Western economies riding a wobbly bike

PUBLISHED : Tuesday, 13 July, 2010, 12:00am
UPDATED : Tuesday, 13 July, 2010, 12:00am

Memo to David Cameron, Nicolas Sarkozy, Angela Merkel, Barack Obama and, yes, you too, Hu Jintao and Manmohan Singh: running an economy is like riding a bicycle. If you keep up good speed you can make progress and even show off tricks such as riding without using your hands, but if you reduce your speed you can wobble and fall.

There, unfortunately, the analogy breaks down. With a bicycle, you can remount and ride again. But with a stalling of a modern economy, people's livelihoods are at stake, and it is not that easy for many of the casualties (to echo one of Margaret Thatcher's main lieutenants who urged jobless people to 'get on their bikes' and travel to find work).

Indeed, after three recent trips to the United States and several European countries, it seems to me that many Western countries are about to fall off their economic bicycles without any ideas of how to get on them again. From trivial things to large issues involving the socio-political economy, country after country is failing to tackle the real issues. There have been some debates about when and where to staunch government deficits, but there has been little discussion about how to tackle several cancers that are eating the hearts and souls of the West (and Japan).

These include not only governments living beyond their means, but also the failure to comprehend the increasing challenge from Asia, and potentially from Africa, crumbling infrastructures and poor educational standards, the problems associated with rapidly ageing populations, and the debilitating encouragement that governments have given to the idea that being rich is glorious without considering how and where wealth is achieved.

It should have come as a shock that it has been reported that there are 70 British university graduates chasing every available job. Some employment counsellors are advising graduates to take any job they can, even flipping burgers.

It is hardly the best time for Cameron, the new British prime minister, to be cutting government spending. Given the protection promised to some ministries, including economic aid and education plus heavy defence obligations that are difficult to cut, some ministries may face savage cuts of up to 40 per cent. The government, of course, claims the cuts are essential to reduce an unsustainable deficit and debts, and to build foundations for future growth.

That is a laudable hope, but experience suggests that brave government dreams turn so easily into terrible nightmares. Thatcher became prime minister dedicated to small government, curbing the deadly powers of trade unions and releasing the energies of the private sector. She certainly smashed the unions, but she unleashed the robber barons of private enterprise, who had little thought for anything but profit. Public utilities suffered and prepared the way for a new burst of government spending under Tony Blair and Gordon Brown to repair the damage.

The worry must now be that cutbacks will kill or damage vital organs from the body politico-economic.

Britain is a paradigm as the chief US ally, and one of the world's commercial and financial centres. But it is not one country that is cutting spending savagely. It is a pan-European effort, which is worrying Obama and even some European economists. Unemployment among young people in Spain is almost 40 per cent, and most other European economies are fragile. If all governments simultaneously try to cut spending and increase exports, it will be a disaster for most of them, and for the world.

Reports from the Organisation for Economic Co-operation and Development (the club of rich industrial nations) indicate that savings by the private sector, households and corporations will total US$3 trillion this year (US$1 trillion each in the US and euro zone, US$500 billion in Japan and US$200 billion in Britain).

Figures of this magnitude, which mean an excess of income over spending of 7 per cent of gross domestic product, suggest that it is the worst time for governments to bring about further contraction. If households and the corporate sector are net savers, then growth and employment can be maintained only either by government spending or by running a trade surplus.

As Yves Smith, founder of the Naked Capitalism blog, noted: 'When both domestic households and the corporate sector are saving at the same time, then you need to have a very large trade surplus, a very large government deficit, or some combination of the two. There is no other way to square this circle - anyone who tries to tell you otherwise does not understand double-entry bookkeeping, which the West has used for at least the past five centuries with some success.'

Smith argues that the tendency of the corporate sector to save rather than invest in growth is tantamount to capitalists abandoning their role as promoters of capitalism. This quest for quarterly profits sits badly with future growth because investment tends to gobble profits, especially where bold initiatives are concerned.

Added to this has been the dangerous growth of financial engineering, whereby big corporations have become more interested in the financial casino than in turning out quality products and investing to quality.

The most striking thing for any visitor from Asia to Europe or the US is that standards are poor and no one cares. Those who have jobs seem to have no fear of losing them, and no intention of worrying about courtesy or letting customers intrude upon their lifestyles. Trade unions in Europe have made it plain that they will not tolerate having their cosy 35-hour working weeks, long holidays or early retirements spoiled by having to deliver a good performance.

Hu and Singh might be laughing at the Western disarray as it marks an end to a mere few centuries of economic domination. But cutbacks in Europe will diminish trade opportunities and slow their own economic bicycles. It is time for Beijing and New Delhi to remind the West that we ignore what is happening 10,000km away at the peril of all of us.