Short-term gain for long-term pain

By John Rapley

Suppose you lived in a 12-room house on a vast lot with swimming pool, servant's quarters and space for three cars. But you didn't own any cars because the mortgage payments soaked up all your income. Nor did you maintain the pool. Most of the rooms remained unfurnished and your children had to skip meals from time to time, and all because of your onerous liabilities.

Now imagine two financial advisers came along to tell you how to get out of your predicament. The first tells you to sell the house, downsize to something more affordable, and thereby free up the money to feed your children, set aside a rainy-day fund and maybe buy a car. The second banker tells you to keep the house, sell the fixtures, cut the electricity, take your children out of school and make them beg. Whose advice would you take?

Well, when it comes to electing our governments and the policies they offer, time and again we opt for door number two. Governments in many countries are accumulating massive long-term liabilities which will eventually bankrupt them. This problem is particularly acute in the developed countries, where pension and health-care liabilities will, on current projections, crush public finances in coming decades.

One effect of this rising burden of dependency is slowing economies. Productivity growth has apparently been slowing across the West for decades, but governments are still making promises as if the gravy train is about to start running anew. When they realise they can't find the money to pay their bills, they turn to austerity bailouts. Whether IMF or EU partners, the recipe is the same: keep the house and stop eating.

Which means, of course, you are cutting the electricity and running down your assets. Rather than tackle their long-term, structural deficits, governments are turning to short-term austerity. The cyclical burden that will erode your economy grows worse, while any short-term attempt to restore growth is curtailed by spending cuts.

It makes no economic sense. It is, however, good politics. There are powerful constituencies, like bankers, pensioners and public-sector workers, who would be hurt by any attempt to tackle the structural deficit. But as long as their incomes aren't cut, the resulting economic stagnation doesn't matter to them. In fact, to the extent that recessions lower prices, they actually benefit from the weakening economy.

It's not that there aren't political leaders and intellectuals who aren't telling us the truth. It's just that there are no votes in it. There's always some opportunist, somewhere, willing to promise happy days around the corner with just a little more belt-tightening.

Taking the lead

So, amid signs that the US economic recovery is running out of steam, European unemployment is rising and China's boom may be slowing, which is to say at the very time governments should be taking the lead in restoring growth, they are sitting on their hands.

We're going on six years since the global financial crash, and the world economy still struggles. A few more years of this, and we'll match the Great Depression for the longevity of a slow recovery. And like that economic catastrophe, this one was caused not by a financial crash, but by bad policy.

We all need to adjust our expectations downwards, but we're going about it all wrong. We should be lowering our long-term sights, living with more modest expectations of what our system can deliver us, and thereby use our resources with maximal efficiency. Instead, we are sticking to our ambitious plans, but rendering them impossible by eating into our muscle.

It will end badly. But by then, the generation of politicians who brought us this show will all be long gone. I'm sure that hadn't occurred to them.

John Rapley, a political economist at the University of Cambridge, is currently on a visiting professorship at Queen's University in Canada. Email feedback to columns@gleanerjm.com and jr603@cam.ac.uk.