Easy Answers are the Wrong Narrative

I was watching an interview last night with Warren Buffett by Charlie Rose on the economy. Yes, I know I’m weird. I don’t watch sports or movies. I watch documentaries and listen to interviews. I have the academic’s disease in spades. There was a lot of discussion about a lot of things but the one thing that grabbed me was the question Rose asked about what Obama should have done differently on the economy. Buffett is an Obama supporter and made a point of saying that the President had basically responded as well as he could to the economic challenges and he hated hindsight criticism. However, the one point made was that the President really hadn’t emphasized early on how difficult this economic recovery challenge would be and that the passage of the stimulus was perhaps glossed over as a panacea that it could not be for many reasons.

This narrative came back to me this morning as I plowed through The Economist with my morning coffee. Only this time, similar behavior was attributed to Angela Merkel in the cover story called The World Economy: Be Afraid.

The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.

I laughed at the idea of Obama favoring class warfare over fiscal leadership given that paragraph followed directly after the sentence: “But the collective obsession with short-term austerity across the rich world is hurting”. Obama’s been leading the charge on austerity.  I honestly don’t think any one person or an S&P national downgrade is going to deter the Republican party from leading the entire country off the cliff in pursuit of the White House. Maybe once they’ve figured that all of their candidates have so many warts they are unlikely to pass muster with the base AND independents, they’ll get back to being a minority party instead of group of hostage taking ideologues. But, I doubt it. They are all spinning overly simplistic messages that resonate with the many people looking for simple answers. The global Great Recession is not done with us yet and to pretend there are simple answers to pass around is expedient and immoral.

The Economist is talking about the timidity of leaders across the globe to really lead on programs that could tackle the severe economic problems we face. The problem is that many seem to be offering up messages that offer policies contrary to what’s really needed. The call for austerity right now, instead of when the houses are in order, keeps me busy trying to find a safe place to stash my little nest egg. There’s only so many places in Norway, Malaysia, and Korea for small investors. Even China’s manufacturing behemoth is showing signs of slowing which is undoubtedly, yet another sign of lack of customers. Yet, every developed nation is pulling in its horns further and further. There is a lack of correct–as well as bold–action.

Germany, for instance, thinks the main problem is fiscal profligacy and so is reluctant to boost Europe’s rescue fund; yet a far bigger fund is needed if a rescue is to be credible. The most urgent solutions, such as restructuring Greece’s debt or building a protective barrier around Italy, require the most political courage—something that Angela Merkel, Nicolas Sarkozy et al have yet to exhibit. The chances of a bold enough plan will shrink if markets stabilise. The less scared they are, the more likely Europe’s spineless policymakers are to jump yet again for a plan that does just enough to stave off catastrophe temporarily, but lets the underlying problem get worse.

Much of the world is now paying for their timidity: witness the increasingly dark economic backdrop. A slew of recent indicators suggests the euro area is slipping into recession, as Germany’s exports slow, the fiscal screws tighten, confidence slumps and the banks’ travails imply tighter credit. Even if the euro-zone crisis were to be solved tomorrow, the region’s GDP would probably shrink over the coming months.

America’s economy is still limping along, though the summer slump in share prices and consumer confidence suggest future spending will weaken further. The Federal Reserve is trying new ways of support, somewhat half-heartedly. Whatever it does, America is currently on course for the most stringent fiscal tightening of any big economy in 2012, as temporary tax cuts and unemployment insurance expire at the end of this year. That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November. If Democrats and Republicans fail to hash out a compromise on the deficit, draconian spending cuts will follow in 2013. For all the tirades against the Europeans, America’s economy risks being pushed into recession by its own fiscal policy—and by the fact that both parties are more interested in positioning themselves for the 2012 elections than in reaching the compromises needed to steer away from that hazardous course.

What about the cushion the emerging markets provide? That, too, is getting thinner. Their growth is slowing (as it needed to, since many economies were overheating). Recent falls in emerging-world currencies and stock prices show that financial panic can afflict the periphery too (see article). Some emerging economies, including China, have less room to repeat their 2008-09 stimulus because of the debts that splurge left behind. Monetary policy can be loosened: several central banks have cut rates. But, overall, the emerging world will be less of a buoy to global growth than it has been hitherto.

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