Friday, January 20, 2012

Yet more on why austerity isn't working

Today we can add to the roll call of Damascus-road conversions (following S&P's last week). This time it is none other than Christine Lagarde of the IMF - obviously helped by her welter of  economists. When she was French economics minister, she championed austerity policies, arguing that only by driving down deficits would room be made for growth to return. Such Hayekian mumbo-jumbo seems to have been cut down by the - dare I say it - Keynsian good sense of the IMF.

At the heart of the warning issued by the IMF, World Trade Organisation, World Bank, World Health Organisation and the Organisation For Economic Cooperation and Development plus a cluster of development banks from across the continents, is a simple assertion: austerity by itself doesn't work.

Faced with decelerating growth across the globe, these representatives of the nearest thing we have to an economic establishment, argue that governments need to manage deficit reduction only in a way that promotes growth and employment. They further argue that policy responses to the mounting crisis have to focus on reducing inequality through labour market reforms and the use of the tax system to encourage job creation.

Even more surprising is that they agree with the International Labour Organisation in its assertion that governments need to invest in skills training, education of young people and social safety nets to cushion labour market transitions. The elimination of inequality is essential for generating stable growth in the world's economies.

Well, let's do that then. Messers Cameron and Osbourne are always banging on about how the OECD, IMF, WTO et al are key audiences for their policies. Well, they are listening and seem to find the UK policy path somewhat wanting.

I must say that I find it gratifying that the great Keynsian institutions - IMF and World Bank - are bringing their thinking more into line with their founder. But I am much more gratified to hear the biblical echoes in all this.

There is a strong strand in scripture that talks about equality being a goal of social and economic policy (if use of that language is not too anachronistic). We see it not only Paul's argument in 2 Corinthians 8:1-15, but the whole concept of the Jubilee, which stood at the heart of Old Testament economic thinking, Jesus' announcement in Nazareth and the early church's focus on economic sharing so that no one within the community was in need.

It is interesting that Steve Keen, an Australian economics academic, has called for a jubilee as a key tool in stabilising the world's economy. You only have to look at figures out this week showing that UK debt is currently running at 400% of GDP - that is, we owe four times the nation's total output. Most of this financial sector debt; another chunk is corporate debt; quite a bit is personal debt (mortgages, credit cards and the like); and a vanishingly small proportion is government debt.Who ever owes it, the maths indicates that we will never pay it off unless we have at least another decade of austerity, zero growth, rising unemployment and plummeting living standards.

Is there any other out of this mess than considering what a debt write-off would mean, how it would work and what shape it would leave the world's financial system in? Keen acknowledges that this is not straight-forward but since every other suggestion seems to be steering us closer to the economic rocks, someone should be crunching the numbers.

Of course, the question of living standards and perpetual growth is a question the Bible has a good deal to say about as well. But that's for another day.

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