Innovative economics needed to cut unemployment
By Neil Behrmann
Developed nations require radical innovative economic policies to combat slack growth and growing unemployment.
Current economic measures are patently not working as each economic cycle has failed to counter growing structural inbalances that are weighing on growth. Unemployment, currently around 48 million in member nations of the Organisation for Cooperation and Development (OECD), an aging populace and infrastructure and massive state and individual debt are depressing growth.
The drugs of Keynesian stimulation, monetary printing press and devaluation have caused the economic patients to become addicted. Nations require more and more of the drugs to keep on growing but over the long term the side effects have created weakness.
Outdated policies that fail in the modern globalised world
Before suggesting changes to outdated policies here’s a brief explanation of what they are. John Maynard Keynes an erudite UK and international economic advisor and speculator, proposed policies that would prevent another 1930's Great Depression. An essential part of his “General Theory of Employment, Interest and Money” published in 1936, was the multiplier effect adapted from another economist RF Kahn. In essence, if an economy is depressed, the state should borrow and use the money to build roads, bridges, dams and other projects. Companies and people would get jobs to complete the infrastructure and they would spend their earnings. This demand would create income, output and further employment, raising demand and growth in the economy. Keynesian policies became fashionable in the 1960’s but since there were only mild recessions, they created “full employment” followed by accelerating inflation, especially in the seventies. Another problem was that the public sector grew into an inefficient and wasteful octopus which took over an increasing share of the economy. This was especially evident in the UK and the rest of Europe.
The other theory that became fashionable was monetarism to end the “Great Inflation” of the seventies. The guru was Milton Friedman who believed that restrictive monetary policies aggravated and prolonged the depression in the thirties. He also warned that excessive monetary expansion combined with Keynesian policies caused the inflation of the seventies. Friedman believed that steady consistent money supply would help economies grow in a non inflationary way. The US under President Reagan, the UK under Margaret Thatcher, which suffered the worst inflation, pursued tight money policies with a vengeance. The result in the early eighties, was surging interest rates, recession and high unemployment. But they also cut taxes, creating incentives for business, so economies recovered again. Unemployment decreased, but the overall level of jobless in the growth cycle, was higher than preceding years. The nineties had mild recessions and low inflation the so called "Great Moderation".
Unfortunately lax money supply caused asset bubbles in real estate and equities in the first decade of the new century. After the equity crash and 9/11, Alan Greenspan, Federal Reserve Chairman, egged on by Professor Ben Bernanke, who had joined the Fed, applied excessive monetary expansion. This was the underlying cause of the credit bubble that brought about the crash of 2008 to 2009, a recession and rising jobless queues.
Repeating the same dangerous mistakes
Prof Bernanke, who was unfortunately promoted to Fed chairman and the Obama Administration’s economic advisors promoted a recovery with dangerous “Quantitative easing” or money printing and Keynesian stimulation. The UK and European economies followed. Economies recovered as the private sector had to rebuild inventories, but governments once again are repeating a series of mistakes.
In the US, President Obama is pursuing anti business rhetoric and policies such as higher taxation that reduce incentives. The crisis in Europe, especially the UK, has brought in its wake, “slam on brakes” measures, notably, slash spending and increase taxes. But to keep the economies moving the UK and other European central banks are continuing to print money with the aim of keeping interest rates low. The clear aim of the new UK Coalition government is devaluation, but the law of unintended consequences has come about. Sterling has rallied following Chancellor George Osborne’s rhetoric of public spending cuts and tax increases.
Unsurprisingly stock markets are volatile-rising then sliding on fears that Europe will slide into recession and the US will encounter stagnation. Asian stock markets are below their peaks, but in relative terms are better performers.
A few positive suggestions
* Here are a few brief suggestions on what should be done. First President Obama, Mr Osborne and other politicians should shut up and go on holiday as soon as possible. Every time they open their mouths they dent confidence. They are poisoning hope, an essential ingredient for business recovery and it would not be surprising if equity markets revive when they are on vacation.
* There should be tax and other incentives for businesses to invest in research and development, software, databases and skills and allow them leeway and give them and banks encouragement to raise equity capital that will enable them to expand and create jobs.
* Fed chairman Bernanke should immediately steady monetary growth to counter the risk of inflation. His present policies and those of Bank of England Governor Mervyn King, are creating the climate for what the late Austrian economist Ludwig Lachman termed “mal investment”. Money flows into wasteful projects such as “Dubai towers”, property, commodity and other speculation and then general inflation, followed by the inevitable downturn. Credit should be tailored to finance businesses so that they can develop, grow and provide jobs.
Neil Behrmann is author of financial thriller, Trader Jack- The Story of Jack Miner (HandE Publishers)
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