The ?real world?, as we economists call it, is very schizophrenic about economics and its practitioners. It tells us we are not a science and should not presume omniscience. Yet it expects us to deliver precise judgements about the state of the economy and the likely consequences of a policy. I have always thought of economics as more like medicine where there is some science and lot of technical equipment. Yet every patient is a different case, and diagnosis and cure are very much a matter of personal judgement of the doctor in charge.
The Prime Minister being a seasoned economist as well as a political leader knows very well how to be the ?good doctor?. At the G-20 while there was a clash between the American view of a need for continuing stimulus and the European view of an urgency for restraint, he proposed a formula that squared the circle. He could well see that while in April 2009 the world was united in perceiving an abyss staring it in the face with financial meltdown, one year on that unity was gone. Different regions in the world had arrived at different distances from the same starting point. The unity of 2009 hid some important differences and they are coming out now.
The appropriate policy is no longer a single co-ordinated one because the world, despite globalisation, is not a single economy. Asia has had a growth recession at best and no financial meltdown. It does not need banking reform since its banks were not allowed to do foolish things with other people?s money. Along with Canada and Australia, they can quit the coalition of 2009 and go their own way. The US is recovering at a decent pace?about 3%?but since unemployment always lags behind growth, the political imperative for continuing reflation is strong. Yet, the US has a drastic fiscal situation thanks to the profligacy of George Bush in all his eight years. President Obama?s Budget director, Peter Orszag, resigned since he believes the time for reflation is over. Keynesians in the Obama administration want to continue the stimulus. They do not want to get serious about deficits and debts. It is a delicate matter of judgement. The economy is recovering but the Keynesians think it is not yet robust enough to start dieting, while Orszag thinks the need to get fit is urgent.
This is not the case in Europe. In the UK, elections have yielded a coalition government, which has made the reduction of the deficit a top priority. The UK arrived at the recession with an already fragile public finance situation, with debt to GDP ratio rising even in full employment and it now needs to tackle the structural deficit. The argument is about the pace of cutting, not its necessity. Labour would have cut it more gently than the new Chancellor wants to but the difference is small. There is a recovery that is running at around 1.5% of GDP growth. The argument is about the likely effects of the cuts but each side pretends that it knows the effect on employment and personal incomes to the last decimal place. The certainty is political since I don?t know of any model that accurately predicts such things four to eight quarters in advance. If we are uncertain as to what has already occurred in the recent past?the pace of recovery?then how can we be so assertive about the future?
Eurozone countries have fallen back from their early recovery. Germany and France were ahead with their reflationary packages, but in the last six months the Eurozone economy has slowed down and raised concerns about the sovereign debts of Greece, Spain, Portugal and Ireland. A committed Keynesian would, say, reflate until growth recovers and then start the payback. But that is a risky alternative, especially for a group of unevenly developed economies (who should never have got into a monetary union). Eurozone has no mechanism for fiscal transfers and even the recent creation of a stabilisation fund has raised fear among the German tax payers that they would end up paying for Greek indiscipline.
For the time being the situation will remain cloudy. We are back to reading tea leaves. China?s manufacturing growth may be slowing but the inflationary pressures there may also be easing. The US is slowing down but not too rapidly. The UK may yet have a growth bounce, although unemployment may go up. Nothing in economics offers a clear answer to the question as to whether we will have a double-dip recession. If anyone purports to know, he is not an economist but most likely an astrologer.
?The author is a prominent economist and Labour peer