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Title : How should countries react to a recession?
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How should countries react to a recession?

; I seem to be getting into the habit of putting disclaimers at the top of my posts: for the purposes of this discussion, I'm going to assume that a mild pace of economic growth is a good thing. The truth is it probably isn't... but that's a topic for another discussion.

I read this fairly long profile of Robert Reich and the film Inequality for All, of which he is the star. The basic thesis (which the Guardian heartily endorses) is that there is a causal link between the growing economic equality in Western countries in the last three or so decades, and the current difficulty many countries seem to be having in getting things moving in the aftermath of the Global Financial Crisis. This got me thinking about how countries have been reacting to economic conditions in the last five years, and how they could be doing better.

Certainly, it seems true that the austerity policies being heaped on in countries like Greece and the UK seem to be leading to a kind of death spiral rather than pulling these economies out of their funk. Governments cut spending, which effectively pulls money out of the economy. Consumers have less, spend less, resulting in lower taxation revenue and job losses, therefore increasing welfare payments. The deficit returns, leading to a further round of cuts, less spending, further job losses, et cetera. Not fun, and not effective.

The genesis of this seemingly irrational activity seems to be in the conflation of two issues. The first is sovereign debt caused by so-called structural deficits, and the second is the recession conditions that began in 2008. Structural deficits emerge when governments put themselves in a position when their long-term spending exceeds their long-term revenue. The way this seems to happen is that when economies are in an exceedingly strong position, rather than run a surplus and save that money for a raining day, they unleash an electorally-popular round of spending increases and tax cuts. While times are good, everything's fine. As soon as there's a bump in the road, revenue drops (and quite possibly spending increases too). Boom, structural deficit! Debt balloons, and soon enough there is a real problem.

Obviously, structural deficits are a Bad Thing, and need to be solved by an appropriate combination of tax increases and spending cuts. The problem is that such deficits become most apparent during times of recession; in other words, when the economy is most vulnerable and least able to cope with the medicine it needs. Tax increases during a boom economy can be easily absorbed. When it's teetering at the edge, though, those same increases might just send it over.

Here are some of my random thoughts on the current mess, bearing in mind that I'm not an economist:

• I agree that inequality is bad for economies, because it reduces the speed at which money circulates, causes asset bubbles, and does other bad stuff.
• Not having your own currency is bad (looking at you, PIGS). You don't get to print money, that limits your room to move.
• Whether or not you have your own currency, wealth taxes seem like a good idea. Use it or lose it! Part of the problem we're currently having is that there isn't enough capital to go around. This seems crazy, and is basically a failure of how currency works. There's all this productive capacity, people want to use it, but because of a lack of notional numbered stuff, it sits there idle and people go hungry. Weird. So, for the economy to get going again, more of this currency needs to be in circulation. In this sense, taxes on wealth (money that's not being spent) seem more effective than taxes on income (most of which would probably have been spent anyway). Wealth taxes would also improve the inequality situation, although there are other structural issues that would need to be addressed.
• This isn't politically palatable. But surely austerity isn't either?
• It occurred to me that globalisation is making everybody's job that much harder. No advanced country is genuinely self-sufficient any more, which means that good trading terms need to be maintained with creditors. Therefore, default and devaluation largely come off the table. Governments don't really have the power to shape their own economy through their notional control of their currency because doing so would damage too many trading relationships on which they depend.
• I'm not sure what happens to the existing mountains of foreign credit being held in countries like China. That stuff is toxic for everyone, including the Chinese. It would actually be good for all comers if it would just disappear. And yet, doing that constitutes default and everybody is scared of that.
• Another way to deal with this problem is to print money and devalue the currency, which is what countries are currently trying to do. But it doesn't work so well when everybody's doing it. In the meantime, printing money risks overshoot and run-away inflation.

I think I'm going to stock up on canned food.

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