Recession IV

[W]hat experience and history teach is this—that people and governments never have learned anything from history, or acted on principles deduced from it.

—GFW Hegel

The Great Crash in the US in 1929 followed a period of boom, a bubble. The initial government response was retrenchment, often seen as the genesis of the Great Depression. Franklin Delano Roosevelt, after becoming president, inaugurated a ‘New Deal’, a form of stimulus encompassing both social welfare and infrastructure projects. During the depression, unemployment vastly increased; read John Steinbeck’s The Grapes of Wrath to get an idea of what things were like. With unemployment went poverty, expressed in the works of official government photographers:

Migrant mother.jpg

Dorothea Lange: Migrant Mother

What’s not so well known is that deaths from road traffic collisions fell markedly during this time; people simply didn’t have the money to afford petrol. Deaths from suicide rose until the beginning of the New Deal:

Suicide.jpg

Source for this and the other diagrams: Stuckler and Basu, 2013, The Body Economic

Economics is theoretical; the equivalent of a medical ‘double-blind, randomised, controlled’ trial doesn’t exist. Modern medicine no longer believes in the power of powdered unicorn horn or of gnats’ urine. However, there are examples where similar countries have pursued very different responses to recession, a sort of ‘natural experiment’.

Communist Russia collapsed in the early nineties. Russia, and many satellites, introduced ‘Shock Therapy’, a period of very rapid privatisation of state assets, though this is now more usually associated with corruption, nepotism, asset-stripping, billionaires and their yachts and football clubs. Shock Therapy lead to mass unemployment, poverty, a great rise in alcohol consumption, and the premature deaths of 10 million Russian men.

Russian mortality.jpg

Other countries, such as Poland and some central European states, privatised much more slowly, averting much of the Russian health and mortality disaster; and their financial recovery was quicker.

Russian and central euro recovery.jpg

In the 1990s, there was a financial crisis in SE Asia. Indonesia, S Korea, Thailand and Malaysia went ‘cap in hand’ to the World Bank, and the IMF (International Monetary Fund). If the Bank provides the finance, the IMF are the ‘enforcers’ or ‘heavies’ of the financial orthodoxy. At one time the IMF thought that health services were a ‘luxury’, and could therefore be sharply cut back. Malaysia didn’t accept the tenets of austerity, while the others did as they were told. Thailand once had an impressive disease control programme, including for HIV. What happened was inevitable:

IMG_20150317_0001 copy.jpg

To return to Europe. Finland and Sweden had major financial problems in the 1980s, with greatly increased unemployment. However, both countries had ‘Active Labour Market Programmes’, a system where the unemployed had access to a counsellor and to significant financial ‘benefits’. The counsellor supported the unemployed person both financially and, if you like, ‘emotionally’ by actively and deliberately helping and motivating the person to find alternative employment. Suicide, the common result of poverty and unemployment actually fell in Sweden:

Sweden suicide.jpg

Contrast this with what happens in the UK. The Coalition has ‘reformed’ the ‘benefits’ system so that, for example, if an applicant is as much as a nanosecond late for an appointment at the Job Centre, he or she will be ‘sanctioned’, a polite euphemism for benefit reduction. Quite how this will help to motivate and support people isn’t explained. And the Job Centre staff get ‘brownie points’ for sanctions. (‘Benefits’ covers pensions, for which people have paid, as well as welfare payments, for which people may well have paid; ‘benefits’ are not a form of charity, neither are those in need the ‘undeserving’ poor of the torrid Victorian imaginations. And ‘reform’ is a euphemism for ‘change’, often for the worse.)

The recent and continuing woes of some of the Euro countries—particularly the PIIGS, Portugal, Italy, (Republic of) Ireland, Greece and Spain are well known. In Spain, the youth unemployment rate is now above 50%, as it is in Greece; the young are the people who we look to in the future to maintain and grow the economies. In Greece, the ‘Troika’ of the European Commission (EC), the European Central Bank (ECB) and the IMF have produced an economy now 25% smaller than previously, with adult unemployment now 25%. And yet this economy is expected to repay the ‘bail-outs’ it has received. Pensions and health programmes have been severely reduced; health provision funding by an initial one-third, and more subsequently. (Remember, pension recipients have paid into their schemes for years.) HIV infections have risen alarmingly; pesticide spraying programmes, to control mosquitoes, have been abandoned, with the inevitable outbreaks of West Nile fever and of malaria. Not to forget, health provision, in the eyes of the IMF, is a ‘luxury’ good. Unsurprisingly, the Greeks recently voted for an anti-austerity government.

There’s another, rather unpleasant, side to the negotiations around the repayments of debts by southern European countries. It’s not where the repayments end up—it’s accepted that the bail-outs to, say, Greece, while they initially go there, they are almost immediately returned to the banks who made the loans in the first place. If you or I spend beyond our financial abilities, our creditors will chase us, and we may well be made bankrupt. Our creditors, who loaned us the funds, will have to accept a much reduced repayment. But if a sovereign country, such as Greece, is in the same position, it really seems that any funds made available as a ‘bail out’ go straight to the banks, those ‘masters of the universe’ who were so foolish to lend in the first place. The condition of the Greek people is of no concern; the poor are always with us. But then banks, as we’ve seen, are ’too big to fail’, and bankers too arrogant to admit their mistakes. For whose benefit are the ‘bail outs’, the bankers or the people?

Remember too, the concept that the Euro was developed as much as anything to stabilise the German export industry. And that, to maintain and grow their exports, loans to poorer countries would allow these to access German products. As ye sow, so shall ye reap.

The unpleasant feature is the hidden political ideology behind the ECB and, particularly, Germany. Southern European countries are Catholic, though Greece is Orthodox. Northern Europe is predominantly Protestant; there are stark echoes of Jean Calvin and the Protestant Work ethos. Frau Dr Merkel’s father was a Lutheran pastor. Think of the idea of the redemption of ‘sin’ in these ideologies. Vengeance is mine, I will repay. In the past, debtors could be taken into debt peonage by their creditors, with no real possibility of ever repaying their debts. But also, long ago, there was the idea of a sabbatical cancellation of (some) debts; the peons could return to their families.

Iceland is beyond the Euro zone, yet was as badly affected by the Great Crash. The three major banks, over-exposed to the collapsing sub-prime mortgage market folded. Following the collapses, the governments called on ‘the usual suspects’, who advised the usual treatment, austerity and repayment of bail-outs. After a while the population revolted, and a referendum on this was held; 93% of Icelanders voted to ditch austerity, and not to repay the debts of the private banks (at least not in any IMF timescale). A new government did as the people, the sovereign, wished, and refused to bail out the banks. (The UK and the Netherlands are fighting this in the courts.)  Compare what then happened in Iceland and Greece:

Iceland Greece recovery.jpg

As the lawyers say, Res Ipsa Loquitur.

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