Commentary—

World Recession Is Forcing Economic Reality

By Mark Weisbrot

A serious financial crisis can force some rethinking of economic and political dogma. The current one is serious for most of the world; the International Monetary Fund (IMF) is projecting world economic growth of just 0.5 percent this year — the worst since World War II — and this number could easily be revised downward.

In the United States, one of the first casualties of the current recession was the extreme fiscal conservatism that has plagued the country for decades. It seems like ages since Bill Clinton’s administration, facing projected budget surpluses of more than $5 trillion, decided that it needed to pay off the entire national debt before committing to any new social spending. President Barack Obama’s proposed budget has a deficit for this year of 12.3 percent of Gross Domestic Product (GDP) — twice the size (relative to the economy) of the next largest deficit in the six decades since World War II. That was President Ronald Reagan’s “military Keynesian” budget of 1983. Like his successor George W. Bush, Reagan never admitted that deficit spending was needed to pull the economy out of recession. Instead he pretended that he was just meeting “defense needs” and granting tax cuts where tax cuts were due (mostly to the wealthy).

Today there is a sizable consensus that deficit spending is very necessary, whatever the Republican leadership may think — if they are thinking at all. This is really just a matter of national income accounting. With consumption and investment falling, that leaves only government purchases and net exports to pull us out of this recession. More on net exports (exports minus imports) in a minute — but for now, this part of our economy is not set to grow enough to pull us out of the recession. Hence the need for the government to step in, in a big way.

Of course, this could be just a temporary change in thinking, with desperation focusing the mind. But there are some signs that it may persist. For example, The New York Times reported recently that Mr Obama’s projected budget deficit for 2013 is “three percent of the overall economy,” a level that economists consider sustainable.”

Indeed this is true, and the arithmetic is simple: If the debt grows at the same rate or slower than the GDP (in nominal terms), it will not grow as a percentage of the economy. That is what matters, not the absolute size of the public debt — a big scary number ($10.9 trillion) that is often thrown around by conservatives. As evident as this is, the major media have almost never looked at the problem in this way before.

The US government has already financed at least $1.2 trillion of borrowing during this crisis by creating money, which was added to the Federal Reserve’s balance sheet. This technically adds to the national debt, but since the government owes the money to itself, there is no net outflow of interest payments from the government on this debt. This reduces the long-term debt burden of the necessary stimulus. Clearly, there are circumstances under which this “monetizing” of some additional borrowing makes sense because the threat of increasing inflation is minimal. The present economic downward free-fall seems to be such a circumstance.

In other words, the United States — because of the special position of the dollar — could to some extent play the role of a world central bank in the present world recession. This would help stimulate our own economic growth as well by increasing demand for US exports. Of course, if the dollar were to lose value internationally in the process (because of the increased supply of dollars worldwide), this would be an added gain for the US economy.

That is because the US dollar is overvalued, and this overvaluation has artificially stimulated our imports and reduced our exports for many years. The idea that the United States needs a “strong dollar” could be the next widely held economic misconception to bend to reality.

(Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, D.C.)