Robert Skidelsky writing in the Guardian highlights a crucial issue – is the idea simply to get the economy to grow or is it more radical than that?
We all know how the global economic crisis began. The banks over-lent to the housing market. The subsequent burst of the housing bubble in the United States caused banks to fail, because banking had gone global and the big banks held one another’s bad loans. Banking failure caused a credit crunch. Lending dried up and economies started shrinking.
So governments bailed out banks and economies, producing a sovereign debt crisis. With everyone busy deleveraging, economies failed to recover. Much of the world, especially Europe, but also the slightly less sickly US, remains stuck in a semi-slump.
So how do we escape from this hole? The familiar debate is betweenausterity and stimulus. “Austerians” believe that only balancing government budgets and shrinking national debts willrestore investor confidence. The Keynesians believe that without a large fiscal stimulus – a deliberate temporary increase of the deficit – the European and US economies will remain stuck in recession for years to come.
But the argument between austerians and Keynesians over how to encourage sustained recovery intersects with another debate. Simply put, what kind of post-recovery economy do we want? This is where economics becomes political economy.
One approach is to carry out redistributive policies.
Others argue that we should try to rebalance the economy not just from rich to poor, but also from energy-wasting to energy-saving. The premise of the green economic agenda is that we have reached the ecological limits of our current growth model, and that we will need to find ways of living that reduce demands on non-renewable sources of energy. So stimulus policies should aim to stimulate not just demand per se. They must focus instead on stimulating ecologically-friendly demand.
These are issues often alluded to on this blog. We cannot grow for ever and we cannot have an increasingly unequal society. We need to develop new policies to create a steady state society.