More Stimulus

Yesterday President Obama announced an investment plan of $50 billion (38.8 billion euros) in infrastructure with a single economic objective: create employment. It also had a political objective: the November elections. Obama has spent months flirting with the idea of a third stimulus plan, which would include a tax rebate to businesses and the middle class, for what he has encountered time and again with the Republicans. Both Japan and the U.S., after a rapid initial exit from the crisis, now confront a bleak horizon that does not rule out a relapse into recession. Hence the new stimulus — a return to the Keynesian thesis, which is very different from the policy of austerity promoted by European authorities and committed to giving priority to the reduction of the public deficit in order to move away from the specter of depression and unemployment.

The fear of a relapse had been weighing heavily on the U.S. economy in recent weeks until a few days ago, when we learned that employment and industry are doing better than expected. Even so, the most probable outcome is a scenario of very slow growth, insufficient to reduce significantly a practically unknown level of unemployment, which is very close to 10 percent.

More than three years after its onset, some of the most adverse consequences of the global crisis remain. Credit has not improved despite the transparency exercise of the stress test in European banks, which enabled the access to markets of some entities, and the central banks have not detained the flood of liquidity through the extraordinary measures to alleviate banking problems.

Facing European policies of spending containment — especially in countries where markets demanded strong adjustments, such as Greece, Ireland, Portugal and Spain, and also in cases very different, like that of Germany — the U.S. and Japan continue to believe in public investment in order to overcome the crisis. That is fine. To believe that the priority must be to convince the bond markets of the purpose of cleaning up of public finances when growth is insufficient to create employment is to forget some of the lessons of history. Both Japan and the U.S. have elevated public debt, but no one suspects the soundness of the two countries.

The markets could be upset even more due a horizon of weakness in economic activity, employment and the generation of sufficient income to grow tax revenue. Without economic growth and the income of agents it is very difficult to pay back debt. Fundamental ideology is therefore not the best companion to try to guarantee economic behavior that acquires employment. If the heart of the advanced countries takes such an unequal approach, global recuperation will be tepid and slow at best.