Bill Emmott - International Author & Adviser


The recovery will prove Thatcherism right
The Times - August 13th 2009

All around the world, economies seem to be turning a corner, moving out of a period of this global recession in which the good news was just that things were getting bad more slowly into one in which things are actually getting better.  Exports are picking up, order books are getting fatter, production is starting to rise—in America, China, Germany, Japan, and even Britain.

                No one can know whether just around that corner a mugger might be lurking, ready to give economies a new thump in the solar plexus. Such things could happen because of politics—remember the 1979 Iranian revolution which delivered a second oil shock—or because some new financial horror is exposed.

But let us, in a positive summer spirit, assume that recovery really is beginning. If that were true, and were to be sustained during the autumn months, what would that tell us about the legacy of what would thus be the Great Global Financial-Crisis-cum-Recession of 2007-09? I would point to four big things, the biggest of which is that the age of liberalism, of the pro-market ideas commonly associated with Margaret Thatcher, is not dead, after all.

The first point, though, is that claims that this has been the worst slump since the 1930s, or in a century, were overblown. It has been bad, very bad, as the Bank of England rightly emphasised in its Inflation Report  yesterday, and the pace of deterioration around the turn of the year was truly disturbing. But the “worst since the 1930s” label has not, thus far, been merited on any measure for Britain barring the GDP performance in just one three-month period (January to March this year), which for most people is meaningless.

This recession has looked historic chiefly because it has been global. But from most national points of view, it has not looked or felt quite so exceptional. In neither Britain nor America has it yet felt worse, for jobs or living standards—surely the two things that matter most—than the early 1980s or (in America’s case) the late 1950s. Unemployment is still rising, but it would have to rise a lot further before this recession achieves once-in-a-century status.

The true novelty of this slump by comparison with those of the 1970s, 80s or 90s is that it was caused by a banking crisis and is deflationary rather than being caused by an effort to tame inflation. Hence interest rates have been at rock bottom, cutting living costs for millions of mortgage-borrowers and thus supporting consumer spending.

The second notable point, however, is that although the recession has been global, there have nevertheless been two types of slump, and the difference is likely to show up in the shape of the recovery. The emerging giants of Asia, China and India, along with some of their smaller neighbours, had a different sort of economic crunch to the one that hit the rich West. Theirs was more like Britain’s in the 1970s and 80s: both China and India had had runaway inflation in the first half of 2008, and so both governments felt obliged to slam on the monetary brakes to try to bring it under control.

It was their bad luck that their own, policy-induced slowdowns then got hit further by the collapse in western demand after the demise of Lehman Brothers in September 2008. But China and India would have had a slowdown anyway, especially as the monetary clampdown produced property slumps of their own. Only about a third of China’s slowdown can be blamed on falling exports.

This distinction is now showing up in faster recoveries. For the good thing about a policy-induced slowdown is that policy can be reversed, which China has done to spectacular effect, instructing the state-owned banking system to lend more money in the first half of this year than in the whole of 2008. There may prove to be long-term consequences of such energetic, indiscriminate lending, just as we in Britain will pay the long-term consequences of our vastly expanded public debts, but the immediate result is a sharp economic recovery.

So prepare for further headlines about the shift of power to Asia and the supposed superiority of the Chinese Communists’ economic management, in the run-up to the next batch of Group of 20 summitry, by finance ministers in London on September 4th-5th and by heads of government in Pittsburgh later that month.

The more important implication is the third big point. This is that, remarkably, we will be leaving a supposedly historic slump with the price of oil at $70 a barrel, which is more than double its level of six years ago. In part, that high price is in anticipation of renewed growth in demand from Asia. But, to have resisted the global slump, it must also imply that supply is highly constrained, both by the under-investment in new oilfields in the past quarter century and by OPEC’s renewed grip on production and the markets.

As recovery gathers pace, the oil price will surely go higher, unless OPEC loses its nerve or Saudi Arabia, newly in possession of surplus capacity, starts to feel charitable and pumps a lot more oil. This is bad news for the strength of the western (and Chinese and Indian) recoveries, as dearer oil is like a tax on growth. But it will be terrific news for environmentalists and producers of electric cars, doing more to cut greenhouse gas emissions than a hundred earnest ministerial gatherings.

The fourth, and biggest, implication of a recession that ends now is that the obituaries that were written last year for liberalism, for the 30 years of policy domination by the ideas of Reagan and Thatcher, will prove to have been premature. The state has been “back” only as an emergency rescue service, albeit vital in that role, and governments all over Europe and America will be selling their nationalised banks and other assets at the first opportunity, and cutting public spending wherever they can. Financial regulation will be tighter at the end of this crisis than it was at the start, but even Hayek, Thatcher’s guru, would not quibble with that.

Indeed, I would venture a prediction. It is that, five or ten years hence, we will conclude that the countries that recovered most strongly and durably from the 2007-09 recession were those whose economies were the most flexible, the most able to seek out new opportunities and to shift resources from dud old sectors to new ones—which means the more liberal countries, such as Britain and America. Over-regulated Europe will feel obliged again to shuffle in a liberal direction. Japan got stuck in its 1990s post-crash stagnation because its economy proved too rigid. That, in the end, is the case for liberalism: not that markets are always right, but that they are a system of constant experimentation and adaptation that governments thwart at their countries’ peril. 


Bill Emmott was editor of The Economist in 1993-2006 and is the author of “Rivals—How the Power Struggle between China, India and Japan will Shape our Next Decade” (Penguin 2009)


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