World still awaits signs of sustained economic recovery

Jeerakathil is a resident of Saskatoon.

There is an uneasy feeling across the world that the global economy is stuck in neutral and may be even sliding into reverse.

Growth across the world is flat despite massive bailouts, deep interest rate cuts, extreme monetary stimulus and painful austerity measures. We are into the sixth year of a recession precipitated by the sub-prime mess and by historical standards the economy should be firing on all cylinders. While there are marginal improvements here and there, it is a step forward and a couple of steps backward.

In Canada, too, the story has a familiar ring. An American recovery and the anticipated export boom was supposed to be the talisman. However, sustained growth has remained elusive. Further, the plunge in oil prices is another ill wind that buffets the economy. The malaise is also spilling over to the once fast-growing BRIC (Brazil, Russia, India and China) nations, further magnifying economic woes.

Business cycles characterized by ups and downs in economic activity are an inherent feature of the capitalist system. These oscillations can stem from inventory adjustments, falling effective demand or a failure of the financial system. There is serious concern that the clock is running out and will plunge the world into another recession.

Countries have attempted to tackle economic declines employing different tools. Prior to the Great Depression beginning in 1929, with the laissez-faire philosophy in full swing, countries generally followed a policy of non-intervention in the economy, believing in the miraculous self-adjustment power of the market. Without any built-in stabilizers to boost incomes, people suffered from massive unemployment, lack of purchasing power and an overall decline in their standard of living.

With the Depression and the emergence of Keynesian economics, there was a rethinking about combating depressions. The major stride in thinking was the acceptance that the state has an important role in stimulating the economy through public spending and expanding demand. It was felt that state intervention was needed to lift the economy out of the underemployment equilibrium.

Government’s role in taming recessions took a beating in recent years. With massive sovereign debt loads and the emergence of right-wing thinking promoted by political ideologues and a few economists, governments took a back seat in managing the economy. The discredited dogma that “the government that governs least governs best” was uncritically accepted by many in positions of power.

In recent years, recessions have been attacked with two weapons — monetary policy and austerity. Monetary policy that involves expanding the money supply and keeping interest rates low has been tried by several central banks. However, the outcome has been dismal.

Money growth and very low interest rates have not translated into increased business investment. It also had the negative effect of increasing household debt. It seems we are facing a persistent “money trap” that John Maynard Keynes predicted almost 75 years ago.

Further, what is happening in Greece, Spain and other European countries confirms that a regime of austerity is also ineffective in stimulating growth.

So it looks like the experts are stumped. No one is sure how to proceed and the global economy limps ahead with tepid growth. Maybe it is time to expand government spending, although in the current political climate it may be heresy to advocate increased public spending.

Governments can increase spending to provide the needed infrastructure in most countries. With low or negative interest rates, it will not be calamitous if governments incur deficits to lift the economy out of the current stagnation.

Of course, a change in thinking is needed. Current policies are not working and it is time that policy-makers jettison discredited political nostrums and look for alternatives that could be the salvation to the present mess.