Snowplowing is a classic technique for newbies learning to ski. You put the skis into a triangle, apex forward and get slightly up on the edges. The natural motion of each ski is opposed to its partner, cancelling out any forward movement on a gentle slope. If the slope is too steep, the triangle shape becomes impossible to maintain, the skis naturally tend towards the parallel, and it's goodnight and goodbye to the newbie as gravity takes over.
The beauty of the snowplow is that although it "paralyses" the beginner, it gives them control. By slightly flattening either the left or the right ski, they move forward in a left or right turn, enabling them to tack their way down the slope. It's not exactly skiing, but it's a hell of a lot better than cart-wheeling down the mountain in a tangle of limbs, skis and poles.
When the G20 met in London in the Spring of 2009 in an attempt to reverse a global financial slump of enormous proportions, they came up with an action plan that was highly analogous to the snowplow technique. As IMF Deputy Managing Director David Lipton noted in a recent Chatham House speech entitled "Resolving the Crisis and Restoring Healthy Growth: Why Deleveraging Matters", the G20's plan consisted of two opposed and contradictory principles.
The political leaders knew that since one of the root causes of the crash was the huge build up in private and public sector debt, part of the cure would inevitably have to be the unwinding of that debt through austerity measures, making austerity a key principle of the hoped for recovery. The second principle, not surprisingly, involved a commitment to taking measures to encourage jobs and growth, including massive stimulus packages. Left ski. Right ski. Contradictory forces. Little of one, you go left, towards austerity and contraction, little of the other, you go right, towards stimulus and expansion.
So far, taking the consultant's famous helicopter view, our newbie skier appears to be stuck half way down the mountain, unable to decide whether to favor the left or the right ski, and with no shortage of onlookers yelling for our skier to ditch one ski or the other. The problem for the politicians is that they are dealing with exceedingly mushy controls where the link between action and result is mediated by complex chains of events which do not always deliver the results that the politicians hope for when they pull on the levers. Lipton's speech is a kind of scorecard, ticking off what has been achieved so far, and noting what kinds of future actions might be expected to bring positive results.
What governments need to do is plain enough. Lipton summarizes this succinctly:
"To resolve this conundrum, policymakers need the right pace of consolidation in the short term, effective and credible commitments (to reigning in public debt) in the medium term time frame, and a willingness to adjust along the way. Deleveraging is necessary, but it should be implemented at a speed and in a way that minimizes the impact on growth."
It goes without saying that this is far easier said than done. The classic case in point is probably the UK, where the Coalition Government has been committed to austerity and has seen growth falter and die, with a triple dip recession very much on the cards by the end of 2012. Plans to step up infrastructure spending to counteract that mean increasing public debt instead of decreasing it, and it is not at all clear that the UK has the fiscal headroom to take on much more debt. If one looks at the projections for UK public debt by 2040, from the Bank for International Settlements, unless the UK cuts back hard, it is set to see its debt to GDP ratio pass 400% by that date, which would put it in a Zimbabwe like position. Like I said, stuck half way down the mountain on a slippery slope, desperately trying to keep those skis in snowplow formation. All Lipton and the IMF can do, as his speech shows, is to keep reminding the newbie skier that he/she has two skis, not one. A bit of austerity, a bit of growth... Will it work? Time and the severity of the slope will tell.
Further reading on austerity:
- Understanding the Implications of Japan’s “Two Lost Decades”: Lessons for Europe and the United States, by John Vail
- Austerity vs Stimulus in the Context of the EU Crisis, by Patricia Gabaldón
- Disinflation and Low Growth versus Inflation and Reasonable Growth, by Valentijn van Nieuwenhuijzen
Tags: austerity , austerity budget , austerity measures , Chatham House , G20 , IMF , London