Fighting the global slowdown

The hi-tech sector has been hit hard in the current slowdown

The Centre for Economic Policy Research's James Morgan - writing for the BBC's World Business Report - compares the current economic slowdown to those the world has experienced over the past 50 years.

Before September, the world faced a situation where production in the newest industries was falling off a cliff.

Information, communications and technology firms were announcing bad results and laying off workers by the thousand.

That was caused, largely, by a decline in investment.

The authorities responded by cutting interest rates, but there was always a problem here.

Falling investment

The looming recession was quite different from the kind of recession we had experienced over the past 50 years.

It was not caused by a boom being throttled by rising interest rates in an attempt to reduce inflation and excess demand for labour, it was much more old fashioned than that.

It was an investment slump that had followed over-investment.

This might not sound disastrous but such a recession - a nineteenth century one - is much more difficult to deal with than the twentieth century kind.

Effective measures

Cutting interest rates has become the tool by which we crawl out of a recession. But such measures have a great effect when rates are, say, 8% - a cut to 4% makes a real difference.

But a cut from 4% to 3%, which is roughly what has been happening, is modest to say the least.

The closer you get to zero the harder it is for monetary measures to work, as the Japanese have found to their cost.

In spite of this, two monetary economists were confidently asserting on the radio that the only thing that could be done to tackle the recession was to cut interest rates.

Increased spending

The doyen of them all, Milton Friedman, was railing against the plans of the Bush administration to pump billions of federal money into the flagging US economy.

The economic adviser to the former British Prime Minister, Margaret Thatcher, agreed with him.

Alan Walters pointed to the failure of Japanese public works projects to lift the economy. But neither mentioned the failure of Japanese monetary policy.

Now there are certainly problem about what is known as Keynesian spending to boost the economy.

But since it is as clear as daylight that cutting interest rates cannot possibly spur investment when nobody wants to invest, the monetarist argument means nothing can be done.

So something has to be done.

New solutions

That something is a large amount of spending that will, as all agree, add 1% to US output over a year.

There are worse things than that.

After all, with any luck it might cause a bit of inflation also, and that of course, would make interest rate cuts more effective in spurring demand.

If we are returning to the nineteenth and early twentieth centuries it might be no bad thing to put in place the solutions nobody thought of then.

And it might be no bad thing to spend money on worthwhile projects, instead of worthless ones, as the Japanese did.