September 12, 2007

It’s a Baron Münchhausen moment for the US

Sir Martin Wolf in “The policy challenge of rescuing the world economy”, September 12 writes that “Prof Martin Feldstein of Harvard University pointed to a 3.4 per cent year-on-decline in US house prices” and “Prof Robert Shiller of Yale argued that the US house prices might ultimately fall by as much as 50 per cent”. Although oversimplified a division would yield that the recession carries a 15 years potential and since this is clearly unacceptable by all standards, one of the main real challenges is how to get out of the current conditions as fast as possible. Wolf mentions the need for the Chinese authorities to expand their domestic demand so that the burden of external adjustment does not fall unfairly on Europe and though he is right on his European concerns I am not that sure that Chinese domestic demand expansion would really be so helpful at this particular time for the US since China’s demand elasticity towards commodities and mid-range industrial products could be higher than the elasticity to the products offered by the US.

This looks in fact much more like what I would call a Münchhausen moment for the US, and by which I refer to that Baron’s legendary escaping from a swamp by pulling himself up by his own hair. If there was ever a moment to hurriedly correct other weaknesses in the US economy; like for instance by tort reform, health sector reforms, more strict supervisions on how much intellectual property right’s originated monopolies are exploited and the introduction of a tax on petrol consumption and that would help to take away pressures from fiscal and trade deficits while at the same time sending a better long term signal to the US economy, this is it.