One thing we can be sure about measures being taken at present regarding monetary and fiscal policy. Had it been done a year ago, it would have added fuel to a fire that was raging out of control. Property prices were absorbing the credit of a system out of control, and credit as cheap as today would have extended all the bad practices that were happening that bit further. The crash would have been a little more almighty.
Still there is something very odd about a system that collapsed because of cheap money, fiscal laxity, and credit being pushed in these directions again as a way to get the system moving. The patient was a drug addict and the patient needs more drugs.
The answer is in the different equilibria in each economic phase. If we go back to the 1970s we had an inflationary period that indicated how much we were living beyond our means. It wasn't then so much the international competition as now, but that we were not as productive as the full employment that was then sought. Monetarists came along and spoke not of full employment (with a bit of slack) that we could achieve by government led imbalances, but a natural rate of unemployment when the rise in inflation was stopped, a rate of unemployment that rose rapidly while governments acted to reduce the inflation. Thatcher and Reagan both instituted an early 1980s recession that brought inflation down, after which there was a slow recovery.
When both Thatcher and Reagan in the late 1980s took some brakes off monetary policy via all kinds of liberated financial markets, we found an exponential rise in prices in the stock market and other financial service assets. Inflation as such was not the problem - liquidity behaved differently. The early 1990s saw a correction - the British economy was rammed into a wall on Black Monday - and there was the dotcom bubble bursting, when one growth sector had attracted ridiculous valuations. We remember these Internet companies, many offering bargains and nearly free or free items, being valued at more than some actual economies. They came down with a bump, but not everything did.
It was remarkable, really, that the likes of Enron failing did not have a bigger impact than it did, as it was a trail of false accounting with extensive and deep tentacles. Another date that lacked impact was September 11th 2001, when there was an immediate lowering of interest rates and infusion of credit into the financial system. Another failing was the short lived South East Asian bubble, though the Japanese never really recovered. There is a clue there why too, reflecting on our own (and the Japanese now) situation.
In this situation (beginning with the South East Asian crash) the supportive credit flows went East but they went into very productive and high growth manufacturing systems, either state led or state eased. Soon those financial flows as profit turned West, at first owned by the West, fuelling a debt by which we could purchase South East Asian goods. Inflation of itself did not return, partly because the credit bought cheap manufactured imports (and it exports money). Instead of inflation, we had a wealth effect, where some found themselves sitting on scarce property and land assets, though others had to engage in real debt to get a foothold on to purchasing these. In the end this one worldwide system grew into such imbalance that a chaotic system existed, one where a tipping point was arrived at - mathematically that's when a quantum variation can have a huge impact, rather like a ball that has arrived at the top of an isosceles triangle. The tiniest nudge sends it crashing.
The Japanese problem was that they had become a developed economy, and lost out to the cheapest of neighbours. Their vertically integrated economy did not cope, and people there did not spend on tick as we did in the West. The Japanese economy found a low equilibrium. Project spending wasn't matched by consumer responses, but the economy should be in good shape as the cheap economies rise (should the Chinese stop suppressing prices and access in its economy, and restricting labour markets).
Perhaps a ridiculous oil price was that more than a nudge to the present collapse: look what's happened since, with a lower oil price again, and that it makes no difference despite it being like a huge tax cut. Now repetitive behaviour is in firms shedding jobs, some on the expectation of hard times - and shedding jobs is one way to get them.
What is needed now is a new balance, a new equilibrium. It has to be based on worldwide terms of trade, in a distribution of goods and services produced, and financial services. We are at the flat end of curves, where drops in the interest rate have almost no effect. House prices have to hit bottom first, and much private credit paid off or cancelled. I disagree with the Liberal Democrats on tax cuts for the less well off. They may have some effect, but only some. What works is the government doing what we do not do. This means spending, and spending on value added projects. All the British government has done is brought forward some projects, and cut some taxes, to put them up (and cut the rise in government spending) in 2010 and especially 2011. It is not enough: it needs the state making a considerable and noticeable impact on projects, and may need some spending to shift private debt into public debt.
The role of the State has risen again, and must. In the eighties and nineties, privatising was a means to competition and efficiency, and also sorting out what was in demand and supply after years of State monopolies had lost the plot. Now, however, comes the time of establishing living standards again in public and private spheres: the rise again of the social service in key needy areas rather than everything via competition. No doubt there can be private ways of delivering some major services, but not if it means lack of accountability.
What is required is to find a new equilibrium that happens at a mass level. The later eighties saw a belief in corrective computers, but this was a mistake. We now know that the more integrated a system, and the faster it moves, the more likely it is to become chaotic. We can suppose that hunter-gatherer societies did not have booms and bust and that later agricultural systems with money had seasonal problems but longer term stability - good prices for years, lower prices for years. Industrial economies had short cycles and long cycles (the fifty year Kondratieff cycle was one) but they all found tipping points. The role of the State in economics is to counter the trend, and this includes checks to inflation and ought to include checks to rising stock prices too.
One wishes in the better times that they took early anti-inflationary and anti-credit measures. Now a good measure, to be ahead of any needed anti-credit house price measure, would be to build houses with many to rent. This would end the house price rise as a wealth effect in the good times, as well as provide value adding work now. We need new transport links: lots of bypasses and restore some lost railways. For example, a new rail service will go from Caergybi/ Holyhead to Caerdydd/ Cardiff, and may or may not stop at Wrecsam. Why not get that line that used to exist from Caerfyrddin/ Carmarthen up to Aberystwyth rebuilt, ruined by Beeching, and the line from Pwllheli to Bangor, so that a rail service could go down the coast and via Abertawe/ Swansea to Caerdydd/ Cardiff? Where I live they built the new straighter A16 on the old Grimsby to Louth rail stretch, and the same around Spalding, but at one time eastern Lincolnshire had a through railway. This cannot be restored, but some of these could be put back, and perhaps there could be a new idea of bus roads (with some imagination). Now is the time for such projects, of physical, economic demand.
The natural rate of unemployment is probably wrongly described: it was always a competitive terms of trade level anyway, but it may depend on achieving equilibrium and stability, and its lowering via activity is what is needed now.
Post a Comment