We seem to be in the midst of something that’s been recurring every few months in this post-Global Financial Crisis world: financial markets and financial commentators around the world are sniffing the wind and asking themselves whether the sky is going to fall again. Last time it was around the Greek bailout; this one seems to be triggered by jitters in the US economy and the focussing of attention on Jackson Hole, Wyoming, where central bankers meet each year.
It will probably come to nothing — or at least nothing dramatic. But there does seem to be a slowly rising tide of anxiety, as the natural resilience of the market economy continues to fail to spring to life.
The economists I tend to read regularly — Paul Krugman, Joseph Stiglitz, Brad DeLong, Nouriel Roubini, Martin Wolf — are pessimistic, but then they always have been. That’s the ‘camp’ they (and, I guess, I) are in. Maybe they’re wrong: maybe the private sectors of the world will spontaneously recover, as more neoclassical writers seem to think, and the main threats are overly-indebted governments and suddenly-reemergent inflation (Krugman & co see deflation as a more evident threat).
We should hope the optimists are right, but we would be unwise to discount the pessimists. Events so far have done more to bear out their fears than their opponents’ hopes.
But amongst the pessimists (realists?), there are also two views — or rather, most of the pessimists feel that things could still go either of two ways. The first is a ‘double-dip recession’, where rather than recovering properly the economy sinks back into decline again, possibly worse than last time. That’s the more commonly discussed prospect, and the one that is haunting Jackson Hole this week.
The second is a ‘lost decade’ (or longer). The model here is Japan, which after decades as a ‘miracle economy’ suddenly ground to a halt in the early 1990s after a financial crisis, to be plagued by years of sluggish growth, and deflation or virtually-nil inflation, from which it has still not completely recovered. Krugman, in particular, has carefully studied the Japanese experience and the range of largely-unsuccessful efforts by the government there to lift their economy out of the mire.
To me, the ‘lost decade’ is in many ways the more worrying scenario. A ‘double-dip’ would be terrible, but it would also galvanise policy-makers and impel action. With a ‘lost decade’ we might be like the proverbial frog in the gradually-heating pot: adjusting our expectations to the changing environment and ‘defining prosperity down’ as Krugman puts it. We can already see indications of this both in US and New Zealand as higher levels of unemployment get accepted as normal by the government and media alike. (A kind of structural and social divide between the ‘kind of’ people who get hit by unemployment and the ‘kind of’ people who decide the news agenda helps with this.)
So what would this mean for New Zealand, and how would it affect the agenda for progressive politics? It is possible that, even if Europe and the US were afflicted by a ‘lost decade’, Australia and New Zealand might escape by hitching our wagon to China and other Asian economies. But this is a precarious hope, and, in any case, it is beginning to look as if China will not be as immune to the global doldrums as had earlier been thought.
For progressives in particular, the implications are dispiriting. The Key-English-Hide government has miraculously solved our Crown debt predicament (with enough left over for lashings of tax cuts for everybody, and an extra scoop for the very rich) through two feats of accounting wizardry. Firstly, they have taken a ‘holiday’ from saving for our future through the New Zealand Superannuation Fund. And secondly, they have assumed downwards the amount of money that future governments will spend in future Budgets — which means the projected growth-path for health, education and other public services over the next decade looks very meagre indeed.
In both cases, Key-English-Hide were robbing from our future in order to make our present look rosier. But the trick for the next progressive government will be to undo these shortsighted decisions — restore contributions to the Super Fund and restore real per capita growth in public services — without causing Crown debt to blow out in the process. That may not be too hard if economic growth exceeds Treasury’s current forecasts, but under a ‘lost decade’ scenario it might instead come in lower than Treasury thinks.
Of course, the first priority for a progressive government in that situation would be to do everything it can to strengthen our economic performance, while taking active steps to assist the unemployed. But if the whole world has gone the way of Japan, then there will be a limit to how much domestic economic policy can do.
We would probably need to look at options for boosting revenue, but we would need to move cautiously. The international tide would likely be in favour of public austerity, with most other countries facing much worse public debt situations than ours. (Thanks, Michael Cullen!) But that could foster a climate of antipathy towards new revenue and spending measures both amongst supposedly ‘informed’ people at home and amongst ratings agencies abroad — even when those measures balanced each other out fully.
It’s not a pretty picture, but nor is it an inescapable one. Leading progressive economists are convinced that determined action by governments and central banks can avoid a ‘lost decade’ — if the will is there. But that will not be decided in New Zealand. Our progressive movement will need to hope for the best, prepare for the worst, and send our best wishes and support to our counterparts in the leading economies.