Nervously waiting for global financial crisis
J. Bradford DeLong, Project Syndicate
Maybe it is excessive skittishness, or perhaps it is the result of global financial volatility in recent years -- crises in Mexico in 1994-1995, East Asia in 1997-1998, Russia in 1998, and then in Brazil, Turkey, and Argentina -- but we economists are more concerned about monetary affairs and possible future disasters than we have been in many decades.
This month, the Switzerland-based Bank for International Settlements (BIS) was the latest to worry aloud about the financial risks that the world seems to be building into its future. "(A)ll the countries hit by financial crisis... experience[d] a very sharp slowdown," the BIS says of the recent past. It then cites "global current account imbalances," particularly "the U.S. external deficit," describing it as "unprecedented for a reserve currency country to have a current account deficit of such magnitude." In short, the world has become "increasingly prone to financial turbulence."
The BIS hints at the possibility of a financial crisis that, with the U.S. at its center, would dwarf by at least an order of magnitude all crises that have occurred since 1933. Yet, in response to this risk, the BIS issues the standard textbook recommendations. Countries whose policies and economies are out of balance should change their policies, thereby restoring balance: "Deficit countries should reduce the rate of growth of domestic spending below that of domestic production. Allowing their currencies to depreciate in real terms would make their products more competitive, and also provide an incentive for production to shift out of non-tradables into tradables."
This is economists' polite code for the message that the U.S. must gradually cut its budget deficit, while other countries -- like China and Japan -- must gradually let the value of the dollar fall and that of their own currencies rise. So the BIS proposes nothing new or particularly attention-grabbing.
But if we turn to America's government, we see an enormous pretense that the current budget deficit is not a problem. As Stan Collender, a noted observer of the U.S. federal budget, has commented, "No one with federal budget responsibilities actually seems to be interested in the budget." This is not "because the budget committees are too busy....(T)he House and Senate...are not doing much of anything...(because) they don't want to." Within the Bush administration, Director of the Office of Management and Budget Josh Bolten "has been virtually invisible," while "the president and vice president...avoid talking publicly about the budget."
Let us be clear on this point: It is not that politicians who wish to take the lead on fiscal consolidation are failing to gain traction; it is that there are no politicians -- at least none with any agenda-setting influence -- who are even trying to steer the U.S. towards adopting a more responsible fiscal policy.
This is a grotesque failure of leadership. Governments that pursue policies -- whether U.S. fiscal laxity or China's exchange-rate peg -- that create unsustainable imbalances do so for what they regard as important political reasons. Appeals to them to change their policies, and thus contribute to the common global good of financial stability, are fruitless unless others are seen to change their policies, act responsibly, and so contribute to the common good as well.
International policy coordination requires a leader, a first mover. But, while the U.S., as the world's largest economy, is best suited for this role, it has so far failed to play its part. Treasury Secretary John Snow has spent almost no public time on the budget, but a lot of public time on China. Republican political operatives care far less about national savings than they do about manufacturing-sector job losses.
"So what else is new?" you may ask -- and with good reason. The list of issues on which the Bush administration has failed to lead is a long one, and failure to take steps to diminish the risks of future financial catastrophe cannot rank very high. The entire Bush administration has been a succession of leadership failures, so why harp on its poor financial management?
Form a purely practical point of view, one reason is that ensuring global financial stability is an issue on which real progress can be made relatively easily. The Bush administration may not care that deficit reduction is the right policy for America, but it might care far more if the issue were framed as a prerequisite for policy changes abroad that diminish pressure from imports on domestic manufacturing employment.
The writer, Professor of Economics at the University of California at Berkeley, was Assistant U.S. Treasury Secretary during the Clinton administration.