It’s not yet certain whether European leaders will arrive at an agreement at today’s summit in Brussels, but what’s already clear is that Europe is running out of time. After two years of kicking the can down the road, contagion from the continent’s debt crisis has begun to infect Europe’s core. Indeed, the credit rating agency S&P recently threatened to downgrade the credit ratings of the entire Eurozone due to the increased risk of financial cataclysm.
[Guest post by Matt O'Brien] Note: This post has been updated. First, there were “green shoots.” Then came “Recovery Summer.” Now, there are yet again signs that a stronger economic recovery may be gaining momentum in the United States, with the November jobs report offering the latest reason for guarded optimism. The headline-grabber was that the unemployment rate declined 0.4 percentage points to 8.6 percent. This was for both good and bad reasons. The good was 120,000 jobs were added in November—more on that in a bit.
In a speech before Parliament last month, British Prime Minister David Cameron posed a rhetorical question as he harangued the opposition Labour Party: “Is there a single other mainstream party anywhere in Europe who thinks the answer to the debt problem is more spending and more borrowing?” Cameron was meaning to taunt Europe’s Social Democratic parties, rubbing in the fact that they lack the power to implement the types of programs they’d prefer.
[Guest post by Matt O'Brien] We’re saved! Or at least not doomed. For a minimum of another week or so. That seems to be the message as markets rejoiced after central banks around the world announced a coordinated intervention to inject dollar liquidity into the global financial system. But what does this mean exactly—and how much will it matter? European banks need dollars. A significant portion of their business consists of making loans in dollars, which they typically first borrow from abroad.
Running a major central bank is never a particularly easy job. An enormous amount of pressure—the weight of an entire economy—is riding on you. Among your major responsibilities is the job of stomping on an economy when it begins to run too hot, generating economic weakness to defang inflation. You’re rarely given credit for your successes and often blamed for problems of others’ making. Yet most central bankers have it easy compared to Mario Draghi, who last week assumed the job of President of the European Central Bank. Draghi’s situation could scarcely be more difficult.
[Guest post by Matt O'Brien] If it doesn't feel like a recovery to you, there's more good reason for that today. The October jobs report added to a long line of underwhelming employment numbers since the economic recovery ostensibly began in June of 2009. The headline number of 80,000 jobs added was, at best, barely enough to keep up with population growth. At this pace, unemployment will come down to less painful levels approximately never. That said, the news wasn't all bad. Private sector job growth has been fairly resilient.
Both the left and the right have been consistently peddling the wrong prescriptions for our economy. Most liberals are focused on the need for additional fiscal stimulus, and dead-set against any premature moves toward what they consider “austerity.” Spending cuts, they say, would weaken the economy. Most conservatives are equally insistent that spending cuts need to begin now—and claim that by reducing expectations of future tax increases these cuts would help the economy.
[Guest post by Matt O'Brien] Pay no attention to soaring executive compensation, or Wall Street bonuses, or even to the latest CBO report on income distribution: skyrocketing income inequality the past few decades is just a “myth”—at least according to Jim Pethokoukis of the American Enterprise Institute.
Everybody agrees that the bipartisan deficit super committee had better hurry up and strike a deal to cut the federal budget by $1.2 trillion so it can meet its November 23 deadline. If it doesn’t, then all hell will break loose. Except it won’t. You may have lost track of the deficit story after Congress and President Obama averted catastrophe at the end of July by agreeing to raise the debt ceiling. Perhaps I can help.
When historians look back at this benighted moment in time, they may find themselves puzzled by how we refused to take the necessary steps to improve our economic situation. Depending on what happens in coming months, they may find that the best solutions—aggressive fiscal and monetary stimulus here in the United States, bank recapitalization and debt restructuring in the EU—were left on the table, while millions unnecessarily suffered. A footnote in that history may be the decision of Fannie Mae and Freddie Mac not to do more to help the housing market recover.