What If a Better Capitalism Came Out of All This?

The prevalent persuasion among economists is that the comparisons between the current crisis and the Great Depression are misguided. Contraction of production and income reached almost 39% in the 1930s. Nothing comparable to this is forecasted to happen in 2009, when the world economy is set to grow by around 3%. In the hardest-hit countries, the drop in production should not exceed 1-2%.

Is this an overly optimistic scenario? Impossible to say, but it's worth focusing on the dynamics of the crisis, which is currently accelerating. Industrial production in Japan has dropped precipitously: September data show a 3% decline with respect to a month earlier. The index of purchasing forecasts, an important barometer of growth, is now at 30, well below the 50-mark that acts as threshold between expansion and recession. Unemployment is rising everywhere: job losses could well reach 1.5 million in the US only; in Spain, it's feared that unemployment will rise to 11% or even 15% in the next few months as consequence of the real estate crash. Retail sales have decreased everywhere.

Governments around the world have just started to react, launching fiscal packages of unprecedented sizes, and not only in the US, but in China and Japan as well. Europe has taken a conservative stance, with a €200 billion recovery plan which is just 1.5% of European GDP. An act of self-confidence or making virtue out of necessity? Perhaps the latter, also considering the enthusiasm with which the ECB cut rates last December and again in mid-January. The unusual size of the cut (0.75%) betrays the central bank's worries. Is it all Maastricht's fault, since the Treaty prevents European from cutting taxes and increase spending by hundreds of millions of euros? Possibly so, but it is to be immediately added: good luck it is so!

It's surprising that most people think that you can sort out a crisis generated by excess total debt (both public and private) by increasing government debt. An excess of debt is consequence of the excessive amount of resources that has been spent over the last decades. How can it make sense to get out of the crisis by replicating and multiplying the very same logic that brought the crisis into being? Capitalism is a good system to allocate resources. It's the one that has historically worked best, but has flaws. The current crisis is the occasion to rethink its structure and correct its problems.

This means changing governance, improve regulation, expand the scope for the redistribution of resources, diminishing hidden subsidies and entrenched interests. In the economic realm there are ample possibilities for this. The environmental question is an obvious candidate: the destruction of natural resources has reduced the quality of life of a good part of the population, and infrastructure is old and dangerous. Education can be improved everywhere. To be sure, satisfying many of these needs pertain to public intervention: this is the time to seize the opportunity offered by the fact that aversion to public action has reached historical lows (by necessity, rather than by conviction) to direct resources where social productivity is higher, while preparing the conditions for private actors to take back their usual role some time down the line, as soon as the situation allows it.

For such an ambitious plan two months are not enough, maybe not even two years. That's why it doesn't make sense to squander public resources only to slow down the fall in economic indicators. It's the best to ponder, in an international context, on future needs and deploy the best tools to do the job. In history books, the crisis that burst in 2008 might well be interpreted as the occasion that was taken to better the quality of life of all. It's an opportunity that still lies in our hands.