The utter bankruptcy of Economics, during the current global crisis, is as obvious as the crash and bankruptcy (virtual or real) of AIG, Lloyd’s, Citigroup or Lehman Brothers. Economists, including Nobel Laureates, are unable to say when the global recovery will begin, nor devise innovative policies to initiate it. 

Why?  

It is not because of a lack of historical evidence. According to the National Bureau of Economic Research, based in Cambridge, MA., since 1854, there have been 32 recessions, or  boom-bust cycles. We have a great many cycles to study.

The average peak-to-peak duration of the cycle was 55 months. But in recent years, the duration of ‘boom’ periods has lengthened.  

• The boom period from the trough in November 2001 to the peak in December 2007 lasted 73 months, or more than six years. 

• Before that, the previous boom period lasted 120 months, or ten years, from March 1991 to March 2001.  

Perhaps, for this reason, managers were lulled into a false sense of security, and economists lost interest in the business cycle. 

Whatever the reason, the current global downturn is unique, unlike any other, and vastly different from the Great Depression of 1929-1939, in the severity of the decline, its global nature and its speed.   

Woody Allen once joked: The world faces two alternatives: we can destroy the world in a nuclear holocaust, or we can ruin the world with pollution and environmental collapse. May we choose wisely!  

Today the world faces a rather similar dilemma, and it’s not funny. The key question policymakers now face is, I believe, the choice between fiscal suicide, or criminal complacency:

Fiscal suicide: Excessive irresponsible spending programs to stimulate collapsing economies, creating enormous debt burdens that cripple future generations,  or

Criminal complacency: Trimming budget deficits and slashing spending, in the face of declining tax revenues, to avoid future debts, thus failing to create jobs and allowing unemployment to reach levels above 10 per cent that destabilize society and create enormous human suffering.

Can policymakers steer the ship of state between these two disastrous reefs?

I do not know the answer. Nor do my fellow economists. The best I can do is to try to define the issue clearly.

* Fiscal suicide: America’s Obama administration inherited a $1.2 trillion deficit, quickly added $600 b. to it, and now runs a deficit equal to $1.8 trillion, or 13 per cent of America’s GDP! This requires America to sell huge sums of Treasury Bonds to China, creating a national debt of $11 trillion, almost as large as GDP.  Future interest payments alone on the national debt are projected to be $806 b. yearly. Future generations of Americans will pay dearly for this fiscal irresponsibility. 

* Criminal complacency: With world trade declining faster than it did in 1929, the world is no longer ‘flat’. Countries are adopting measures to keep jobs at home, restrict imports and favor domestic production. As consumer spending declines,  and business investment disappears, the only demand component left to drive growth is public consumption. This makes it absolutely essential that the government ignore its deficits and pump demand into the economy to prevent disastrous unemployment of 10 per cent or more of the labor force. To do otherwise is criminal complacency. Yet many governments plead ‘fiscal responsibility’ and ‘what will the bond-grading agencies say?’, and avoid such programs. 

Israel’s budget deficit is projected at 6 per cent in 2009. Unemployment will exceed 10 per cent by year’s end. Is the Netanyahu Government’s fiscal stimulus sufficient? Suicidal? Or criminally complacent? How can we know in advance?  

Somewhere between the two extremes of fiscal suicide and criminal complacency, there is a reasonable, optimal tradeoff. But where? My own preference is more toward ‘fiscal suicide’ than ‘criminal complacency’. But I can’t prove this is optimal. 

Perhaps in a decade, a new generation of young economists will create tools that provide answers. Right now, when answers are needed, we have no such tools. Members of my profession are fiercely divided on this issue, right at the point in time when politicians seek answers.