Economic Rebalancing Acts

Jun 30, 2013 Robert Skidelsky

A phrase often heard, especially in leftist circles, is that the 2008 crisis has given us an opportunity to “rebalance the economy,” with production for profit yielding to production for “well-being.” But the world is currently moving overwhelmingly in the opposite direction, toward austerity and shrinking the size of the state.

LONDON – We all know how the global economic crisis began. The banks over-lent to the housing market. The subsequent burst of the housing bubble in the United States caused banks to fail, because banking had gone global and the big banks held one another’s bad loans. Banking failure caused a credit crunch. Lending dried up and economies started shrinking.

So governments bailed out banks and economies, producing a sovereign debt crisis. With everyone busy deleveraging, economies failed to recover. Much of the world, especially Europe, but also the slightly less sickly US, remains stuck in a semi-slump.

So how do we escape from this hole? The familiar debate is between austerity and stimulus. “Austerians” believe that only balancing government budgets and shrinking national debts will restore investor confidence. The Keynesians believe that without a large fiscal stimulus – a deliberate temporary increase of the deficit – the European and US economies will remain stuck in recession for years to come.

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Robert Skidelsky

Writing for PS since 2003
177 Commentaries

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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david b Jul 5, 2013

I'm not an economist, just an MD, with common sense, and what I see from most economists are continued efforts to preserve the status quo and a dysfunctional system. When Oil spiked, I knew we were going to have the worst recession I had even seen. People had had mortages, home equity loans, and credit card debt. a high proportion of income wennt to debt service, with little or no savings in the bank. A few job losses ment this debt couldn't be serviced, and it would spiral down. add the cost of gas to the equation. Boom. I wrote martin wolf multiple times and stated the solutions they are devising for the crisis will cause sovreign debt crisis. I said the recovery won'[t be good because3 it doesn't even address the causes, or provide the real solution. E#very solution has been about making sure the top 1% suffers the least bankers, bond holders, and making sure they could dump their private loss on the general public. Mr. skildelsky continues the false thinking of mr worlf and mr krugman who want to print to preserve the currrent system, keep asset prices inflated, and make sure the true value of these worthless debts are never realized. that defaults on loans that never should have been given don't happen. The public should never been burdened wih banking debt, which was done by the banking technocratic elite, hence the public should default on the debt imposed upon them by the 1% elites. the ecb should back all deposits in the banks, not bond buying programs, and with the saving saved and invested we can rebuild a deleveraged stable system. Nowhere is there talk about lowering the debt burden in this article. Because that helps the 95%, It's a shame that the best policies have never even been considered because the bankers and the 1% have the right to veto any policy that does not benefit themselves. stiglitz would call it rent seeking. Wof, krugman and this author don't step outside of the box and propose the best most effective solutions, they provide an alternative solution that benefits the most wealthy. is it any wonder why we aren't getting the recovery we should. well that is what happens when the best solutionsw are held hostage to the technocratic elite. the euopean nations would be better off defaulting, having their own currency, or the ecb save the euro by backing the depositors, nto the sovreigns. the wealthy woned the most bank debt, now they own the most sovreign debt. all the solutions are about making sure the wealthy avoid having to live with their economic mistakes
- James Edwards Jul 10, 2013
  
  While I agree that the banking debt should have never be burden with the public debt in part that the shareholders should taken a loss or "haircut" as a strings attached just to get the government to bail them out. This would have many of the CEOs being fired rather quickly as they were the contributory cause of the crisis.
  
  However when you have former Henry Paulson as Treasury Secretary making the untilateral decision with no strings attached to help the banking sector which Congress approved the second time around and then he decides not to fix the problem (that's in part GWB's term ended January).
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Jose araujo Jul 4, 2013

"We all know how the global economic crisis began. The banks over-lent to the housing market." Do we? How do you explain the low default rates on mortgages?

The fact is that banks didn't over-lent to the housing markets, Banks committed a fraud and forged contracts and then securized them with the complacency of risk agencies.

This is a myth that has to be fought, default rates and delinquency rates, and the level of families bad debt doesn't explain the crises, fraudulent behavior from the banks does. Yes we have doubled default and delinquency rates, but that's explained by unemployment not excess leverage.

In percentage of total debt, the doubling of defaults its problematic, yes, but far from catastrophic, not only default mortgages rates are traditionally low, but part of the debt still has value. In the end we are talking about increases of 1-2% of total debt.
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Gerald Silverberg Jul 3, 2013

If we internalized the ecological externalities through a Pigouvian tax on greenhouse gases ("carbon+leaking methane++ tax") and redistributed the proceeds progressively, then we could solve both problems simultaneously: income distribution (and banking) on the one hand, and retaining profit maximization as a social-welfare-consistent straightforward business principle on the other. Plus private investment would be automatically and innovatively redirected to environmentally friendly projects without the potential for abuse and misallocation of the current subsidy system (viz. biofuels, pv feedin tarifs).

Elementary, dear Skidelsky!

(James Hansen has been advocating a carbon tax redistributed as a per capita dividend for years.)
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Adam Harper Jul 2, 2013

Right here, the author makes his first and most fatal mistake. He begins in the middle of the story, instead of the beginning.

CRA.

Everything beyond this first sentence thereby stems from a wrong POV.
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Frank O'Callaghan Jul 2, 2013

There is an emerging theme in modern thought about economics. It is that economics itself is deficient.

Skidelsky is among the most thoughtful to approach the problem. It seems to me that economics is more about concealing the issues than illuminating them. Accounting our world in terms of money has missed many if not all of the core issues. The environmental issue is one of the salient neglected areas.

So what are the cores? Resources, work and wealth spring to mind first. As technology, science and organisation have multiplied productivity we need fewer people working to maintain the standard of living. This trend is likely to continue. But there are different standards of living and they are wildly divergent. We have a minority of wealthy, increasingly perplexed as to how to consume their ever expanding wealth, and a great majority struggling to maintain a limited and difficult existence.

Vast inequality, huge deprivation, opulent wealth wasted on a tiny few and an unsustainable system can only lead to the collapse of that system. The question must be; what replaces the system after it collapses? What would be the desirable characteristics of the replacement? Full employment is certainly to be desired and can be achieved at todays living standards with the working week cut by between one and three days. The social benefits of full employment would be a bonus.
What of wealth? Redistribution of the majority of the wealth of the tiny minority would have virtually no effect on the lifestyles of these people but huge effect on the lives of billions of others.
And what of sustainability? That may be expensive and can perhaps be afforded by implementing full employment and redistribution.
Wgat is the world waiting for?
- Jose araujo Jul 4, 2013
  
  I wholeheartedly agree with you, except on the collapse thinking, and that's because we have been evolving in wealth distribution, not regressing. 100 years ago it was many times worse, 500, 1000, 2000 years ago it was even worse.
  
  The system isn't collapsing, its evolving to be more fair, with some steps back now and then.
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Craig Hardt Jul 2, 2013

While your basic premise that there are more ways to measure "value" and economic success than GDP growth is true, there are too many variables and defining those measures of value is even more subjective than defining the measure of growth. I think the stickiness of GDP as a marker of an economy's health comes from the fact that it's a relatively apolitical measure of economic performance. Obviously, other factors must play a role in determining the overall health of a society, but we can't dismiss money as an outdated arbiter of value when it's the way we assign relative value to most things in society.
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Adam Harper Jul 1, 2013

The fiscal deficit has "expanded" two-fold in the last 4 years. This is truly the economic theory that won't die.
- Adrian Garcia Jul 3, 2013
  
  The budget deficit was about 1,400 billion in 2009 and is expected to be around 900 billion on 2013.
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Procyon Mukherjee Jul 1, 2013

Good to see that we have gone back to the basics and the veneer of monetary subterfuge that veiled us from the ignorance of its disastrous consequences ( if pursued singularly as a do-all and end all for every depression that exists in economies), has been removed. The loose monetary policy almost took the Blogoshere by a storm for one full year now, after QE2 (and followed by QE3) was announced, which suited well the politicians, who sat in quiet repose and the debate on tax reforms could be shelved for such a long time. It must return now and it would be interesting to see the moral posturing of all those whose intellectual monopoly is questionable when it comes to the understanding of this divide between what is good for majority versus what is good for a minuscule minority.
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