It’s a recession, Jim, but not as we know it

Western economies are suffering from a triple crisis: an acute sickness, a chronic sickness, and doctors who don’t know what they’re doing.

Phil Mullan

28th May 2009

If we want to understand the current recession, playing the blame game won’t get us very far. Singling out greedy bankers, for example, tells us little about what is going on. Instead, we need to dig far deeper than that, in order to get to the root of the structural problems in the economy.

The challenges we face in the Western industrialised world today are threefold. There isn’t just a single crisis; there are three substantive crises that we must address. These three crises interact with, and on occasion aggravate, one another.

To make a medical analogy: if the Western world is a patient, then this poor patient is suffering from three things. First, an acute illness: the current recession. Second, a chronic illness, which I would characterise as a crisis of production and the hollowing out of value-adding production of goods and services in most Western economies. This is happening at different paces across the West, but it is a fairly common feature. And third, to top it all, this patient has a doctor – the political class – who is making a hash of things and generally making the situation worse. On top of the acute and chronic economic problems, there is a crisis of political leadership.

Let us consider the acute crisis first, the recession. The symptoms are all the things we see around us: businesses closing, output contracting, more redundancies – such as the 15,000 at British Telecom in recent weeks. All of these are typical expressions or consequences of the recession.

However, many now recognise that this is not a typical, business-cycle recession. To stretch my medical analogy probably too far, as Star Trek’s Dr McCoy probably never said to Captain Kirk: ‘It’s a recession, Jim, but not as we know it.’

Various experts and observers have tried to put various epithets to the recession, in order to describe what kind of abnormal, atypical recession we face today. People talk about a ‘banking recession’, an ‘investment banking recession’, a ‘bubble recession’, a ‘financial recession’, or a ‘credit recession’. There may be some good reasons for using all of these epithets – but all of them have downsides, too, in that they tend to narrow down what is going on to the financial sector. The view seems to be that the main problem is in the banking sector, which may be to do with regulation, the over-expansion of credit, low interest rates, and so on; the problem is all in one part of the economy, apparently. I think this is a deceptive and unhelpful way of looking at things.

The epithet that I would use is that this is a ‘financialisation recession’. What I mean by financialisation is the trend over the past 20 years where it is not only the case that the financial sector has become bigger in many economies, in particular in Britain and America, but also that financial activities and financial engineering have infiltrated the whole of the economy. There has been a fusion of financial activity with the rest of the economy. Not only are the banks themselves more important these days, but virtually the entire economy has become dominated by financial-style activity. And it is this that has imploded in the recession of the past year-and-a-half.

This links to the chronic problem, which is the decay of productive activity in the West. The rise and rise of financialisation has been the other side of the atrophy, the wasting away, of productive activity in Western economies. Thirty or 40 years ago, there were large sectors in Western economies that were engaged in the production of goods and services. But that has diminished – and financialisation has risen to replace it. Financialisation has been both a consequence of the weakening of the productive sector, and a palliative to it.

Financialisation is a classic palliative, of course – in the sense that it is only partial; its offsetting impact is temporary in historical terms (perhaps 10 to 15 years for Western economies); and it hasn’t cured the deep-seated problem.

This leads me to the third problem: the crisis of political leadership, the doctor who has been making things worse. This is perhaps the most serious of the triple crises because it is about what we can do to resolve the first two crises, the recession and the hollowing out of production. The ‘doctor’ has been oscillating between effectively saying ‘I can’t see any symptoms’ – denial that there is anything serious taking place – and wishful thinking that time will cure any problematic symptoms and everything will be okay. This is epitomised by the ‘green shoots’ discussion. The ‘doctor’ also sometimes recognises that there are serious symptoms, but says ‘I’m going to be really tentative about it’ – so he restructures the banking sector on day one, but then on day two he pulls back because he’s not sure what to do with these troubled assets relief funds. Such tactical tinkering and dithering doesn’t help.

However, the problem of political leadership can be seen not simply in their tactical mistakes; more fundamentally political leaders have not recognised that there is a need for a more strategic approach to the recession. They have simply responded to the surface appearances of a financial crisis and tried to muddle through. They are evading a recognition of how severe things are, and evading responsibility for addressing the crisis. If their outlook remains myopic and short-termist, and sometimes in denial, they are never going to be able to identify what needs to be done – and this will prolong the crisis and ensure that it reoccurs in new forms later on.

We need to go much deeper than the current discussion of the recession, in order to realise that what is required is a fundamental fix at the level of the productive sector as well as a deeper understanding of the real reasons why all this financialisation is taking place. To return to the medical analogy, simply to treat the acute problem without recognising the chronic one will only cause the patient to relapse into the chronic illness in the future.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem. (Buy this book from Amazon (UK) or Amazon (USA)). This article is based on Phil Mullan’s speech at the Battle for the Economy summit held in London on 16 May.