Economic woes a sign of decline
TheStar.com – Opinion/Editorial Opinion
Published On Fri Oct 22 2010. Richard Gwyn, Columnist
The television images coming out of London and Paris couldn’t be less alike.
In Paris, the scenes are of mass demonstrations and store windows being smashed. In London, the streets are empty and TV reporters have to fill up their time with commentaries of their own.
Yet the two scenes are really the same. Both are about people responding to a transformational event in their lives, the French in excitement and anger and the British with the phlegmatic passivity that is their usual behaviour except when at soccer matches.
Common to the two events are that both are about the End of Big Government.
Government isn’t going to vanish. Nor are governments going to shrink back to their modest size before the creation, right after World War II, of the welfare state. But, almost overnight, government is being seen as a potential source of national bankruptcy rather than the source of national prosperity.
Both in France (there pretty modestly) and in Britain (there radically, with half-a-million public servants due to be cut from the payrolls), and similarly in a cluster of countries such as Greece, Spain, Portugal, Ireland and Iceland, a conviction has taken hold that the smaller the government the larger will be a nation’s economy.
The source for this attitude is the huge budget deficits of the governments of these countries, and likewise those of the United States and Canada (we being better off relatively but in no way absolutely so). The judgment now is that either these deficits are reduced drastically or these countries will face bankruptcy.
In fact, this assessment is grossly overdrawn. It is countries, not banks, that really are too big to fail. Anyway, no bondholder can march in and seize a nation’s assets.
At least as important, the solution of deep spending cuts, even if correct, itself creates a whole new problem. Less government spending means less economic activity and, as a consequence, less tax revenue and so a larger deficit.
In Britain, for instance, it is calculated that cutting the public payrolls by half a million will cause the loss of half a million jobs in the private sector.
The consequence could be what can be called the Japan Syndrome. Once it was widely assumed that Japan was about to become the world’s No. 1 economy. Instead, among developed countries, Japan’s economy is now one of the weakest. It hasn’t grown since 1991. House prices there, once the highest in the world, are back to where they were in 1983. And the debt of the Japanese government — about double the nation’s total output — is the highest in the world.
What went wrong in Japan, economists now generally agree, is that it responded to hard times by cutting back and got itself locked into a straitjacket of slow growth, high unemployment, low tax revenues and, as a consequence of all that, a high debt.
This isn’t to say that the same will happen to Britain or France, and at least as much the U.S., where President Barack Obama is facing the Tea Party’s rebellion against big government.
It’s to say, though, that it may happen, and that what’s now going on is really not some brilliant, carefully thought-out, new economic policy but just a gamble.
Or, to get really gloomy, that what’s really going on is not this or that grand economic policy or theory but the unpleasant reality that all these countries — even, dare it be said, Canada — have reached a peak and henceforth, with quite small variations between them, are due to decline no matter the size of their government or of their deficit.
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