With the stock market recovering some of its losses, house prices rising moderately, optimism being reported locally and nationally, is there light at the end of the tunnel, or is it an express train hurtling toward us?
The message from the party conferences was that we are going to have to tighten our belts as the economy recovers. The big question is when should this happen? Should it be straight away, immediately after the next election, or some other time? My answer is not for a long while yet.
I read a recent article in the Economist quoting Nouriel Roubini, an economics professor at New York University's Stern School of Business. He warned of a slow, U-shaped economic recovery, with below-trend growth for two to three years. (Optimists predict a V-shape, with recovery as rapid as the slide into recession.) He fears that surplus economies like China and Japan will not boost consumption enough to make up for the downturn in American consumer spending
In general, those who agree with him take the line that the unprecedented actions of governments and central banks (enormous fiscal deficits, near-zero interest rates and “quantitative easing”) may have jolted the global economy temporarily into life, but they have not resolved the underlying causes of the mess. They worry that consumers and companies remain excessively indebted, and that cutting back on borrowing will quickly stamp out any recovery.
I also read Robert Reich, the former US Secretary of Labor who is now a professor at the University of California at Berkeley. He wrote a piece entitled ‘The truth about unemployment that no one wants to tell you’.
“Unemployment will almost certainly be in double-digits next year and may remain there for some time. And for every person who shows up as unemployed you can bet there's another either too discouraged to look for work or working part time who'd rather have a full-time job or else taking home less pay than before (I'm in the last category, now that the University of California has instituted pay cuts). And there's yet another person who's more fearful that he or she will be next to lose a job.”
“Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.”
Then I heard an interview with the Director of the Washington based Trends Institute claiming that oil dealers are ditching the dollar in fear that the US economy is not recovering sustainably from the recession. It is the use of the dollar for oil trading that allows the Federal Reserve to print money the rest of the world has to use.
Three separate US experts in the past month who are warning we are a long way out of recession yet.
Then I read an article by David Blanchflower, respected UK economist and former member of the Bank of England monetary policy committee. He was responding to calls for immediate cuts to public spending, claiming that they had the potential to push the UK economy into a “death spiral”.
He advises that lesson number one in a deep recession is you don’t cut public spending until you are into the boom phase. “The consequences of cutting too soon is to drive the economy into depression. That means rapidly rising unemployment, social disorder, rising poverty, falling living standards and even soup kitchens”.
Or as Robert Reich in the States put it: “But if government doesn’t spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier”.The message to our leaders on both sides of the Atlantic is stop worrying about paying off debt until you have helped to create a sustained and lasting economic recovery.
In the meantime there is plenty of work to do and lots of people looking for work. Matching the two will be the route to recovery.