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Crisis of Confidence

John Lanchester:

Quarterly GDP data don’t, on the whole, tend to make the person studying them laugh out loud. The most recent set, however, are an exception, despite the fact that the general picture is of unrelieved and spreading economic gloom. Instead of the surge of rebounding growth which historically accompanies successful exit from a recession, we have the UK’s disappointing 0.2 per cent growth, the US’s anaemic 0.3 per cent and the glum eurozone average figure of 0.2 per cent. That number includes the surprising and alarming German 0.1 per cent, the desperately poor French 0 per cent and then, wait for it, the agreeably frisky Belgian 0.7 per cent. Why is that, if you’ve been following the story, laugh-aloud funny? Because Belgium doesn’t have a government. Thanks to political stalemate in Brussels, it hasn’t had one for 15 months. No government means none of the stuff all the other governments are doing: no cuts and no ‘austerity’ packages. In the absence of anyone with a mandate to slash and burn, Belgian public sector spending is puttering along much as it always was; hence the continuing growth of their economy. It turns out that from the economic point of view, in the current crisis, no government is better than any government – any existing government.

Three reasons why this might be the case:

1) Belgium is special: somehow, someway, their economy is just generally more robust, regardless of government. (I don’t buy this)

2) Austerity is a bad idea: lack of austerity in Belgian has kept the economy chugging along, thanks to spending in the public sector.

3) Psychological effects and expectations: with no government, the Belgian private sector economy has clearer expectations about the short-to-medium term future, and feels more confident in its ability to make investment decisions.

Probably it is a combination of 2) and 3), although I give more credence to the psychological effects that result from incompetent governance.

After this summer’s debt ceiling fiasco, and the subsequent S&P rating downgrade, it has become clear that most of what is wrong with today’s economy is a lack of confidence. In an economy without bureaucratic badgering or government intervention, it is relatively easy to make investment decisions based upon the data provided by markets. In today’s political climate, however, business owners, households, and investors are not sure what the future will bring. The Tea Party is responsible for a great deal of this disruptive atmosphere, but I think the current administration is equally culpable. There is no leadership coming from either side of the aisle, no one with convictions AND smarts to stand up and lay out the grand narrative of what is happening, and what needs to happen for the economy to recover. Obama’s strategy has seemed more aligned with placation than innovation, and it is innovation that drives economic growth. Despite what the Tea Party says they want (smaller government), what would really make them shut up is an economic recovery. The problem with Obama listening to them, taking their outrage at face value, and attempting to appease them through compromise, is that their narrative of the economic situation is misinformed, and their prescription to heal our economic maladies is not the right one. All too often within the realm of economics, it is a confusion between the short and long term that creates misunderstanding, and I think the Tea Party’s ideas fall into this. Austerity is a fix for long-term problems, but we have a short-term problem of a completely different nature that requires a different strategy so that we arrive at the long-term on decent footing; we need more spending and direction from the public sector.

 

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