Comment
Larry Elliott
The response to the attacks in the United States last week has been instant. Old ways of thinking have been ditched to fight the threat to the West. Life after September 11 may never be quite the same again.
No, you haven’t missed something. The armchair generals who were demanding knee-jerk retaliation against terrorism have so far been disappointed. This is not war we are talking about, but economics, where the desire to avoid global recession has led to a rethink of the orthodoxy that has gripped policy for nigh on 30 years.
For the moment, activism is back in fashion. Expansionary policies are back in fashion. Curbs on the freedom of markets are back in fashion. The new enemies for governments are speculators trying to destabilise financial markets, the tax havens that facilitate the movement of funds to finance terrorism, and a deflationary economic climate that will put at risk jobs and growth. It is back to the future with a vengeance, and long may it last.
Consider what has happened in the past nine days. Since the 1970s, macro-economic policy has been governed by the idea that inflation is the real threat to prosperity. The theory was that trying to inject demand into economies would lead to higher inflation rather than lower unemployment. But in the US and Britain for the past decade, precisely the opposite has occurred; expanding demand has led to lower unemployment not higher inflation. Central banks everywhere are now getting the message loud and clear, and have acted in concert to cut interest rates, fearing that the likely impact of the damage to New York and Washington will be a pronounced fall in consumer spending that will lead to a recession, not just in the US but in Europe, Asia and Latin America as well. The priority is international cooperation to boost growth.
But there has been more, lots more. Underpinning the monetarist era has been a messianic faith in unfettered markets, with laissez-faire evangelists insisting that governments should privatise and liberalise, thus leaving the inexorable forces of demand and supply to allocate resources. Would it be a good idea for security at US airports to be handed over to the private sector? A complete no-brainer for the privatising zealots. It would be right, both economically and morally.
This no longer has quite the same resonance after what happened last week. Everywhere, those responsible for security are asking finance ministries how terrorists can move money around the globe to finance their activities without being detected. The answer they are getting is that it is ludicrously easy when there are no controls on the movement of capital and when tax havens operate with the frontier mentality of the wild west. As a result, we now have frantic attempts by governments to strengthen the rules against money laundering, which will involve far stricter regulation and enhanced powers for those fighting financial crimes to uncover the details of suspicious transactions.
Of course, there may be pressure for business as usual once the crisis is over, but that’s hardly the way it feels at present. Take the example of the airlines, now facing catastrophic losses. Airlines are a low-profit business and the market solution to the industry’s predicament would be to allow companies to go to the wall, thereby reducing capacity and increasing profitability. US President George W Bush’s solution will be a bail-out package of billions of dollars as part of a massive fiscal expansion straight out of the Keynesian textbook.
Perhaps the best example of the changing mood comes from the financial markets. In the days after the tragedy, hedge funds thought they could make money for their well-heeled clients by selling shares “short”. For the uninitiated, this means selling shares that they did not own, then buying them back later at a lower level and thus making a profit. This is established practice, but before they could sell the shares the hedge funds had to borrow them from the big Wall Street institutions who owned them. Fearful that this would lead to an orgy of speculation and mayhem in the stock market, exacerbating the risks of economic collapse, the institutions said they would lend the hedge funds the shares only if they paid a hefty premium, thereby saving Wall Street from even bigger falls when trading resumed on Monday.
This was a wise move, but it is worth considering what the theoretical difference is between what Wall Street did and the so-called Tobin tax on foreign exchange speculation, which has always been rubbished as unworkable and unacceptable. The answer is that there is no difference whatsoever, and that perhaps the penny has finally dropped. If so, welcome to a new world.