This year, next year: worldwide economic recession
The specter of recession is haunting the world’s major economies. Whilst there is an intellectual argument about who is to blame and the correct policy packages, democratically elected leaders feel the need to take action. In the United States financial market bailouts are the order of the day. The UK government under Gordon Brown has developed a policy towards the shaken banking sector that aims at restoring liquidity and boosting economic activity. In France, the President, Nicolas Sarkozy has authorized a huge package of measures to stimulate the economy. A government-sponsored investment package of Euro 26 billion is to be spent on boosting investment. Keynesian policy, admired by the left and attacked by the right, is now back in fashion. Recessions, because of the high degree of “roundaboutness" in economic life quickly spread from one sector to another and lead to a drop in growth, a rise in unemployment and a shake out of industries and firms that are not meeting consumer wants in a cost-effective way. They also spread quickly from one country to another. Why this huge change in attitude towards government intervention in developed market economies?
There are a number of ways of answering this question. First, it is clear that if banks collapse or if they are strapped for liquid resources then credit contracts and if credit contracts then purchases contacts and so it goes on. Second, even although there may be doubts over the initial source of the problem (some argue an inadequate supervision by the monetary authorities, others argue that the very existence of monetary authorizes suggests an in appropriate expansion of the money supply anyway) democratically elected governments find it difficult to resist citizen pressure that something should be done, even if that “something" builds up a problem of government indebtedness that future governments are likely to find restrictive. No economic policy idea is ever truly dead and policies are or tend to be historically contingent. For thirty years Keynesianism was out but now a mixture of monetary policy (dramatically-reduced interest rates) and fiscal policy (tax reductions of one sort or another or boosting government expenditure) are back, in the United States, in the United Kingdom, and in Western Europe generally. Whilst the stricken giants of the US automobile industry, for example, need either to collapse or dramatically shrink and change, no government is going to be able to stand by and watch the sector disintegrate in a messy way. Some degree of economic management of decline is inevitable.
The impact of the recession is, because of the interconnection between and amongst national economies, not simply in the United States but world-wide. The United States is expected to experience a very deep recession and maybe even a very long period of no growth. This could be the worst experience of economic malaise in the last fifty years. It will pre-occupy, as it has already done so in terms of the pre-inauguration experience, the Obama presidency. He is already deeply committed to a sustained package aimed at stimulating the US economy. The domestic agenda will be more significant for him than the international agenda immediately upon taking office and for some time afterwards. His plans are bold. The experience of recession in France and in Western Europe as a whole is, if we can use Sarkozy’s proposed package as a measure, predicted to be the worst downturn on twenty years. Even if China and India are seen as “engines of growth" in Asia, their exports are linked to expansion in the markets in developed market economies (“western markets"). China’s economy is skewed. Domestic production is not evenly balanced with export production and if exports collapse, the economic impact is huge. Chinese growth will slow but it will not be eliminated. Economies dominated by natural resources such as Russia, are already experiencing significant falls in demand and this is likely to continue. It is bad news all round.
Growth in the world economy is inevitably interlinked. There have been some efforts of economic coordination internationally within Europe and between Europe and the United States. In recognition of their economic inter-dependence, China, South Korea and Japan have been in communication in an economic summit at Prime Ministerial level. China is using some of its surplus to stimulate its economy (domestic expansion in China creates opportunities for imports from Japan, especially of goods for the new Chinese middle-class). The present stage of “economic globalization" is not under question; markets vary from period to period, despite the recession, unless countries opt for strong protectionist measures or consolidate strong regional alliances that benefit a defined group of countries on a regional basis. Trade is always and everywhere a political issue, more so in bad times than in good. Critics of the current trends in policy should reflect on the possible alternatives. The choice politically is not do this (expansionist economics packages) or do nothing (belief in the self-regulating nature of economic life). It is do this (expansionist package) or do something worse such as reverting to deep and sustained economic protectionism.