Friday, 13 August 2010
Austerity obsession will prolong misery
So, here we are. The economy is going into wind down before it has had time to get back on its feet. The Bank of England has just revised its growth outlook downwards and US news is more than disheartening. Equity markets are falling worldwide, and even China has, it seems, eventually been caught up in the global slowdown.
This dismal picture was marginally lightened by the unemployment figures of the Office of National Statistics (ONS) in the UK: a fairly large quarterly rise of people employed, a considerable fall in the claimant count. But even here much caution and warnings as to a shortlived surface phenomenon, unlikely to survive what most regard now as an inevitable "double-dip" recession or even a long depression – near zero growth and high unemployment for many years to come.
Overall, then, we are going into slowdown. Little, if any, doubt, about it. But why, exactly? There is much detailed discussion by experts – for example, of fiscal stimulus programmes in the US having failed, and having mistakenly outcrowded monetary policies geared towards keeping down the costs of borrowing by the state, ie bond (Treasury) prices, of the Cameron-cum-Clegg austerity obsession bringing this on, at least in the UK.
All of this is besides the point, though much of it will, eventually, come into the narrative. There is no immediate technical and short-term reason for this downturn, but there is an important longer-term one: there was a very big crisis. One that shed considerable doubt on the ability of a radically decentralised system of economic co-ordination to assess risk and promote general welfare.
In the aftermath of this crisis, nothing essential or effective was done to remedy the original problem of the failure of markets to assess social risk properly. Some villains were too big to fail and thus bailed out. The burden was shifted from private to public finances. There were some half-hearted fiscal stimulus programmes to reflate debt-ridden economies in some parts of the world, and a bit of "quantitative easing" in others. All of which have failed to infuse private sector agents with sufficient confidence to move on, to invest and lend again. Instead, those who can have retreated to speculation on commodities (copper, wheat, oil) as their safest bet in the longer term.
The likely outcome will be worldwide stagflation. Inflation, brought on by high long-term commodity prices (for copper, wheat, oil) through financial speculation, that will eventually lead to an increase in interest rates. Hence, mortgages and household debt will remain a huge headache, especially in the UK where current household debt is, still, particularly high. And stagnation, brought on by a sustained lack of private sector confidence and expectations of sales in anything other than commodities.
Meanwhile, when October comes round, and with it the spending review, stand by to blame the government. Their long-announced austerity measures can only worsen the hell we are headed towards by making very sure that private sector expectations are going to be even less salutary than expected. After all, 500,000 jobs lost in the public sector, at a minimum, and 600,000 to 700,000 in the private sector by the end of this parliament, aren't exactly what you would call a confidence-inspiring upward trend. "The markets" – and their self-appointed guardians, the credit rating agencies – know as much, and are worried. Not about the UK debt, but about the lack of future sales perspectives.
The Cameron-cum-Clegg austerity obsession will do little, if anything, to solve the original problem. The big crisis and its causes. It won't get the debt down, since the economy will stagnate, at best, but it will do much to prolong and deepen the misery of the many. For very many years to come.
*This article first appeared at Comment is Free