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Dr. Doom’s deathbed prescription for capitalism

Fiscal stimulus | Dr. Doom’s deathbed prescription for capitalism Anthony Harrington

Capitalism, like socialism, is bust. At least, in its present form. So says Nouriel Roubini. It is just as well that the markets do not hang on his words the way they do on Fed Chairman Ben Bernanke’s or we’d be seeing ten percent falls across the board on a daily basis.

Roubini called the late-2007 recession, which turned into the 2008 financial sector catastrophe, which turned into the 2011 sovereign debt crisis, well ahead of the game – a little too well ahead, actually, for his own good, since he had to put up with a lot of flak as the markets kept on rising while he kept on prophesying. The nickname Dr. Doom has kind of stuck ever since. Now, it seems, he’s convinced that without radical action advanced economies are heading for limbo.

Compare this with Bernanke’s reassuring judgement in his latest Jackson Hole speech, to the effect that nothing fundamental has happened to the US economy to derail a return to historic trend growth in the medium-term. Chalk and cheese. The markets, not surprisingly, much prefer Bernanke’s version of the future to Roubini’s.

Take to the streets

The problems Roubini sees with advanced economies are many and various, and, in his view, are starting to show up as serious social unrest on the streets:

“Recent popular demonstrations, from the Middle East, to Israel, to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment and hopelessness…”

Now I always worry when people start off with a view and garner references that appear to illustrate its veracity. They tend not to be too picky in gathering up their illustrations. This shows up in Roubini’s comment, in particular, in the inclusion of the UK’s extremely odd, recent criminal riot fest as an instance of popular unrest. The UK version of street trouble involved gangs of hooded youths briefly terrorizing various town centres on successive nights before the forces of law and order got their wits together and remembered that policing was, after all, their business. Was this about hopelessness? Not a bit of it. It was about criminal enterprise and energy allied to a delight in watching things burn. The fact that a very small number of 16- to 20-year-olds are completely and utterly brainless, with not the slightest grip on the concept of consequence until it bites them in the rear, does not tell us much about the state or fate of advanced economies. One suspects that it was ever thus…

The problem is, when you encounter one worm in the apple barrel, it’s only natural to look for others. Maybe Roubini is painting with too broad a brush across what is, after all, a massively complex field. Bald summary propositions are a way of focusing the mind, but they don’t necessarily make for accurate judgements. Here he is, for example, on why capitalism is bust:

“(After the 2008 crash) a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, Eurozone debt crises and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the Eurozone, the United Kingdom and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia) are experiencing sharp slowdowns. Until last year, policy makers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bail-outs and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits."

Cure for the cancer

Maybe, but as Bernanke hinted at Jackson Hole, he still has QE3 up his sleeve. What is needed to end what is otherwise shaping up to be a long sojourn in the land of the zombies, Roubini argues, is “a return to the right balance between markets and the provision of public goods”. Enterprise alone won’t do it. We have to “move away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.”

The new model he wants is more, and presumably hefty, fiscal stimulus on infrastructure investment to generate more jobs, plus short-term fiscal stimulus allied to long-term fiscal discipline. Politicians, of course, have an excellent track record in spending today and demonstrating restraint tomorrow. Not. Plus, he wants more progressive taxation. I thought the middle classes were already being impoverished and soaking the rich seems to pull you back towards that “broke” European socialist model. Sweden’s tax structure, anyone? The US could well benefit from rethinking its tax structure, but just try getting elected in 2012 on a hefty tax raising platform…

My fellow blogger Ian Fraser, commenting on Roubini’s May 2010 book, pointed out that Roubini was evincing astonishment back then at the fact that nothing had yet emerged to replace laissez-faire economics. By late August 2011 Roubini’s view seems to be that nothing other than a swift kick to the hinder parts will help.

However, the only “doable” part of Roubini’s prescription seems to be the bit about infrastructure spending. I’m seeing a lot of conservative economists and market commentators arguing that the problem with QE1 and QE2 was that while the headline numbers looked huge, they should have been, oh, about four times as big. One wonders what America’s foreign bond holders would have had to say if the Fed, with the unlikely support of Congress, had indeed gone down that road…

Further reading on fiscal stimulus, globalization and Roubini:

Tags: Ben Bernanke , capitalism , Dr Doom , economic governance , economic policy , european debt crisis , eurozone , Federal Reserve , fiscal stimulus , global financial crisis , global recession , Ian Fraser , jackson hole , monetary policy , Nouriel Roubini , QE1 , QE2 , qe3 , recession , recession 2011 , socialism , Sweden , tax , UK riots , US economy
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