The leaderless global economy: Can economic history suggest lessons? – VOX 03-13-13

Salient to Investors:

Peter Temin at MIT and David Vines at Oxford write:

The global economy succeeded in the second half of the 20th century because US power could recruit countries to cooperate to maintain prosperity, and again at the end of the 19th century led by Britain.

The US has squandered its leadership with two elective wars and massive tax cuts, and with low interest rates and a property boom. Countries normally raise taxes to fight wars, but the US did the opposite, believing ‘deficits don’t matter’ and tolerating a property boom because inflation did not rise.

Germany has squandered its leadership within Europe, because the architecture of the new currency union was flawed.

Unemployment is widespread across the industrial world because the private sector is holding back on expenditure. Idle workers naturally become angry and join extreme political parties.

The personal sector remains burdened with housing debt in the US, while in Europe banks are heavily burdened and will not lend. Investors are holding back and causing high unemployment and low growth to become self-fulfilling prophesies.

The gross debt-to-GDP ratio in the US may exceed 100% in 2013, and is approaching 90% in Europe.

The 1930s taught us that the first priority of economic policy is to reduce unemployment, but this is widely seen – wrongly – as conflicting with the need to deal first with the fiscal crisis, just as there was a widely held view that the gold standard should come first in the early 1930s.

Countries with low demand and massive unemployment are unable to service and draw down their debt: just as they were unable to defend the gold standard. The reduction in fiscal debts from spectacular levels after World War II took place at a time of full employment, growth and rising tax revenues.

International cooperation is needed to solve these problems but cooperation and foresight are in short supply – opposition in the US to new taxes and German reluctance to expand to ease the burden on the southern Europeans. Countries in East Asia, including China, remain hesitant to expand demand rapidly enough to absorb goods exported by the US and Europe.

Read the full article at http://www.voxeu.org/article/leaderless-global-economy-can-economic-history-suggest-lessons

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