Peter Jones: US still has power to change world

Published on 25/09/2012 00:00

LEADING American economist Paul Volcker believes the looming presidential election could make or break us, writes Peter Jones.

Many elections are described as “historic … momentous … a turning point …” and so on, usually by the victors. Few actually deserve that description, but the US elections due in just six weeks do. Though he didn’t actually use any of those words, that was the understanding I took away from listening to Paul Volcker at Gleneagles last Friday.

While Mr Volcker is not exactly a household name this side of the Atlantic, he is one of the giants of central banking and macro-economic management. He was chairman of the US Federal Reserve under Presidents Jimmy Carter and Ronald Reagan, a Treasury under-secretary for President Richard Nixon, and more recently advised President Barack Obama on how to stimulate economic recovery. Proposals he made to ban retail banks from undertaking riskier investment-style banking were dubbed “the Volcker rule” by Mr Obama.

So, in terms of understanding what matters in the world economy and how political decisions affect it, Mr Volcker is in a class of his own. To hear him at the annual conference of the Institute of Chartered Accountants Scotland was a real privilege. In summary, he said that the US election outcome and how politicians handle it will determine the fate of the world economy, whether it embarks on a steadier recovery path than so far, or whether it will teeter towards depression. That’s a pretty big agenda for one election in one country. How does he figure that?

Mr Volcker’s longevity at a high level of public service is not simply due to his intellectual abilities, but to a gift for reducing the immensely complex to relative simplicities.

The fact is, he said, that the global recession of 2009-10 is unlike most other recessions because it stemmed from the financial crisis which has left the developed world with a problem of too much debt – government debt, banking debt and household debt. And that means it is very hard to generate any kind of growth in a hurry.

That is because borrowing large sums to spend on stimulating growth is out for most governments because their debts, as a proportion of GDP, are beyond the levels that used to be thought of as the ceiling on borrowing. Interestingly, he did add that he thought the UK did have a little bit of room to borrow more for expansionary purposes.

Can we look to Europe for growth? No, because Europe’s leaders he viewed as too intent on pursuing austerity to deal with the debt crisis facing various governments despite the increasing evidence that austerity was damaging growth prospects and provoking social disorder.

These leaders, he said, “are not quite ready to face a world in which the euro, which is the symbol and substance of European unity, is damaged or abandoned”. He went on to cite the experience of Argentina which, faced with a mountain of unserviceable debt in the period 1999-2002, defaulted on its borrowings, broke the fixed currency link with the US dollar and then saw the peso devalue enormously. It endured two years of extreme economic pain, but then recovered remarkably quickly.

With these remarks, I took to mean that Mr Volcker does not think that the euro will survive, but until that point is reached, eurozone countries will be mired, as they are now, in recession or near-recession.

What about the developing world – China, India, Indonesia, and Brazil? These countries have had fast rates of growth in the last decade which have boosted the world economy. The developed world has benefitted from this through the export of technology and skills.

Now, however, growth in the developing countries has slowed to about half of what it was five years ago. And without the demand from the developed world for products, it looks unlikely that the pace of growth in east Asia and Latin America will pick up again.

Japan, the world’s third largest economy, shows little sign of getting out of the stagnation it has been in for the last decade, he said, so that leaves the US, still the world’s largest economy, accounting for about a fifth of world GDP.

Despite its problems with large levels of federal government debt and relatively high levels of unemployment, the US managed to motor on this year, with growth of between 1.5-2 per cent on an annualised basis. “If we are in a crisis, it’s not much of a crisis,” he said. “I think the prospects in the US for sustained high growth are pretty good.”

The big unknown that might either maintain or jeopardise America’s recovery is, of course, the US election. As I have written before, US politicians have to deal with a self-imposed “fiscal cliff” – that big spending cuts and tax rises will happen automatically in January, causing severe economic upheaval unless politicians deal with it.

The problem, Mr Volcker said, was that the ideological divide between Republicans (for spending and tax cuts) and the Democrats (for spending and tax rises) is perhaps deeper and wider than ever before. So, if the election produced a divided legislature, with Democrat Barack Obama in the White House and the Republicans controlling Congress, as is the case just now and which opinion polls currently seem to indicate is likely to continue, the prospects for agreement on what to do look poor.

Mr Volcker stopped short of backing either party, though my guess is that he thinks the Democrats have the more persuasive economic argument. His preference, he said, was rather that there should be a decisive result, giving a clear mandate to one side or the other to get on with their programme.

He concluded by remarking that he had grown up in a world where the US was unquestionably the world’s leading political and economic power, which was no longer true. But in this instance, America had the opportunity and the capacity to lead the world towards economic recovery.

If Mr Volcker is right, then this election could have a profound impact not just on the global economy but also on world politics. On the one hand there is economic recovery and new vigour behind values of democracy and the market economy. On the other, there is stagnation, possibly depression, and even bigger question marks over those developed world values.

Whether American voters and their elected representatives are up to the challenge, we will find out after 6 November.