The fog of uncertainty in a manic economic depression

In an interview published on 30 August last year, UK Chancellor of the Exchequer (Finance Minister) Alistair Darling  revealed his view that the economic downturn was “arguably the worst” in 60 years. He was quickly dumped on for talking down the economy and the underlying analysis was gleefully trashed. Grim prospects, The Economist acknowledged, “But the worst outlook in six decades? Nonsense.” Perhaps Darling does not seem so nonsensical today, now that the economic depression is turning manic.

Six months on, and the record breaking bad news, bail-outs, lowest ever interest rates and decisions to print money (polite society calls it “quantitative easing”) are piling up. Reporters, commentators, wire services and politicians – especially the ones in office – seem to get more hyper-active by the day. And the sum of what we know is that we don’t how serious the recession, depression, down-in-the-slump is going to be.

We know among other things that it includes the worst corporate results ever in the US from AIG, which insures the activities of at least 100,000 companies worlwide, and the UK’s worst ever from Royal Bank of Scotland, which was quite recently the world’s biggest commercial bank. December saw a 40 per cent year-on-year decline in machine tool orders in Germany, which is particularly telling because machine tools are things with which you make things. It is the heart going out of manufacturing. Japanese exports were down 46 per cent in January compared to one year before, while car output fell by 41 per cent. In the US, General Motors’ February car sales were over 50 per cent down from the level one year before and Ford’s fell by 48 per cent.

China is thought by many commentators to be in a stronger position than the US and Europe because its savings are proportionately higher. China’s January export figures were 17 per cent lower than a year before. While share prices have plummeted in every other stock market, they climbed in China from November to February, and bank lending actually increased – but most observers agree that millions of workers have lost their jobs and about half of its toy-making companies have shut down. China’s production figures in January have been withheld by the National Bureau of Statistics because the Chinese New Year resulted in an extremely short working month and the statistics would therefore be artificially low and liable to misinterpretation. And misinterpretation could lead to a dangerously counter-productive response. Even China is vulnerable.

And then there are the numbers. They are crazed as well. 585 billion dollars here (China’s fiscal stimulus, with more maybe coming), 1 trillion dollars there (US target for increased lending) on top of 787 billion dollars (the US stimulus package), and what seem like daily announcements of billions of pounds, euros and dollars worth of bail-out, stimulus, bank insurance, losses and write-offs.

And still nobody knows how serious it will be. Which also means, of course, that nobody really know what will work – whether anything will work, in fact. At least since the collapse of Lehman Brothers  bank in mid-September, having posted losses of 3.9 billion dollars – heaven knows why was anyone worried about that – hardly a serious sum, these days – since that 15 September landmark day, there has naturally and rightly been an intense debate about policies for recovery. Understandably trying to learn from the past, some of it has taken the form of an argument about how the US recovered from the 1930s economic depression. Was it the New Deal that did it, President Roosevelt’s interventionist policy, or did that fail and was it World War II that gave the stimulus for recovery?

Part of the problem here is that lessons of history are never as clear as teacher wants. I was brought up to beware of sentences that begin, ‘History teaches us that…’ I was taught that these words usually are forerunners for some pretty dubious history and rickety logic. When one group of politicians – Obama and Brown and their supporters, for example – draw on Roosevelt for inspiration, we can expect another group – the like-minded with McCain and Cameron, for example – to argue that the New Deal at best produced a bit of an upturn till 1936, but then nothing improved until the war started and generated lots of new jobs. And then we can expect the economists to kick in and argue the toss over whether Roosevelt actually turned away from the true New Deal in 1936, which explains why improvement ground to a halt and the 50 per cent reduction in unemployment achieved by then was not followed through. And then we’re immediately into discussing whether Roosevelt’s predecessor Hoover was as catatonic as he has been made out to be and whether there is a case for Andrew Mellon’s preference at any early stage for letting the banking crisis play itself out, not to mention whether the protectionist Smoot-Hawley Act was to blame, or earlier protectionism, or not protectionism at all.

I’m no economist but for what it’s worth, I think the pro-interventionists win this debate by a country mile; back in the day, Milton Friedman made his reputation by co-authoring a devastating study of the Fed’s failure to intervene and there was a solid left-right consensus of professional economists in favour of one form or another of the interventionist interpretation.

But really, folks, how do we know? You cannot run the counter-factual in real conditions. By which I mean that, even once you have sorted fact from chaff to identify what really was done and what happened when, you cannot know actually what would have happened if it had been done differently in this, that or a combination of many different respects.

If the UK’s economic depression ends this year, will that prove the Brown government’s fiscal stimulus worked? Don’t expect the Conservatives to accept that . But if the economic depression ends next year or the year after, will that show Labour recovery policies failed? Do expect Labour to argue that they cut short the worst economic depression in 60 years. They would say that, wouldn’t they, but how can we know if they are wrong or right? 

Perhaps an early end to the depression in the UK will be nothing to do with British government policies. Maybe it will be a side effect of the Chinese fiscal stimulus working while the US one fails.

Everybody wants to end the recession/depression sooner than it would otherwise  end, but we can only know whether the government succeeds or fails on the basis of knowing when the recession would have ended if left to itself or treated with different policies. And this we do not know because, see above, we know the recession is serious but we don’t know how serious.

Whatever anybody says, at this point nobody has any real idea what policies will work, when, and how well if at all. And governments are basically running out of options: they have done what they can do and they now have the choice of folding their arms and telling everybody to be calm while the remedies work, or continuing to flap their arms and crank out more billions in guarantees and stimuli and so forth.

Excuse me for being simple-minded but I still think the way out of the crisis is by investing in new activities for which there is potentially a huge market. Going green still seems to me to be the best economic way forward as well as meeting the need to make drastic reductions in our emissions of carbon dioxide and other global warming gases.

Last word amid the fog of uncertainty: the largest green investment programme in the world at the moment is in China. Interesting.

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