The rise in retail sales over the Christmas period had some optimists, those still clutching straws, believing that maybe things are not going to be that bad after all. They’re going to be disappointed. In the months to come, the December quarter will be seen as having been a ‘last hurrah’. A last gasp before going under.
And 2012? So far it’s had a very odd feel about it. Nothing has happened, nothing is happening. It’s as if all crises were put on hold over Christmas and they’ve not resurfaced yet. Is this the lull before the storm? Very possibly.
But this has to be the year when the severity of the austerity programme starts to hit home. The bill is on the table and it’s going to have to be paid. The price? Unemployment. It’s going to rise steeply. More and more businesses are going to give up the unequal struggle. Inequality is going to get worse. For the first time in decades there’s going to be severe hardship in Britain, not only for those on low incomes, but for scores of middle class people who have always somehow managed to dodge the effects of ‘bad times’. This time there’s going to be no escape.
The real worry is that the coalition have fixated on austerity. They seem blind to the fact that austerity alone will not fix the problem. In fact their fixation has made things a whole lot worse. Today, we are told that income levels will not return to 2008 levels for another eight years.
Joseph Stiglitz believes that austerity policies are driven by ‘a combination of ideology and vested interests’ and ‘seem reflect a commitment not to grow’. In the case of Britain it may be less of a commitment not to grow and more of not having a clue what to do.
FEATURED ARTICLE by Joseph Stiglitz
The year 2011 will be remembered as the time when many ever-optimistic US citizens began to give up hope. President John F Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, those in the US are beginning to see not only that those with taller masts have been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.
In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realising the “American Dream”. Now those dreams, too, are receding. By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment cheques had run out. Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labour force – meant little to the 50-year-olds with little hope of ever holding a job again.
Indeed, middle-aged people who thought that they would be unemployed for a few months have now realised that they were, in fact, forcibly retired. Young people who graduated from college with tens of thousands of dollars of education debt cannot find any jobs at all. People who moved in with friends and relatives have become homeless. Houses bought during the property boom are still on the market or have been sold at a loss. More than seven million families in the US have lost their homes.
The dark underbelly of the previous decade’s financial boom has been fully exposed in Europe as well. Dithering over Greece and key national governments’ devotion to austerity began to exact a heavy toll last year. Contagion spread to Italy. Spain’s unemployment, which had been near 20 per cent since the beginning of the recession, crept even higher. The unthinkable – the end of the euro – began to seem like a real possibility.
This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to six or seven per cent (the pre-crisis level of four or five per cent is too much to hope for).
But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. On the contrary, austerity will only exacerbate the economic slowdown. Without growth, the debt crisis – and the euro crisis – will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue.
Moreover, the major emerging-market countries, which steered successfully through the storms of 2008 and 2009, may not cope as well with the problems looming on the horizon. Brazil’s growth has already stalled, fuelling anxiety among its neighbours in Latin America.
Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. For example, high unemployment has depressed wages and increased poverty.
The good news is that addressing these long-term problems would actually help to solve the short-term problems. Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth and job creation. More progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand. Higher taxes at the top could generate revenues to finance needed public investment, and to provide some social protection for those at the bottom, including the unemployed.
Even without widening the fiscal deficit, such “balanced budget” increases in taxes and spending would lower unemployment and increase output. The worry, however, is that politics and ideology on both sides of the Atlantic, but especially in the US, will not allow any of this to occur. Fixation on the deficit will induce cutbacks in social spending, worsening inequality. Likewise, the enduring attraction of supply-side economics, despite all of the evidence against it (especially in a period in which there is high unemployment), will prevent raising taxes at the top.
Even before the crisis, there was a rebalancing of economic power – in fact, a correction of a 200-year historical anomaly, in which Asia’s share of global GDP fell from nearly 50 per cent to, at one point, below ten per cent. The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by a combination of ideology and vested interests, almost seem to reflect a commitment not to grow.
As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions. With all of the problems confronting the global economy, we will be lucky if these strains do not begin to manifest themselves within the next twelve months.
Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.