Martin Wolf is one of the better print journalists writing today. I see his articles in the Financial Times – the salmon-colored daily newspaper out of London. He must have been really inspired because he wrote back to back articles on May 28 and May 29. Both articles are well-written and thoughtful. Together they illustrate a very broad range of policy choices available for today’s challenges. They also reflect a very soothing (the sheep) but potentially dangerous (the wolf) potion offered by modern day Keynesians.
In Friday’s article (http://www.ft.com/cms/s/0/6a75d8d4-69f0-11df-a978-00144feab49a.html ) Wolf takes issue with the OECD’s current policy advice that countries soon begin fiscal consolidation and monetary tightening. Wolf appears to agree with the OECD but then wavers on the fiscal suggestion with respect to the UK. He likes the idea for the long-term but frets that engaging too soon would threaten the recovery. He suggests waiting until “recovery is assured.” Wolf then goes on to suggest that in the context of a fiscal consolidation, a loose monetary policy might not be effective. He says with respect to tighter money, “Why the OECD makes this recommendation is beyond me.” The upshot of his article is to control government borrowing but not too quickly. I am not sure what he is recommending about monetary policy since he seems to not prefer monetary expansion or contraction.
Wolf’s Saturday article ( http://www.ft.com/cms/s/0/7f55fe18-6a8c-11df-b282-00144feab49a.html scares the crap out of a fictional boy named Bobby using the idea that economic aftershocks are inevitable and will contribute to an unstable world economy. These aftershocks are the natural aftermath, according to Wolf, of excessive private and government borrowing. Combining this bad news with problems in transforming nations, China’s bubbles, and instabilities on the Korean Peninsula, Wolf concludes with this advice to Bobby, “It is going to be miserable. But you can learn Chinese and go east.”
Wow, I wonder what Wolf had for dinner Friday night! On Friday he was very unhappy with the OECD’s conservative policy advice but willing to consider a way out of the woods. On Saturday he seemed to indicate that developed countries don’t stand much of a chance. He recommends that we move to China. What’s up?
What’s up is what I have been saying for months – but I am not nearly as pessimistic as Wolf (before you call me a simplistic optimistic, please read the final line of this diatribe). The Whack-a-mole economy is a reality. Call it after-shocks or whack-a-mole – the story is the same. We went on a spending binge and now – now when we are at our weakest – the bill is coming due. While this situation is no cause for celebration, it is also not a reason to tell Bobby to pull up stakes and move to China.
Wolf’s problem is no different from the indigestion and confusion of other Keynesians. They live in a world of tradeoffs and zero-sum-games. They live in a world of seeming short-run political realities that offer only palliatives and no means to deal directly with real fundamental problems. The fundamentals are simple. People in the US spend and borrow too much. The cure is already in place. No one asked for a recession but the truth is that it sparked an awakening that is causing us to rethink the notion of debt-related risks. Wealth-ravaged consumers are already saving more. The government is discussing how to restructure. Just as saving was lost during the decades when we spent too much – now some spending will be lost as we reverse engines and save a little more. How can that be bad or worrisome? Wolf laments that it will cause another recession but that knee-jerk Keynesian reaction misses the boat.
How can it be wrong to point-out the true sources of our problems and directly address them? Would it really be better for policymakers to say they are going to fix the real problems sometime in the indefinite future? In the meantime instead of solutions we get speeches and weak populist-inspired temporary rebates that support and incent the very behaviors that landed us in this mess. It seems to me that the more governments credibly and quickly do something REAL about deficits and debt, the sooner people will be assured that things will get better. Those aftershocks or whack-a-moles will be minimized by market reactions that are based on credible policies that address what’s really wrong with this country. Convincing people that we are on an unwavering path to addressing our worst economic problems should send a message of optimism that can only create a climate conducive to economic growth. It might take a while, but it sure beats the hand wringing and negativism of Wolf and his fellow Keynesians.
Last line – before you call me names – please note that my optimism is based on policymakers doing the right thing… and soon. That is, my optimism is conditional. If our government and Fed continue to stall on the right policies, then I would suggest that we all move to Vietnam. It is cheaper than China and the beaches are beautiful.