Here's an excerpt from a pretty provocative piece in the Financial Times over the weekend by Philip Coggan. Sorry about not blogging it until now.
Those who believe that US, UK and other European efforts to reflate their economies will prove equally ineffective tend to draw their arguments from the so-called "Austrian school" of economics. They believe that the current recession is caused by the over-investment and excessive debt levels that occurred in the 1990s. This slashed the return on capital.Now, Coggan doesn't quite believe this story, but it isn't clear why. He admits the falling dollar is dicey at best in that what is good for the US here is bad for Europe, already struggling under an excessively high euro. Only if the dollar falls against East Asian currencies will this turn out to be a boon for the global economy, and thus far there are no real reasons to be optimistic on that score.
Growth can be restored, on this view, only if the excess capacity is destroyed, so that the surviving businesses can become profitable again.
The actions of the central banks have thus been a mistake. By slashing interest rates, they have simply allowed fundamentally unprofitable businesses to survive for longer than they should have done, prolonging the period of low returns. Likewise, Japan's refusal to allow a clear-out of its corporate and financial sectors has been a primary cause of its economic doldrums over the past decade.
Indeed, the central banks may have made matters worse. Low rates have simply allowed other bubbles to develop in the housing market, and have persuaded consumers to take on even more debt. The eventual crash will accordingly be all the greater.
Savings rates, debts levels and the US current account deficit are all enormous and growing. Interest rates have been rising rapidly for six weeks. Productivity gains in the 1990s are now fueling disinflation more than economic growth.
The US economic gurus all predictly recovery for the 2nd half of 2003 therefore, in Coggan's estimation, absolutely must be right. If not, the "Austrian School" bears (how is their analysis here any different from Marx, again?) will have their day.