Global nature of recession more apparent

 

WORLD VIEW:SCATTERED THROUGH the international policy websites, economic blogs and media discussion of the economic crisis there is a growing awareness of how deep and global it is, how it compares to previous crises and how ideological mindsets prevent adequate policy responses.

There has been much discussion of how this crisis compares to the Great Depression of the 1930s, too little empirical analysis of why so. That gap is addressed by two economic historians, Barry Eichengreen of Berkeley and Kevin O’Rourke of TCD in an article on the excellent Vox website (www.voxeu.org, referenced in the equally good www.irisheconomy.ie group blog written by Irish economists).

They show, using accessible graphs of the relevant statistics, that global industrial production has fallen just as fast since the April 2008 peak of this boom as it did in the nine months after June 1929. Global stock markets are falling even faster now than then. So is world trade.

Policy responses are also comparable, but they are more radical now than then. Thus average central bank discount rates have declined faster and from a lower base in 2008-9, while money supply has increased much more sharply. Fiscal deficits are also much more pronounced now. Eichengreen and O’Rourke conclude that “the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is, even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work”.

On the Irisheconomy blog, O’Rourke references another interesting piece of historical investigation, by Thomas Philippon and Ariel Rashev (www.nber.org), into relative wage rates and education levels in the financial sector compared to other parts of the US economy.

It shows there have been three distinct periods: from 1909-1933 the financial sector was 17 per cent better educated and 50 per cent better paid than others; that there was a dramatic shift from the 1930s to the 1980s, when it lost its human capital and high-wage status and another in the 1980s when neoliberal deregulation restored its levels of skill and pay almost exactly to those of the 1930s.

This experience is probably replicated elsewhere in the main centres of global capitalism, particularly those most exposed to the Anglo-American style financialisation of the recent period now coming so abruptly to a close. Ireland became one of its enthusiastic junior partners in the 1990s, making our experience comparable in some ways to that of much larger economies wrestling with similar problems of how to rescue the economy from the collapsing financial system with public money.

Taking up that challenge, Martin Wolf argued in the Financial Times on Wednesday that the greatest test facing US capitalism was how to manage the end of the golden age on Wall Street in such a way that the resolution of this crisis is not simply the harbinger of the next one. He makes use of Philippon and Reshaf’s work, and of an article in the Atlantic Monthly by Simon Johnson of the Sloan School of Management at MIT (see www.baselinescenario.com) and a former chief economist of the IMF.

Johnson argues that as a result of the organisational dominance and ideological hegemony established from the 1980s, the financial oligarchy exercises a hold over US capitalism similar to that of business elites in emerging economies like Russia. They have in common: torrid credit growth; large inflows of foreign capital; excessive leverage; bubbles in asset prices, especially property and, finally, asset-price collapses and financial catastrophe. Most important of all, such a powerful sector can dictate the terms of the solutions adopted by political leaderships, who end up in thrall to a sector incapable of recognising or absorbing the full extent of their losses.

As a result, ad hoc solutions and policy drift become simply, as Wolf puts it, “a non-transparent way of transferring taxpayer wealth to banks”. This is the main burden of Johnson’s, Paul Krugman’s and other economists’ critique of the Obama-Geithner approach. It uncannily resembles our Irish debate on the same subject.

Wolf notes that bankruptcy tends to be excluded from such policy scenarios, even though it is part of the classical capitalist repertoire. So, in the Irish debate, are compulsory debt-for-equity swaps or nationalisations. In his column here on Wednesday, Vincent Browne concluded that the Government opted for the Nama bank rescue scheme not because they wanted to bail out their developer friends but because “their minds are overawed by the might of the capitalist and financial systems. They are . . . prone to being persuaded that if the big boys are not looked after, we are all done for”. The Italian Marxist Antonio Gramsci called this ideological mindset “hegemony”, to describe the way in which powerful actors create false systems of belief that are widely accepted in society.

One positive intellectual product of this crisis is that it has encouraged the best economists to go more public with their debates on its causes, consequences and appropriate policy responses. This breaks them out of the disciplinary isolation characteristic of the neoliberal period, in which they contributed powerfully to the dominant ideology of efficient markets. State and market relations are changing profoundly, with the state’s role being re-evaluated more positively. As for the financial sector, Nouriel Roubini uses a good analogy: like Concorde, it must be “replaced by a somewhat slower but more stable engine that is less prone to very hard landings”.