Wishing on the economy

Fri, Dec 16, 2011, 00:00

WITH CHRISTMAS gifts likely to be less generous and not bought on easy credit this year, Irish households will feel less cheer than usual. Most families will toast the new year with a smaller glass of whiskey than they would like.

The dead weight of the economy hangs over this year’s festivities like a dark rain-laden cloud. So, as 2012 beckons, what sort of economic resolutions do we need to make to try and make next year better?

It is tempting to think that the first commitment should be for a return to healthy growth. Yet that would be a wasted wish, and unrealistic. There is still too much debt – consumer debt, bank debt and Government debt – too much of an economic hangover from the boom years, to make that possible, not just at home but in most of the rest of Europe and the United States too.

It may offer little comfort to know this, but the shortest bear market of the 20th century lasted 17 years. This suggests that we are in for a long haul, with at least a decade of weak growth to come. Real and prolonged growth cannot return until the debts are properly addressed, and most countries have done almost nothing to reduce them so far.

Indeed, if we continue the ‘quack’ treatments of the last few years, there is a danger of even greater pain ahead. The economists who keep telling us we only need to boost consumption and print money to get out of the slump have got it wrong. Such policies will only add to our debts. These ideas are like the slippers you got last year from your mother-in-law. Best forgotten.

So what should western societies promise to do in the next 12 months to better treat our economic ills?


The first thing we need to do is fire all the economists. Well, perhaps not all of them. But certainly Bernanke and Greenspan (retroactively) and all the others who got us into this mess. The ones who said markets should always be self-regulating, that housing bubbles are just a bit of froth, that too much debt doesn’t matter and that printing money will somehow solve our problems. They all need to go, along with the rating agency bosses, central bankers and the self-serving politicians who fed off their nonsense. We need some new economists in 2012, with new economic ideas. We need economists with principles, not just a greed-driven mantra.

Adam Smith believed that justice and fairness were essential elements of good economics, that social wellbeing should lie at the core. An overemphasis on short-term gains which fall mostly into the hands of the tiny minority was not the idea at all.


We also need to eradicate financial bubbles. In classical economics, there are two sorts of activity – the productive sort and the unproductive sort. While it sounds very nice superficially, unproductive activity is the type that creates wealth without any effort. It generates what economists call “unearned income”. It is the sort that comes from bankers gambling on currencies or derivatives. It results from speculation on the stock market or from buying and selling houses for short-term gain. It played a huge part in expanding the massive financial bubble we experienced, which so widened the gap between rich and poor. So our second resolution should be to stop this. We need a very small financial transaction tax, just big enough to make all those banking pips squeak.


We also need to create jobs and boost savings. One way to create jobs would be to do away with all income taxes, to stop taxing the hard work that is so essential to a healthy economy. Unfortunately, of course, other taxes would need to rise. Western governments can’t fill a hole just by digging less. So we should tax resource-use much more heavily, to better protect the world’s resources. We should tax the dead heavily too, those who no longer need their money. And also the rich, much more than the poor. Even Adam Smith said that.

We also need to boost savings, to ensure families focus on the future again and put money aside for that occasional rainy day. During the 1980s, western citizens were encouraged to spend, to drain their savings and live off debt. We need to reverse that tide, encourage saving, put household balance sheets back in order and live within our means. Of course, consumer spending will fall. But which is more important – continuously rising corporate earnings or a healthy, balanced society?


Given the massive quantity of government and bank debt in the euro zone, which will need to be refinanced in the next few years, the single currency will travel a rocky path. Abandoning it would be a grave error, however. Firstly, a lot of the negative sentiment about the euro in the media has been fuelled by British and US bankers and politicians wanting to divert attention from their own woes. The underlying foundations of the dollar and sterling are, in many ways, much weaker than they are for the euro. Secondly, leaving the euro would be suicidal. Any relaunched punt or drachma would immediately plummet in value, while all the country’s debts would remain in euro. It would actually increase the burden. So even if we need to raise interest rates, and bring yet more economic pain, the euro must be protected.


We need to focus on what’s important. For the last three decades, economic growth has been viewed as a purpose, not a choice. But growth is only really a happy outcome. It is not a means of measuring humanity’s progress. We seem to have forgotten that. There are a wide range of other ways we can all find purpose – through social, cultural, family, intellectual and spiritual pursuits – that do not depend on rising debt or drain the planet of its resources. In our hearts we all knew that the recent level of economic activity was just a bubble, a freak occurrence. We knew too, that it carried consequences. So we need to change the way we think, and what we value.

Although these changes will be hard, we can at least look forward to something better in the end if we take them – more balanced and sustainable societies, less dependent on borrowing, a world where resources are properly valued, where products last longer and the gap between rich and poor is much narrower than today.

If we start the treatment now, we can end 2012 in a much healthier state than 2011. We might even be able to afford a decent dram.

Graeme Maxton’s new book, The End of Progress: How Modern Economics Has Failed Us,is available now