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What is a recession? Is it good or bad? Commentators say “we are heading towards global recession” rather like a ship heading into a storm. A storm is not man-made, it's an act of Nature. What about recession? Do we create it, or is it a plague Heaven-sent to punish the ungodly? And can we somehow escape recession, or is it inevitable?
Here are some quick answers: First let's look at the apparently crazy proposition that a recession can be good. Let's say you are feeling a little over-stretched financially. You're carrying a mortgage on an over-priced home; you weren't being unwise – when all homes are over-priced you don't have much option. You're also paying off a car and a boat. You need the car – public transport just doesn't work for you and your family. And the boat – well you live near a large lake and the boat is a lot of fun in summer. And it's a fairly modest craft, certainly no mega-yacht. Also… well you've had one or two extra expenses recently with the family and things, and your four credit cards are a little over-stretched. So what's to do? You decide to rein in a bit, reduce expenditure, enjoy what you've got, try and get those credit card debts down (after all, 19% on the outstanding debt doesn't make any sense, does it?). So you trim your sales, avoid the malls, and enjoy the quiet, shopping-free life. In other words, personally speaking, you're going into recession, pulling in your horns. And you can't say that's not good. In fact it's positively virtuous. But it doesn't stop with you and your bank account. If you're not buying, the stores won't be selling. So they won't be ordering from the manufacturers, who won't be producing… and won't be employing. That's a drop in the ocean if it's only you who's cutting back. But suppose we all, or at least a good part of the population, are doing the same. When we collectively stop spending and stop buying, we collectively don't need to produce, so we stop producing. And production slow-down with inevitable staff layoffs have got to happen, which only makes matters worse. So while you are virtuously cutting spending, and counting on cutting your credit card debts, you are also counting on keeping your job, and now that's by no means certain. You got over-stretched financially so you're effectively going into personal recession by not buying what others are producing. That's good. But everyone else is reining in their expenditure, and they're not buying what you are producing. So your job's on the line. When we all reduce our buying, we are reducing production and effectively putting our jobs at risk. When we all move into recession that's not so good. Enter 2008 Recession is man-made. It can happen when there's near-full employment and producers can sell all they can make so wages are pushed up and so are prices. Generally in such conditions a mild correction can solve the problem and bring inflation back within bounds. But the 2008-9 recession is multiplied-up several notches. First, the overall credit debt in the developed countries became a major factor. People were committing their incomes for 2-3 years down the road. Second, property prices were doing their own crazy thing, as cheap mortgages encouraged a home-buying spree, uninformed buyers were sold small-print traps which later proved unworkable, and irresponsible banking practices encouraged people to take out 2nd and 3rd mortgages on the inflated values of their over-priced homes. The higher you go, the harder you fall. A popular scapegoat in the autumn of 2008 was the banking and financial collapse. But this overlooks the credit overhang. If you've committed your income for the next three years by spending it now, then it stands to reason that you won't be able to do any shopping for a while. Basically, this should not happen. In a properly ordered economy, credit needs to be more strictly controlled – whether we like it or not. Similarly with mortgages. A good-rate, long-term, clearly described mortgage for first-time buyers is important. But second and third mortgages at cheap rates create their own property bubbles, and a “roof over your head” becomes a simple gamble. But having got into a serious recession, can we get out of it – apart from sitting around feeling gloomy for two years? Recession? No thanks. A recession is a shortage of consumer demand and thus a shortage of jobs. This points to the need for investment, which creates jobs and pay and encourages spending now. But private business and industry are naturally wary of investing during a recession when sales are already down. So the public sector needs to step in. But not with free handouts, which distort government accounts by mixing current expenditure with capital investment, and increase government debt. The solution lies with Regional Development Banking, which can focus on specific areas, providing investment and follow-up guidance for startup companies, as well as investment in regional infrastructure. Drawing on their local Development Bank, Regions can borrow against future income to provide major infrastructure, repaid for example from an uplift in business rates. A report by PricewaterhouseCoopers, Unlocking City Growth, commissioned by Britain's Core Cities Group, demonstrates that by using this approach, increases of between 50% and 80% can be achieved in housing, jobs and economic output. It also allows cities to share in the growth dividend, to get a return on their own investments, something that may become increasingly important in a different economic future. It's a matter of simple logic. People are not buying now because they're saving – and very virtuously so, too. But they still want to work. And it's no use working to produce more consumer goods if people aren't consuming. But working now to produce benefits that will be enjoyed later creates a perfect balance. We only need the financial flexibility to respond to the demands of the moment. And the Regional Development Bank is “just the job”.
Peace, Productivity and Industrial Relations |
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