Recession II

If ‘economics’ originally meant something like ‘household management’, today it’s synonymous with the management of wealth and productivity of a country. Economics is a largely theoretical activity, and it’s beliefs (or models) are highly politicalised. Since WWII, three models have dominated in the western world:

Neo-classical

Neo-liberal

Keynes

Economy made up of

Individuals

Individuals

Classes

Individuals are

Selfish, rational

Selfish, but layered (unquestioning acceptance of tradition)

Not very rational

Policy recommendations

Free market or intervention

Free market

Active fiscal policy, income redistribution to the poor

Response to recession

Stimulus

Austerity

Stimulus

Politics

(Almost) any

Conservative (usually)

Social-democrat/liberal

Source: based on Ha-Joon Chang, 2014, Economics: The User’s Guide

In the ’thirty glorious years’ after WWII, neo-classical theory was dominant; Thatcherism and Reaganism, from the early 1980s onwards, were based on the neo-liberal model of von Hayek and the Chicago school. This emphasised a reduction in the size of the state, the belief that markets knew best and should be interfered with as little as possible, and that the state ought not to be a provider of services. It also believed in the ‘trickle-down’ theory of wealth generation and distribution. Neo-liberalism reaches its apotheosis in the simplistic ideology of the ’Tea-Party’ faction of American republicanism, and in ‘libertarianism’, the extreme exposition of laissez-faire economics. (Laissez-faire was, after an initial stutter, the early response of the UK government to the Irish Potato Famine; it advocated ‘do nothing’, the market will take care of things. While Ireland exported grain to England, the population starved, died or emigrated.) The neo-liberal response to recession is austerity.

In the UK, the implementation of neo-liberal beliefs lead to the sale of state assets (or privatisation) and deregulation of the banking industry. The NHS, for example, was then expected to develop ‘internal markets’; more recently, the trend has been to open services to competition between all providers (also known as ‘creeping privatisation’).

If growth in the thirty glorious years was unspectacular, it was mostly positive, so that Supermac could boast, rightly, that ‘you’ve never had it so good’. (He, Macmillan, was able to build, at a time when the UK was still raddled economically after WWII, some 300,000 new homes per year.) Neo-liberalisation saw a massive increase in the banking industry, and a similar decline in manufacturing industry. Banks began to look for ever more ingenious methods to make money, because they now could. Mortgages were sold, predominantly in the US, to people who were poor risks; but packaged and repackaged with ‘insurance’ and sold as ‘risk free’. In reality, these products were junk, and were the root cause of the Great Crash of 2008/09.

The Labour government in the UK organised a massive credit package for its banks, on the basis that they were ‘too big to fail’, and attempted some modest stimulus to try to stave off a recession. When the Coalition government took power in 2010, they proceeded on a policy of austerity; a reduction in state spending, particularly on ‘benefits’ but with no rise in income tax. The Conservative part of the Coalition blamed the Labour party for the crash initially; as well as them, so-called ‘benefit-scroungers’, a supposedly vast pool of the idle and work-shy were blamed, as well as ‘health-tourists’ and the obese.

Recessions in the past have been (usually) associated with rises in unemployment, rises in poverty, rises in suicide, and other health problems. The economic cycle generally recovers, with a return of growth and prosperity, though recovery when austerity policies have been invoked is, historically, the exception. Part of the theory of austerity is that, by ‘getting a grip on government finances’, confidence will return to investors more quickly.

Despite Mrs Thatcher’s assertion, there is an alternative. John Maynard Keynes was the leading economic thinker of the 20th century. In a recession, he advocated increased government investment on infrastructure projects, and support through social welfare for those affected. Increased government spending could be financed by borrowing; the quid pro quo was that in good times, the state should build up reserves, for the natural state of economies is cyclical. This was said to be one of the failures of the recent Labour governments; they borrowed in good times to pay for extensions of the welfare state, or ‘benefits’, when they should ideally have been saving.  The graphic says otherwise, and shows that the debt ‘problem’ began with the Great Crash and the bail-out of the banks. It’s possible that the increased borrowing under the Coalition actually relates to some Keynesian social welfare stimulus, no matter that this isn’t the general understanding.

Budget_2015__predictions_and_UK_news_-_Telegraph.jpg

Source: Daily Telegraph

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