I often ask myself why I continually get sucked into reading The Economist. I think it's because it's fascinating to watch a dedicated neoliberal rag trying to carry on as if their entire worldview had not been completely repudiated by recent events.
Just pretend it's a normal recession. Recovery should be right around the corner. Okay, the next corner. You know what it was? It was the earthquake in Japan. But now we're on course. Or now. How about now? I think they've quietly taken it down, but for quite some time they had a section entitled "America's Recovery"; it looks like they've changed it to the value-neutral "America's Economy."
What is glaringly obvious is that their neoliberal ideology will not allow them to understand what really happened and therefore, they have consistently underestimated the severity of the crisis and their policy advice is just the usual free market bag of tricks, with a little mild (and therefore, ineffectual) Keynesianism thrown in for good measure. They clearly have no idea what the nature of the crisis is and therefore, have no idea what we should be doing to recover.
We Are In a Balance-Sheet Recession
So okay, before I turn to The Economist, I should be clear on what I believe ails the economy. I subscribe to the widely-advocated notion that the present crisis is, at bottom, a debt crisis - or, to use the language of economist Richard Koo, we are in a balance-sheet recession (Keynes' preferred term was "liquidity trap"). If you're not already familiar with the general idea, see Richard Koo (here), Paul Krugman (here) or even conservative economist Kenneth Rogoff (here).
Given that the problem is, at bottom, a debt problem, there are three potential solutions:
1) Fiscal stimulus: As indebted homeowners spend less, the government has to step in to fill the gap or the economy rapidly contracts. By far the clearest explanation of why this is so is contained in this must-see 10-minute video by Richard Koo, the economist who coined the term balance sheet recession:
http://www.youtube.com/...
2) Debt restructuring: Debt reduction tackles the debt problem most directly. It is discussed briefly by Paul Krugman here. And Mike Konczal discusses specifics here and here.
3) Inflation: Inflation lessens the burden of the debt. There is quite a bit of controversy as to whether this could be effective in a "balance-sheet recession" (a/k/a liquidity trap). However, if inflation could, in fact, be successfully produced, it would lessen the burden of debt and therefore, inflation-producing policies are advocated by Paul Krugman, Kenneth Rogoff and Gre Mankiw.
The Economist on the Economy
Okay, here we go, The Economist on How to Avoid a Double-Dip:
ANYONE who managed to switch off during the summer holiday has faced a rude shock on his return. The world economy is in much worse shape than it was only a few weeks ago. . . . All this has led to a grim, and sudden, reassessment of growth prospects, especially in the rich world. Forecasts for 2012 have been slashed. The odds of a double-dip recession have risen sharply on both sides of the Atlantic.
"[A] grim, and sudden reassessment"? No one who believes the problem is a balance-sheet problem is surprised by any of this. But okay, he was on a beach somewhere and now he's had a "rude shock."
In 2008 the world economy was saved from depression by a bold and co-ordinated plan to shore up banks and counter the slump with fiscal and monetary stimulus. Today there is no boldness (the euro-zone crisis is the epitome of politicians doing too little too late). There is no co-ordination.
Alright, kind of vague, kind of obvious, but I'm with him here - should be bold, should be coordinated. Check and check.
And, to the extent that policies have a common theme, it is the wrong one: politicians across the rich world are taking too short-term a view of fiscal austerityâa bout of budget-cutting which will only increase the risk of another recession. It does not have to be this way. Echoing the spirit of 2008, policymakers could adopt a co-ordinated strategy to boost growth.
OMG, is there a Keynesian working at The Economist? But why didn't he get the fact that we're in the Lesser Depression until he returned from his summer vacation in 2011? Whatever. This is good. Short-term austerity is a no-good, lousy idea.
Two priorities stand out. First, a recalibration of fiscal and (in some places) monetary policy.
Recalibration? That's not promising. But it's okay, he's a Keynesian.
Second, a big push on supply-side reforms, from freeing trade to slashing red tape.
Huh? Supply-side? Keynes is about demand-side stimulus! And what the hell does free trade and deregulation have to do with the debt crisis? Seriously, I feel like if I asked a neoliberal what 2+2 is, he'd say "Deregulation."
Adjusting fiscal policy does not mean simply doling out more stimulus. The trick is to put in place more reforms now that will improve the public finances over time without slamming too hard on the brakes today. . . .
There's that recalibration. Keep spending even-ish (don't slam on the brakes) and make cuts down the road. But, of course, if this is a balance-sheet problem - which it is! - we need more than just not cutting, we need significant stimulus, debt restructuring and/or inflation.
But it could be fixed. The congressional supercommittee charged with finding ways to trim the ten-year deficit as part of the recent debt-ceiling deal could agree on a bolder package of entitlement cuts and new revenue, while Barack Obama and the Republicans could limit the short-term squeeze by extending the temporary payroll-tax cut and boosting spending on things like roads and school repairs.
So okay, some mild stimulus (payroll tax cut, roads and school repairs), but with bold entitlement cuts? It's better than no stimulus so, I'll take it, but our entitlements are already threadbare and inequality is at banana republic levels. Given that state of affairs, why is the solution to cut entitlements? How 'bout asking the rich to kick in? And here's an idea, how 'bout fixing health care? Throw a dart at a map and take that country's health care system - long-term debt problem solved.
Crisis-hit countries in the euro zone, under pressure from Germany and the bond markets, are now trying to shrink deficits as fast as possible. But a lesson from Italy and Spain is that bond markets worry as much about economies' ability to grow as the size of their deficit.
I actually kind of agree with this, but I would go even further - the evidence is that bond markets worry more about an economies' ability to grow.
That suggests putting priority on fiscal reforms that boost growth, such as raising the retirement age. And it argues against speed at all costs. Greece will benefit far more from a well-designed privatisation scheme than a fire-sale to raise cash.
What the what? How is raising the retirement age going to boost growth? How will privatization boost growth? What Greece really needs is to restructure its debt - banks are going to need to take a hair cut and the sooner it happens the better. See e.g. Argentina. The banks are the ones that made all the crappy loans -they and their bond holders can take part of the pain, instead of record profits and bonuses with all of the pain passed on to the public.
A serious growth agenda should also involve a joint commitment to productivity-boosting reforms. Measures such as cutting trade barriers or getting rid of excessive regulation (for which the Obama administration announced plans this week) are a good idea everywhere.
More free trade and deregulation? I'm sensing a pattern here.
Other priorities will differ by country. America needs to overhaul its worker-training programmes . . . .
Oh wow, the employment-is-a-structural-problem argument? The underlying assumption is that our high unemployment is structural - people don't have the right training. Who could believe this? Lehman went bankrupt, the market crashed and we started losing 750,000 jobs a month. We all watched it happen. That has nothing - nothing! - to do with worker training. Krugman argues against this at length (here's one, but he has lots more on his blog - search for structural unemployment or Casey Mulligan).
[W]hile many European countries should open up cosseted professions and relax planning rules. . . .
This is pretty vague. Opening up "cosseted professions" sounds like a way to pay workers less. Relaxing planning rules sounds like deregulation. What is clear is that none of it gets at the underlying debt problem.
Such a growth agenda won't transform the rich world's prospects. The recovery will still be fragile and sluggish. But it has a far better shot at avoiding both recession and stagnation than today's policy mix. It is high time to change course.
But this isn't a change of course! You're just recommending more of the same (with just enough stimulus to keep the market from crashing). To me, this speaks with stunning clarity to the bankruptcy of neoliberalism. They have no idea what's wrong with the economy and they have no idea how to fix it. You could get the same analysis from a Paul Ryan doll with a string in his back.
You'd think people who really do understand what's happening would have some influence. But my guess is that policy will look something like this, except it will be cut in half to appease the centrists.