As the world economy lurches toward recovery, we’ve learned four lessons. We’ve also failed to learn at least two.
Here they are:
KEYNES WAS RIGHT (i)
Free markets don’t always work. That was the key insight that British economist John Maynard Keynes drew from the depression of the ’30s. He argued that the automatic, self-adjusting model of the capitalist economy was false. Yet, as an optimistic liberal, he believed that government action could rectify the market’s faults.
This recession has been a test case of classic Keynesianism. Faced with the spectre of falling consumer demand, governments around the world pumped money into their national economies.
The amounts have been staggering. The United States federal government is expected to run a $1.6 trillion (U.S.) deficit this year.
But the strategy appears to have worked. China is going gangbusters. Japan is out of recession as are, probably, both Canada and the U.S.
Even more striking is the ideological turnaround. A year ago, no one was a Keynesian. Even Jack Layton’s New Democrats vowed to produce balanced budgets.
Now Conservative Prime Minister Stephen Harper has embraced deficit financing. Who could have predicted that?
KEYNES WAS RIGHT (II)
Keynes’ other great insight was the need for global economic coordination.
That’s why he spent so much effort lobbying for international institutions that could stabilize finance and trade.
In the end, the institutions that emerged were less robust than he suggested. Even so, they have performed credibly in this crisis.
The International Monetary Fund in particular has emerged as a star. For years, it was seen to be the villain of the world economy, as it bullied small, indebted nations into slashing social spending in order to appease international financiers.
But in this recession, the IMF has been in the forefront, setting the targets for global fiscal stimulus and then coaxing member states to meet those targets.
At the same time, the World Trade Organization – itself a popular villain just a few years ago – has managed to persuade most countries not to engage in self-defeating trade wars.
This hasn’t stopped protectionism. The U.S. uses loopholes in its free trade treaties to discriminate against Canadian firms. America and China are engaged in a tit-for-tat trade row over tires.
Still, no country has engaged in the kind of the wide-scale protectionism that characterized and deepened the Great Depression.
KEYNES WAS RIGHT (III)
While he’s remembered most for his views about the virtue of government spending, Keynes did spend much of his professional life fretting about deficits, inflation, currency fluctuations and international imbalances.
Just as the Depression of the ’30s revealed the fundamental weakness of imperial Britain, so this recession has highlighted the fragility of the U.S.
Its overall economy is in imbalance (Americans spend too much and save too little) as is its war-drained federal treasury.
This doesn’t mean the U.S. is a spent force. Even after Britain lost economic clout, it managed to keep its empire for another 30 years.
But the writing is on the wall. China and others are already questioning the role of the American dollar as the world’s premier currency.
And America’s massive and growing government debt – while necessary to fight the recession now – does promise future inflationary trouble down the road.
In that sense, the growing debate over whether recession or inflation poses the real danger to the American economy is moot.
As Keynes might have pointed out, the answer is both.
YES, CHINA IS IMPORTANT
Even before the recession, it was commonplace to talk of the 21st century as Asia’s. The slump has proven the clich?-mongers correct.
China, with its peculiar brand of faux communism and authoritarian capitalism weathered the recession better than most. Canada owes its bounce-back to China’s prodigious appetite for raw materials. America has financed itself for years on the savings generated by Chinese workers and farmers.
In both Africa and South America, China has become the major economic player.
This doesn’t mean Beijing is now the centre of the world. If history is any guide, the Chinese "miracle" will be as fraught with setbacks as the Japanese, German, Irish and Icelandic versions that preceded it.
But large upheavals usually produce qualitative change. The lasting effect from this recession is the rise of China.
Unlearned lesson I: Just because the economy’s better off it doesn’t mean you are
Blame the media for this one. We like simplicity. When the economy, as measured by gross domestic product, goes down, we produce panic headlines. When GDP goes back up – as it appears to be doing now in Canada – we drop the story and get back to covering celebrities.
In fact, many recoveries are uneven. The economy, as measured in terms of goods and services produced, can be growing even as unemployment continues to rise.
Economists, with their love of paradoxical euphemisms call this jobless recovery.
So far, it looks like that’s where Canada and the U.S. are heading. The stock market is working its way upward. In Canada, the housing market remains strong. In fact, it never crashed.
But the job market – otherwise known as what most people do to earn a living – is expected to stay weak.
Even the federal government predicts that the official unemployment rate won’t fall below 9 per cent next year.
Remember: After the far more benign recession of the ’80s, it took seven years for employment to return to pre-slump levels.
Unlearned lesson II: Don’t just fiddle with financial markets. Fix them
Paul Krugman, the Princeton economist who writes in the New York Times argues that the economies of the West today are too biased toward the financial sector. He’s right. He’s also following an intellectual tradition that includes early 20th-century thinkers like Thorstein Veblen (who differentiated between businessmen engaged in the shadow play of money and those, like engineers, who did "real" things), as well as Marxists such as Rosa Luxemburg, who saw global finance as a source of fundamental instability.
Finance in itself is not illegitimate. Any society requires some kind of mechanism to transform savings into productive activities.
But finance in our day is impossibly opaque – to the extent that, in a Veblenesque way, it does siphon off resources and, in a Marxist way, does threaten the real economy.
The true Ponzi scam artists are not people like convicted New York fraudster Bernie Madoff. Rather they are those who thought up and sold the perfectly legal but ultimately dodgy financial instruments known as collateralized debt obligations that then blew apart the international banking system.
Yet, as Krugman points out, we encourage this kind of behaviour by paying financiers far more handsomely than those who do more useful things.
None of this is being addressed in a fundamental way. International organizations like the so-called G20 play around the edges. London and New York continue to vie with one another to be the world centre of finance Ponziism. Toronto boosters would have this city join that league.
At best, the world of international finance is complex. In its current form, it’s dangerous. We should have learned that lesson, too. We haven’t.
Thomas Walkom’s column appears Wednesday and Saturday.