Economists at Goldman Sachs are warning that the world may be tipping from recession into a "great stagnation", with real growth set to remain below 1% per annum for many years to come. (Daily Telegraph report here). Their research into downturns over the past 150 years apparently reveals that the probability of stagnation is always higher after financial crises, as opposed to more "conventional" recessions.
With the global economy, or at least that of the Western world, struggling for momentum three years after the financial crisis, Goldman's report seems less like a forecast than a factual description. And in any case, is anyone really surprised at their conclusion? Financial crises differ in their details but not in their essentials: people get carried away by good times and mortgage the future to the hilt. When things go pear-shaped and the bills start coming in, it takes forever to struggle out from under the accumulated debt.
This is not to belittle the Goldman team's work; it's always good when someone provides solid factual support for something that you strongly suspect to be true. However, the real question now is, what can be done about it?
One man who thinks he knows is the head of the House of Commons Treasury Committee, Tory MP Andrew Tyrie. On the eve of the party's annual shindig (sorry, conference), he's published a report that calls for....no, go on, have a guess. Right! He wants lower spending (he's especially upset about rising spending on overseas aid and environmental initiatives), together with lower taxes on business. (BBC story here). Other right-wing Tories, including John Redwood, have already come out in support of Tyrie's position.
Well, as the almost forgotten Tory-shagger of the 1960s, Mandy Rice-Davies, might put it, they would say that, wouldn't they? Yet it's highly doubtful that cutting taxes on businesses and the well-off would do much to give the economy a lift in current circumstances. There's no evidence that the corporate sector is being held back by a lack of cash, or even a lack of lending -- the banks' repeated assertion that slow credit growth is due to a lack of demand rather than over-cautious lending policies is almost certainly true. Rather, companies are refusing to invest because they are profoundly uncertain about the future, which is hardly surprising as policy-makers struggle to come up with coherent policies to deal with an unprecedented set of problems. It strains credulity to think that a lopping a couple of points off the corporate tax rate would be enough to unleash entrepreneurs' "animal spirits".
Still, as the Goldman report puts it, "a pick-up in the recovery is likely to depend on policy being able to restore confidence and putting in place reforms that can decisively jolt growth". As I've noted here before, even centuries ago monarchs knew that slow economic times were the best times to get the castle rebuilt or the fleet refurbished on the cheap. Something of that logic seems to lie behind President Obama's jobs initiative, which of course the Republicans are hell-bent on destroying. And here in the UK, there's widespread media support, across most of the political spectrum, for infrastructure spending as a way of giving the economy the needed "jolt". For example, today's Times (paywa££) offers up six megaprojects, including a Thames sewage tunnel, Oxford-Cambridge motorway and new London airport as possible means to that end, though unfortunately, the paper wants to finance these in the worst possible way, through private finance initiatives.
Messrs Tyrie and Redwood's statements today suggest that the Government would have a hard time getting any kind of infrastructure spending past its more right-wing supporters, even with the incentive of PFI profits. Stagnation, anyone?
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