From the LONDON REVIEW OF BOOKS:
Quarterly GDP data don’t, on the whole, tend to make the person studying them laugh out loud. The most recent set, however, are an exception, despite the fact that the general picture is of unrelieved and spreading economic gloom. Instead of the surge of rebounding growth which historically accompanies successful exit from a recession, we have the UK’s disappointing 0.2 per cent growth, the US’s anaemic 0.3 per cent and the glum eurozone average figure of 0.2 per cent. That number includes the surprising and alarming German 0.1 per cent, the desperately poor French 0 per cent and then, wait for it, the agreeably frisky Belgian 0.7 per cent. Why is that, if you’ve been following the story, laugh-aloud funny? Because Belgium doesn’t have a government. Thanks to political stalemate in Brussels, it hasn’t had one for 15 months. No government means none of the stuff all the other governments are doing: no cuts and no ‘austerity’ packages. In the absence of anyone with a mandate to slash and burn, Belgian public sector spending is puttering along much as it always was; hence the continuing growth of their economy. It turns out that from the economic point of view, in the current crisis, no government is better than any government – any existing government…
It is this failure of political will both in the EU and US which is starting to make the contemporary economic scene resemble that of the 1930s. The discipline of macro-economics was born out of the study of the Great Depression, in an attempt to understand what had happened and avoid a repetition. That’s why it’s so depressing to see the developed world not just sleepwalking towards another recession, but actively embracing policies which make it more likely. Governments can’t all simultaneously cut spending while also continuing to grow their economies: it just defies common sense to think they can. The problem is in large part to do with the application of an incorrect metaphor, the easy-to-understand idea that a household has to live within its income. But governments are not households, and the idea of cutting your way to prosperity cannot be read across from an individual’s finances to those of the state. It’s a manifest fact that these policies, and the refusal to embrace stimulus spending, are causing economic slowdowns all over the world that are triggering the current anxiety in the markets, which is in turn causing the predicament of governments to intensify, as confidence sinks and the self-fulfilling expectations of a second downturn take hold. This in turn puts pressure on expectations about governments’ abilities to repay their debts, which further lowers confidence, and so on….
It’s starting to look as if the best-case scenario for the aftermath of the crash is already dead. In that version, governments muddled through to economic growth, cutting public spending in the process, enjoying the already mentioned rebound which tends to follow recessions, and the developed world went back to partying like it was 2006. This prospective version of events had a big hole at the centre, about the way the financial sector should be reformed; in any case, it now looks very unlikely to happen. The next scenario – the one we are on course for at the moment – is not so much the next-best as the next-least-worst. It is modelled on what happened to other parts of the world over recent decades, from Latin America to Russia to South-East Asia, as they underwent debt crises and consequent economic collapse. In all cases, the relevant economies recovered, after about a decade of hard times and widely shared economic pain. In this model, the debts are gradually paid down, the economy is slowly and miserably rebalanced, and eventually things grow back to where they were when the bubble burst. There is a general sense of baffled incomprehension in the West at the idea that this should be happening to Us, instead of to Them; it turns out that this trajectory of crisis and slow recovery is a lot more bearable when it happens to other people, ideally in far-away countries of which we know little. But that is what we look to be on course for at the moment….
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