We all know how the global economic crisis began. The banks over-lent to the housing market. The subsequent burst of the housing bubble in the United States caused banks to fail, because banking had gone global and the big banks held one another’s bad loans. Banking failure caused a credit crunch. Lending dried up and economies started shrinking.So governments bailed out banks and economies, producing a sovereign debt crisis. With everyone busy deleveraging, economies failed to recover. Much of the world, especially Europe, but also the slightly less sickly US, remains stuck in a semi-slump.
So how do we get out of this mess.The familiar debate is between austerity and stimulus. “Austerians” believe that only balancing government budgets and shrinking national debts will restore investor confidence. The Keynesians believe that without a large fiscal stimulus – a deliberate temporary increase of the deficit – the European and US economies will remain stuck in recession for years to come.
I am believer that the recovery from the crisis requires fiscal stimulus. I don’t think monetary policy, even unorthodox monetary policy, can do the job. Confidence is too low for commercial banks to create credit on the scale needed to return to full employment and the pre-crisis growth trend, however many hundreds of billions of whatever cash central banks pour into them.
So, like Paul Krugman, Martin Wolf, and others, I would expand fiscal deficits, not try to shrink them. I advocate this for the old-fashioned Keynesian reason that we are suffering from a deficiency of aggregate demand, that the multiplier is positive, and that the most effective way to reduce the private and public debts a year or two down the line is by taking steps to boost growth in national income now.
Robert Skidelsky says "Redistributive measures go quite well with stimulus policies, because they may be expected to increase aggregate demand in the short term (owing to lower-income households’ higher propensity to consume) and minimize the economy’s dependence on debt financing in the long term. Initial damage to the confidence of the business class caused by higher taxes on the wealthy would be balanced by the prospect of higher overall consumption"
Re-balancing the economy from gas-guzzling to energy-saving – and from private to public consumption – is bound to alter the goal of economic policy. Maximizing GDP growth will no longer be the top priority; rather, it should be something we might want to call “happiness,” or “well-being,” or the “good life.”
The radical case is that the pre-crisis economy crashed not because of preventable mistakes in banking, but because money had become the sole arbiter of value. So we should be energetic in seeking recovery, but not in a way that simply reproduces the structural flaws of the past.
By Robert Skidelsky
