The Confidence Fairy... It's Called a Depression for a Reason.

30/01/2013 10:11 | Updated 31 March 2013

If the Great Recession has proved one thing it is that there are few economic responses that both left and right can agree upon, or even really agree upon even among themselves. If there was a manual it would be followed. With hindsight we know all there is to know about how to manage the Great Depression. Adherence to the Gold Standard was catastrophic; deficit spending came too late; interest rates were poorly and erratically managed. So, if we were five years into the Great Depression right now we would have a pretty good idea about what to do (or at least a mountain of information, which is admittedly not the same thing).

But we are not five years into the Great Depression, we are five years into the Great Recession.
There is a taboo that about using the 'D' word. That naming it makes it so, and that using the 'D' word will spook the market. You have to wonder about this thing called The Market, which is made up of self-styled masters of the universe who run for cover under the bed at the slightest jitter in the stock-market. People who treat the market as if it were a paranoid agoraphobe, and confidence as if it was some sort of mythical, unknown potion that could be bottled just so long as we got the formula right.

If you want to have confidence, be confident. We have constructed a system that ensures that those whose money is borrowed (the people with pensions and mortgages) don't get to have a say at all; the least that the economic gate-keepers could do is to pretend that they occasionally bear the same risks of losing their well-tailored shirts. British companies are currently sitting on three-quarters of a trillion pounds in cash reserves, and inflation is still pretty low. Would a gun to the head make you feel more confident?

People seem to be using the term Great Recession in order to distinguish it from the Depression of the 1930s, which is understandable as the term 'depression' is linked with that period and all the things that went with it. The glamorous cars, the gangsters' molls, the hats. But what Keynes noticed, and Paul Krugman has been banging on about for years, is that depressions are not cyclical events but break-downs in the business cycle that function by a different logic. So a focus on budget deficits would only be sensible strategy if you were trying to win the last war. Cameron and Osborne are the generals who showed up to the Somme with bayonets and cavalry.

Witness the abrupt about-face as Q4 output figures were released showing a looming triple-dip recession. Actually increasing spending on capital projects (transferring money from cash-rich but confidence-poor business to confidence-rich but cash-poor Government) was back on the table fast as anything, whereas a week previously such capital investment was the height of irresponsibility because the world would end if anything threatened the sanctity of the British triple-A rating.

So why do we keep pretending as if managing a system so complicated and subtle as an economy is a matter of pulling a lever here, and twirling a knob there, and so long as you get the levers pulled in the right order and the knobs twirled in roughly the right way things will generally turn out right? The metaphor often given by the Chancellor and Prime Minister is that of an oil-tanker which takes a long time to turn around, but even that doesn't work as an analogy for the economy, as oil-tankers can only turn to port or starboard and slow down or speed up. They don't suddenly go underwater or discover that they can fly, or decide to switch to sail halfway through a voyage.

As an economy is so uncertain, what organisational theorists might call a complex dynamic system, why not endow it with a presumption towards justice? That is, when undertaking normal business-cycle management (and, at the moment, abnormal business-cycle management) have a statutory obligation to consider economic justice in decision-making when no other over-riding evidence exists for economic claims. To be clear, I am not calling for redistribution of wealth, what I am calling for is incentivising the use of datain economic policy making so that, for example, reducing the size of the deficit by cutting public services only happens when the assumption that social protection in deep recessions can be most easily guaranteed by reducing public debt is proven beyond reasonable doubt.

It isn't an accident that the collapse of aggregate demand and its failure to respond to normal economic management (like cutting interest rates, flooding the market with new money, and intervention in the bond market) is known as a depression. Depression, while often stigmatised and poorly understood, is often treated by 'unlearning' current behaviours, 'reverse-engineering' the logical pathways of thoughts by which simple problems become unsolvable crises and separate issues become generalised feelings of dread. Treatment focuses on breaking these pathways and finding new means to turn panic into problem-solving. In short, the first step in overcoming depression is to realise that what you had been calling logic really wasn't that at all, and that new thinking is needed based on new evidence.

Similarly (and extending the metaphor to breaking point) sailing into a depression means that sails are aerodynamically propelled by lift, and sailing out they are propelled by drag. Different sails are required depending on local conditions. My point is that your technique and your tools change depending on local conditions, and assuming that what worked once will work again, and especially a misguided clinging to the idea that all you need to make one set of tools work is just to be ultra-disciplined is a false logic. And logic that fails to respond to facts is called ideology.

The market is not the same thing as the economy, and if the fundamentals of this economy are as sound as we are told they are by Messrs Cameron and Osborne, and economic policy can turn on as much of a dime as it has in recent days, then why not make justice its central focus? As Oscar Wilde never said: If a recession may be regarded as a misfortune, and a double-dip recession as carelessness, a triple-dip recession just looks like cruelty.