Friday, April 24, 2009

Economic crisis - an end in sight?

Many people seem to think that the world economy, after a bad period, may have put the worst behind it. The cover of this week's Economist Magazine vividly illustrates the alternative opinion.

The economist warns that optimism contains important traps. One is a mistaken belief that things are getting better.

"The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths."

We've had our beefs with The Economist in the past, but this seems like a sensible thing to say. It does, of course, have profound implications for the tax justice agenda, especially with respect to the crucial ingredient for change: political will.

Martin Wolf in the Financial Times has some interesting perspectives. While GDP data shows countries such as Germany and Japan performing even worse than the big financial-sector economies, notably Britain and the US, this masks something else: the fiscal side of things - government revenues and spending - are affected very, very much worse in the Anglo-Saxon economies, partly because of their over-reliance on finance.

"The shift in this balance in the UK’s private sector between 2007 and 2010 is forecast (implicitly) by the IMF at 9.6 per cent of GDP (from minus 0.2 per cent to plus 9.4 per cent). The swing in Germany, in contrast, is just 0.6 percentage points. When the private sector shrinks its spending relative to incomes, either the current account or the fiscal balance must shift in equal and opposite directions. The current account deficit always changes relatively slowly. It is hard to change the economy’s structure quickly. So it has been the fiscal position that has deteriorated massively.

Thus, in the crisis-hit countries themselves, the consequence of the private sector cutback has been the fiscal deterioration."

Economic prediction, at least in the short and medium term, is a mug's game. But this blogger's gut feeling is: don't bring out the champagne yet.


Blogger Physiocrat said...

This bandying-about of aggregate figures ought to stop. It is meaningless and leads to wrong actions.

First and foremost, they are unconnected to what really matters to people, which is their feeling of well-being.

Second, and worse, "growth" means more noise, more stress, more anxiety, more pollution, more congestion, more rubbish, and faster depletion of limited resources.

Third, the figures only measure what can be measured so what cannot be measured is ignored, such as the meal cooked and eaten at home from home-grown ingredients. Conversely, eating pre-cooked meals with lots of wrapping is good for this "growth".

Fourth, the whole growth engine has been constructed on an endless increase in land values, leading to reckless lending, unaffordable housing, and now that the project has gone belly-up, policies have been directed primarily to pumping up the house price bubble, with newspapers like the Mail cheering when the bubble shows signs of reflating.

Fifth, growth has no association with distribution of wealth and experience shows that it simply widens the gap between rich and poor.

11:22 pm  
Anonymous Thom harvick said...

Well articulated. I have to agree keep the champagne in the cellar. One thing I have noticed is the media invoking a sense of recovery to their audience. Yet when asked "home sales are up last month, do you think that those numbers are slightly inflated, and also have tax returns helped homes sale? What about future forecloses dropping prices? They don't have those answers, and yet seem elementary in pose.
gotta love "report this cause I said so" attitude.
Thom Harvick

2:54 pm  

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