I think we can say that there is a consensus that we are experiencing a global recession. Even those countries that still manage to be in growth, like China, are experiencing a sense of crisis as they see their global export markets shrink. Unemployment is growing fast, businesses are shutting down. So what should governments, reserve banks and others be doing right now?
One of the unsettling things we are seeing is an absence of a global consensus on what needs to be done. Or if there is a consensus about a broad outline, it is breaking down when we get to the details. Perhaps the most interesting but also confusing potential solutions to our problems is the so-called ‘stimulus package’. The concept itself is easy enough to describe: it is an injection of public money into the economy to off-set the effects of recession. It does this in several ways: by ensuring that funding (which might otherwise be decreasing or even disappearing) is secured for important public policy objectives; that public infrastructure investment is continued, to improve services and facilities but also to provide employment; to secure disposable income for members of the public so that public consumption continues (thereby ensuring that business continues to find customers); to secure financial institutions and thereby ensure that capital continues to be available.
Stimulus packages began to be mentioned as mechanisms for beating the recession from the autumn of 2008. The first major such package was unveiled by the United States in February 2008, and consisted of $150 billion, mainly in the form of tax rebates. The second package was also a US measure, in October 2008; this time it was $700 billion, much of it aimed at rescuing financial institutions. Then came China in November 2008: $586 billion to be spent over two years, mainly on the construction of major public facilities and on infrastructure. More recently we have had President Obama’s stimulus package, this time totalling $787 billion and with a wide range of targets for the money.
In Europe the picture is much more confusing. In November 2008 the President of the European Commission, José Manuel Barroso, was proposing an EU stimulus package of €200 billion, and this was subsequently adopted. But in addition some member states produced their own stimulus, with France adopting €26 billion in December 2008 and Germany €50 billion in January 2009. Ireland hasn’t done this at all, but rather has engaged in accelerating cost-cutting.
And now the question has arisen whether there should be international coordination to provide still higher amounts in stimulus – which is what the Obama administration is proposing and the UK is supporting – or whether what has been done is enough for now, and we should wait to see what happens – which appears to be the view of the European Commission, supported by Germany and France.
The arguments sometimes used against such packages is that it is unclear whether they produce the desired effects, that they may be accompanied by protectionist measures, that they may over the medium term fuel inflation, that they create public finance deficits that may be hard to row back.
The counter-argument may be this: this is not a test laboratory for economic theory, this is a crisis which is escalating and developing at breakneck speed. I doubt that a ‘cautious’ approach makes much sense, in that inadequate stimulation probably produces very limited effects and may be less desirable than no stimulus at all. Looking back at the depression of the 1930s, it seems to me that the concept of an aggressive stimulus has some justification in the evidence of economic history and is worth trying in order to avoid the real social and political disasters that could still come our way. I suspect this is not the time for prudence and caution. I suspect that Obama is right.