- The Washington Times - Tuesday, February 23, 2010

Now that the patient seems to have survived, the world’s economic doctors are trying to determine what the treatment — trillions and trillions of dollars in government stimulus spending — did to the long-term health of the global economy.

The longest, deepest global recession since the Great Depression ended last summer. For the final quarter of 2009, China and India reported strong growth and the United States said gross domestic product rose at an annual rate of 5.7 percent.

But the recoveries of key economies in Europe and in Japan have been tentative and halting, despite government stimulus spending.

Many Republicans in the United States argue that President Obama’s $862 billion stimulus package — despite the recent growth — is a failure.

“In the year since the Democrats’ ‘stimulus’ program was enacted, over 3 million jobs have been lost, billions of dollars have been wasted, and an unprecedented debt has been passed on to our children. These are not the results that America hoped for,” House Minority Whip Eric Cantor, Virginia Republican, said earlier this month.

Obama administration officials sharply dispute that, arguing that the rate of job losses has plunged.

Such debates have erupted around the world as governments sort through the results of an unprecedented attempt to prime the economic pump through spending, tax cuts and slashed interest rates.

In Britain, economists have aired their differences in open letters after the government of Labor Party Prime Minister Gordon Brown announced that the country’s stimulus spending will continue at least through national elections set for June.

A group of 20 top economists — including former International Monetary Fund Chief Economist Ken Rogoff and Oxford economist John Vickers — argued in the London Sunday Times that a “compelling case” has been made to throttle back on stimulus spending. That position is in line with the opposition Conservative Party.

But a second group of economists, in a pair of letters to the Financial Times, said Friday that “history is littered with examples of premature withdrawal of government stimulus, from the United States in 1937 to Japan in 1997.”

“With people’s livelihoods at stake, a responsible government should avoid reckless actions,” they wrote.

As policymakers around the world contemplate winding down some of their unprecedented stimulus programs, economists are scrutinizing the fallout.

“Governments and central banks around the world have spent more than $11 trillion to support the financial sector and about $6 trillion on fiscal stimulus programs,” said Ruth Stroppiana, chief international economist for Moody’s Economy.com. “Without these extraordinary policy measures, private demand would have collapsed, and the resulting social and economic costs would have been even greater.”

Echoing Mr. Obama, the International Monetary Fund recently concluded that “extraordinary policy support forestalled another Great Depression.”

While central banks around the globe have used monetary policies as aggressive measures to spur economies, fiscal efforts have generated the most heat and political debate.

China offered the first substantive plan, a $586 billion stimulus package in November 2008. The first fight of the Obama administration resulted in a $787 billion stimulus package that passed Congress with almost no Republican support. The Congressional Budget Office later revised the figure to $862 billion.

A year ago, U.S. and British officials engaged in vigorous battles with reluctant European governments over the size of fiscal stimulus plans. In the run-up to an emergency Group of 20 summit in London in April, European countries bluntly rejected U.S. pleas for bigger government spending plans.

“In contrast to America, our social systems are not on the decline right now,” said German Chancellor Angela Merkel, leader of the conservative Christian Democrats. “Our social market economy will enable us to cope with this complicated situation.”

Mirek Topolanek, a former Czech prime minister, who was serving as president of the 27-nation European Union at the time, was even more direct. He described Mr. Obama’s stimulus package as “a way to hell” that will “undermine the stability of the global financial market.”

According to the IMF, the U.S. stimulus, equal to 4.8 percent of GDP, was the largest in the world in relative terms among the world’s leading economies, followed by China (4.4 percent), Germany (3.4 percent), Canada (2.7 percent), Japan (2.2 percent), Britain (1.5 percent), France (1.3 percent), India (0.5 percent) and Italy (0.3 percent).

Though varying in size, most national stimulus packages included increased funding for public employees, infrastructure projects, housing/construction support, and money for social safety nets, such as unemployment insurance and wage supplements. In resisting Washington’s pleas to spend more, many European countries argued that their larger safety nets stimulated the economy without new money.

Of the nine nations examined, only Italy did not include tax cuts as part of its stimulus plan, according to the IMF.

Only three of the nine countries have reported economic growth during 2009: China (10.7 percent), India (7.9 percent, through the third quarter), and the United States (0.1 percent). The U.S. posted especially strong growth in the final quarter of the year.

By contrast, the European bloc as a whole grew at an annual rate of just 0.4 percent during the October-to-December period. Germany did not grow at all, and Italy’s economy declined by 0.8 percent.

“Over the past two quarters, real GDP has grown only 0.5 percent [in countries using the euro], hardly a dent in the 5 percent peak-to-trough decline recorded during the recession,” Wells Fargo said in a research note last week.

In the United States, Republicans have pronounced the stimulus a failure because the economy continued to shed an average of 103,000 jobs per month during the fourth quarter, when the unemployment rate exceeded 10 percent, up from 7 percent during the fourth quarter of 2008. They recall that Mr. Obama’s economic advisers had forecast that the jobless rate would top out at about 8 percent early last year.

But Democrats counter that the rate of monthly job losses has plunged nearly 90 percent, and that the economic carnage would have been much worse without the federal dollars. The U.S. economy shed 20,000 jobs last month, and the official jobless rate fell to 9.7 percent.

Private economic forecasting firms seem to agree with the Democratic argument.

IHS Global Insight, Macroeconomic Advisers and Moody’s Economy.com each attributed 100 percent of the third quarter’s turnaround to the stimulus, saying the U.S. economy would have contracted for a fifth consecutive quarter without it. According to each firm, there would be at least 1.6 million fewer jobs today in the absence of the stimulus.

The recovery of the world economy is on track and appears to be sustainable but uneven, said Nariman Behravesh, chief economist at IHS Global Insight.

“With growth proceeding at a 3 percent annual pace, the world economy will reach a new peak in the third quarter of 2010,” Mr. Behravesh said, but “full recoveries in Western Europe and emerging Europe are not expected until 2012, and Japan’s recovery will stretch out until 2014.”

Mr. Behravesh envisions a “two-speed global recovery,” with most developing regions, especially Asia, in the fast lane.

Even if fiscal stimulus has helped prevent private demand from collapsing, it has not come without potentially severe consequences, said Ms. Stroppiana of Moody’s Economy.com. What helped in the short term may hurt in the long run.

“Costly fiscal stimulus measures and bank bailouts, combined with lower [tax] revenues, have rapidly eroded public finances, threatening longer-term fiscal sustainability in some countries,” she said.

“Policymakers face a difficult balancing act. If they withdraw support too early, they risk depressing demand, hindering job creation and scuppering the recovery,” she said.

“But delaying fiscal correction measures too long could harm medium- to long-term growth, as public finances would take longer and be much harder to repair,” she said.

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