of the third-quarter, reinforcing the evidence that each has begun to emerge from the recession. As they get ready to join their opposite numbers in Pittsburgh, the leaders from these three countries say they remain committed to maintaining their own current economic stimulus programs.
Learning from an Expensive Gaffe
The Japanese are particularly mindful of ending their stimulus programs in the midst of that country’s economic recovery. Most economic historians agree that one of the chief reasons Japan had so much difficultly pulling out of its more than 10-year tailspin was because the government prematurely ended its financial intervention after the real estate bubble burst.
On the subject of continued economic stimulus, the President will probably let other global leaders at the G-20 summit do most of the heavy lifting.
Either way, it seems clear our domestic stimulus programs will remain unchanged through the middle of next year.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
