It was like throwing a bucket of water at a house ablaze. The results might not be quite promising.
After much political haggling and intense media attention, the stimulus package Barack Obama wanted was finally passed this week. At the US House of Representatives, not a single Republican voted for the package. At the Senate, confirmation of the final version had to wait until midnight as the 60th vote belonged to a Democratic senator who went home for his mother’s memorial services. Obama had a plane bring in the senator and then return him to his home state.
After the much-awaited $787 billion stimulus package finally cleared the US Congress, Wall Street responded by a further drop in stocks. There was, obviously, no dancing in the streets.
The $787 billion package is, by any measure, an expensive one. To finance that, the US will have to go even deeper into debt. The next generation of Americans will inherit trillions of dollars in public debt.
But that package is, by no measure, enough. It is that pathetic bucket of water thrown at a raging inferno.
Economist Paul Krugman estimates that the package will manage to restore only a third of the jobs lost since the onset of the present crisis. It will not restore all the jobs lost. In a word, the package will only cushion the impact of the downturn; it will not bring recovery.
Considering the breadth and depth of this economic downturn, all policy responses have been undertaken to stop the fall. But the fall, by every indication, is still continuing.
The dimensions are simply mind-boggling.
Trillions of dollars in asset value simply evaporating. Trillions of dollars needed to stem the tide of bankruptcies, company closures and rising unemployment. In India alone, one economist estimates that 20 million people slide back into poverty for every percentage point of GDP growth lost to the crisis. In China, the number of jobs lost to the downturn in estimated to be well over 30 million thus far.
Last year, the crisis was understood as being principally financial in nature. Governments stepping in to save the banks was seen as the key response to cut the bleeding. Lowering interest rates was seen as sufficient to nurse economies back to the track of growth.
Today, the central banks of the world’s biggest economies have cut policy rates to nearly zero. Interest rates cannot, of course, be zero or lower. That means that all the ammunition in the hands of the central banks to bring a monetarist solution to bear on the problem has been exhausted.
Today, nearly every government in the world is putting a public expenditure plan in motion. They are throwing in their respective buckets of water at their respective burning houses.
The collective outcome of doing that will not, as in the case of the Obama stimulus plan, be very promising.
What is clear at this point is that all the institutions available for economic governance, including the multilateral institutions such as the IMF, are dwarfed by the magnitude of the crisis. It is simply that the markets have long ago outstripped the governments of the world.
Nothing illustrates that more than what we saw in Iceland. When that small nation’s banks collapsed, we found out the assets and liabilities of these troubled banks were many times the size of Iceland’s GDP. There was no way the Icelandic government could even think of bailing out its banks. It was like asking a small fish swallow a whale.
All over the world, citizens are expecting their governments to do something to stop the downturn. Because of that expectation, governments have to somehow go through the motions of putting out an economic conflagration — even if they know that their last precious bucket of water will have very little effect on a large fire.
This is the most difficult realization to reconcile with in this crisis: decades of economic expansion have now produced market forces that dwarf institutional capacity to control them.
Protectionists somehow try to imagine that we could erect political barriers to contain the global movement of productive forces. Advocates of big government somehow cling to the ancient belief that the state could be larger and more powerful than the economy.
These are superstitious ideologies drawn from centuries-old impressions of what governments could do with larger policy instruments. They have failed to account for the fact that corporate giants operate in a borderless global market and that financial institutions such as the global hedge funds move far larger volumes of money than individual governments could ever hope to command.
The mitigating measures — adjusting interest rate regimes and stimulus packages — are not entirely useless. But let us not assign too much to them. They can only mitigate the social costs but cannot cure a plague.
As in the case of the deadly bushfires that swept southern Australia last week, we can only do a bit of rescue work and then hope the global economic conflagration works itself down. All of Australia’s firefighting assets could not possibly stop a blaze of such magnitude in the face of high temperatures and high winds.
What that means is that we have to tame our expectations on what governments can do and try to understand the dynamics of a large economic phenomenon that we can only hope will work itself out quickly.