For the economies whose leaders signed on to Sunday’s communiqué, the hard work is just beginning.
Far from calming the raging debate about how to save the world economy, Prime Minister Stephen Harper's Group of 20 summit has fanned the flames, inspiring a heated reaction from those who believe policy makers have been captured by the orthodoxy blamed for the Great Depression.
The headline from the Toronto summit was the pledge by the advanced economies of the G20 to halve their deficits by 2013 and at least stabilize debt three years later. Canadian officials characterized it as a victory for the host nation – an achievable target that reflected a compromise between those who believe government debt has grown too large and those who argue the economy remains too fragile to live without stimulus.
But the cheering faded overnight, and by Monday morning the question that followed G20 leaders into their weekend gathering was being asked louder than ever: How do you cut spending and still generate economic growth?
For those who advocate a conservative approach to fiscal policy, the answer is simple: debts have grown too large, and reducing them will lower interest rates and steady confidence.
The other side of the debate has an equally convincing argument: pull the plug on government stimulus before private consumption is ready to take up the slack and you condemn your economy to sluggish growth, if not deflation.
On Monday, the patron saint of that perspective, Nobel Prize-winning economist Paul Krugman, weighed in on Canada's G20 summit. Mr. Krugman called the results “deeply discouraging,” arguing that an embrace of austerity exacerbated the Great Depression and that current policy makers have likely condemned the world to a similar fate.
“We are now, I fear, in the early stages of a third depression,” Mr. Krugman wrote in his New York Times column. “It will probably look more like the Long Depression than the much more severe Great Depression. But the cost – to the world economy and, above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense.”
Mr. Krugman's views are extreme. Even many economists who share Mr. Krugman’s wariness about a rush to austerity argue that he is exaggerating by suggesting a depression already has set in. John Curtis, a former chief economist at Canada's trade department and a distinguished fellow at the Centre for International Governance Innovation, and Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace, said Mr. Krugman is forgetting about the rapid economic growth that is occurring in Asia, parts of Latin America and Africa.
Stéfane Marion, chief economist at National Bank Financial, pointed out that nominal gross domestic product in the United States is higher now than it was before the recession – suggesting deflation isn’t the threat that Mr. Krugman makes it out to be.
Nominal GDP contracted by 50 per cent in Great Depression, Mr. Marion said.
Still, Mr. Krugman’s is a hard voice to ignore. All three of those economists said they agreed with the Nobel Prize winner’s larger point: that policy makers represent one of the biggest risks to the recovery.
“This the wrong time to be pulling the plug on fiscal stimulus,” said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y.
US Nobel Prize of Economy winner Paul Krugman delivers his speech after he was awarded with the Global Economy Prize 2010 of the Kiel Institute for World Economy in Kiel, northern Germany, on Sunday, June 20, 2010.
“You don’t push down when you’re already going down anyhow, so I think it’s a mistake,” Mr. Weinberg said in an interview. “It’s a mistake for Britain to make cuts this year, it’s a mistake for the Europeans. Whereas I was expecting a flat economy for Europe and for Britain, I’m now looking for declines.’’
Mr. Weinberg points to signs that the world’s advanced economies remain weak. “When I look around the G7, I see declining money and credit everywhere,” he said. “Even in mighty Canada, bank credit is up just a little bit, just a hair, and monetary growth has ground to a halt … We’re looking, I believe, at a monetary contraction that’s much more akin to the Great Depression that anything we’ve seen in our lifetimes in a normal business cycle.”
At the same time, it’s unclear just how committed the G20 is to austerity.
Excluded from the commitment was Japan, and soon after the concluding statement was released on Sunday, French President Nicolas Sarkozy told reporters that there was no binding deficit target at all. Despite the deficit pledge, the G20 emphasized that sustaining the recovery means “we need to follow through on existing stimulus plans, while working to create the conditions for robust private demand.”
Those comments left many economists and investors unsure whether the G20 had resolved anything at all.