Is Posen right? I haven't a clue. But he does raise one point which I think is worth noting: there's more at stake here than simply a bit of lost productivity growth and economic capacity:
I've used this historical reference a number of times, but it is an admittedly extreme example. Posen is right to use the language of "let us not forget" as this is merely a reminder - not a prediction of what is to come. Nevertheless, the point is well taken. Last year, Rory wrote a great piece on the brewing summer of discontent: the seething popular anger in the aftermath of the financial crisis and the demand to do something.
"This poses obvious risks to political stability and commerce. It also constrains the options available to policymakers, making beggar-thy-neighbor actions such as the imposition of trade barriers, subsidization or nationalization of industries and currency devaluation more likely. History tells us that these domestic political considerations, particularly in the developing world, risk reinforcing the downward economic spiral, as policymakers appease factions and fail to reach coordinated regional/global programs. They also risk, particularly in the case of currency devaluations, setting off a [chain] reaction of competitive responses that, in the absence of regional cooperation, ultimately destabilizes the system as a whole."So it's clear that while inaction is not an option, the kind of response that the political leadership provide matters even more. The G20 proved to be surprisingly successful in coordinating a strong response to the crisis itself, but that level of cooperation is starting to fade in the aftermath as leaders re-focus domestic priorities. The recent signs of a looming "currency war" are a worrisome case in point.