"A long malaise seems like the optimistic scenario"

Nobel Prize-winner and former chief economist at The World Bank, Joseph Stiglitz writing in The Financial Times offers a bleak appraisal of the moment: the US can borrow at extremely low rates to make the investments in infrastructure and targeted job-creation that could jump-start economic growth (which is also the key to longer-term deficit reduction), but the politics of austerity make any effective policies or optimistic scenarios impossible:

Pre-crisis, America, and to a large extent the world economy, was sustained by a bubble. The breaking of the bubble has left a legacy of excess leverage and real estate. Consumption will therefore remain weak and austerity on both sides of the Atlantic now ensures the state will not fill the void. Given this, it is not surprising that companies are unwilling to invest – even those that can get access to capital…

Corporations are awash with cash, but the banks have not been lending to the small and medium-sized enterprises that are, in any economy, the source of job creation. The Fed and Treasury have failed miserably in getting this lending restarted – this would do more to rekindle growth than extending low interest rates though 2015!

But the real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments. This will both promote growth and generate tax revenues, lowering debt to gross domestic product ratios in the medium term and increasing debt sustainability. Even given the same budget situation, restructuring spending and taxes towards growth – by lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not – can improve debt sustainability.

The politics, however, are elsewhere. Markets know that the mix of low tax and debt fetishism sweeping the North Atlantic means that there are no instruments at hand: monetary policy won’t work, fiscal policy is constrained, growth will slow and the improvement in deficits (brought by austerity) will be disappointing...

All of this makes it more likely that the North Atlantic will enter a double dip, but there is also nothing magic about the number zero. The critical growth rate is that which stops the jobs deficit growing larger. Problematically, America and Europe’s current growth rate of about one per cent is less than half of the amount required to do this.

When the recession began there were many wise words about having learned the lessons of both the Great Depression and Japan’s long malaise. Now we know we didn’t learn a thing. Our stimulus was too weak, too short and not well designed. The banks weren’t forced to return to lending. Our leaders tried papering over the economy’s weaknesses – perhaps out of fear that if we were honest about them, already fragile confidence would erode. But that was a gamble we have now lost. Now the scale of the problem is apparent, a new confidence has emerged: confidence that matters will get worse, whatever action we take. A long malaise now seems like the optimistic scenario.

Excerpted from The Financial Times via Roosevelt Institute, New Deal 2.0