Not stimulating: the scary prospect of a drug-free economic recovery

Whether we like it or not, the world is going to have to learn to adapt to a stimulus-free economy, Don Pittis writes.
Don Pittis has reported on business for Radio Hong Kong, the BBC and the CBC.
When our household was simultaneously nurturing a baby, a book and a doctorate, the household's drug of choice was caffeine. At that time, I learned something that Misters Obama and Harper, the leaders of China, Europe and the rest of us must reflect upon as the world begins to rein in its spending.

If you have participated in baby-raising, book-writing or doctorate-completing, you will know that (at least in the short term) they are not generally self-supporting. As the parent of a 20-something child has warned me, sometimes it seems as if they never will be.

Certainly at that stage, in any case, someone has to go out and earn the milk money.

The plum jobs at my place of work were the nine-to-five shifts. But commuting from Oxford to London at rush hour was hell by any means. The train was lovely, if expensive, for the train part. But getting from quaint Iffley to the Oxford station, and then from Paddington to BBC's Television headquarters added more than an hour to the trip each way.

The alternative, travelling to London by car at rush hour, was suicide by stress. Especially stressful was the place, devised by some fiend in the Ministry of Traffic Chaos, where the motorway narrowed by one lane and turned into an urban street. 

It was preparing for 12-hour overnight shifts where I learned my useful lesson, because this was the solution to all my problems. Working 9 to 9 overnights I could sail into London door to door in less than hour, and sail back chortling all the way as I surveyed the choked inbound lanes. Not only that, but my employer had a rule that if you worked overnights, you only had to work three of them to count for a week's pay.

The only fly in the ointment was that baby-minding and many other normal activities tend to be a daytime thing. So once a week, I had to readjust my body clock.

The brilliant discovery was that heavy caffeine addiction has a bright side. One of the withdrawal symptoms is lethargy and an overpowering urge to sleep.

The night before I was about to start work I would have a normal sleep. In the morning, however, in place of my conventional high-test jolt, I would have a mug of camomile, a mild central nervous system depressant. 

The tea was refreshing for a moment, until the expected caffeine failed to hit. At that point my brain would become woolly, and I would doze the day away with the curtains closed till my evening alarm rang.  Then, a cup or two of my favourite stimulant to fend off the impending withdrawal headache and I was on the road, bright-eyed and bushy-tailed.

The lesson I learned, and that I would like to share, was that stopping a strong stimulant is effectively indistinguishable from taking a strong depressant. 

And that is what the world economy has just begun to do. 

Cuts are in vogue

As I write, Britain's new prime minister, David Cameron, has already announced almost $10 billion worth of budget cuts. Other European governments are finding they can no longer afford to stimulate their economies. Iceland began to cut long ago. Spain is cutting spending by around $20 billion. Despite a new round of strikes, Greece is being forced to cut as part of its bailout. China, terrified by signs of renewed inflation is also cutting.

In the U.S. Mr. Obama is also feeling pressure to cut spending. America is currently overspending by about 10 per cent of the value of everything the U.S. economy produces. And that doesn't include the liabilities of the individual states. 

Obama's budget chief, Peter Orszag, is anxious to start cutting. "We want to make sure we never wind up facing the sorts of choices that Greece now faces," he told Reuters news service. 

Stimulus is, by definition, a macroeconomic effect. It is borrowing from the future to spend today.

Here in Canada, the PM and Finance Minister Jim Flaherty are also working on getting their spending down. Flaherty's tiny time pills are running out.

In case it is not obvious, I should remind you that there is no way to make budget cuts while continuing to stimulate. There may be good and bad ways to spend stimulus money. But stimulus is, by definition, a macroeconomic effect. It is borrowing from the future to spend today. Whether the spending is on Greek swimming pools or U.S. bridges, the stimulus effect is the same.

As everyone knows, the theory of economic stimulus was, to repeat an analogy I've used before, to push the car till the engine starts pulling on its own. How you think the current cuts in spending will affect the world economy depend on whether you believe the economic engines are already purring.

I'm afraid others besides me believe that the excited feeling we've had over the last few months is still at least partly drug-induced, as potent artificial stimulation courses through our financial nervous system.

Interestingly, attempts to restart the economy using stimulus in the 1930s (FDR's New Deal), have been criticized by many economic historians for not going far enough and stopping too soon.  By that argument, the world's economies really didn't restart until the much larger stimulation of WWII.

But just like in the mid-1930s it appears the tide is now turning against stimulus. 

We won't feel it immediately. As with interest rate cuts, spending cuts take time to work through the economy. But gradually we'll notice the effect. Perhaps Bombardier will sell fewer trains. European car companies will buy less steel. Gradually companies will decide it is time cut inventories and lay off a few more workers.

No matter how much of the economy you feel is 'real' or not based on stimulation, cutting government spending will reduce the size of the total economy.

Just as cutting off the caffeine is the same as taking a depressant, cutting stimulus is the same as depressing the economy. There is no way around it. No matter how much of the economy you feel is "real" or not based on stimulation, cutting government spending will reduce the size of the total economy.         

When I used to cut my caffeine to help me prepare for a night's work, I felt quite good about it. Effectively, like most of us, I was going through life hyped up on a drug, that, or so I've read, if it were brought on the market today would be a controlled substance. Even now, I occasionally take a brief caffeine holiday to rest up. After all, a person's body and brain can only take so much stimulation. Cutting the caffeine gave my body and brain a break, to reset at a lower level and recover.

Maybe that is what the world needs, too. We have been hoping to hype the global economy into higher and higher levels of stimulation using government spending and low interest rates. It has become a habit. Perhaps we have become stimulus-dependent.

The prospect of doing without such a habit-forming crutch is a little bit frightening. But whether we like it or not, it seems as if the financial markets are forcing us to grit our teeth and hope for drug-free recovery.

Note: Mouse over the highlighted countries to see how each is cutting back in an effort to tackle its deficit: