Acknowledging over-optimism: Christine Lagarde, MD of the IMF at a CNN debate in Washington DC. Photo: Getty
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The “New Mediocre” – and why the eurozone may be sliding back into recession

Something seems to have gone structurally wrong with all of the advanced economies: their ailment is chronic, not acute.

This summer, we went on holiday to Italy. While Britain seems to be in a state of perpetual flux, nothing much had changed since the last time we were there: the same delicious food and wine, the same immaculate medieval towns, the same beautiful frescoes and churches and galleries.

Yet there is a dark side to Italy’s immutability, especially for its citizens. Another thing that has hardly changed in the past decade and a half is the level of the country’s national income. Italy’s GDP was, in real terms, no larger this past year than it was at the turn of the millennium. That is a staggering fact. Even with the collapse of 2008 to 2009, the UK’s national income has grown by more than a quarter over the same period.

Nor are Italy’s prospects improving. The International Monetary Fund has revised its forecast for Italy’s growth this year from an already desultory 0.3 per cent to -0.2 per cent. If this projection is correct, it will signal that Italy’s economy will have contracted in every quarter since June 2011, with a single exception.

For most of the post-crisis period, the received wisdom has been that the laggardly performance of the eurozone’s Latin periphery has been the result of fiscal incontinence and a sad lack of the moral fibre needed to undertake the necessary structural reforms. That has certainly been the line taken by Germany in the interminable negotiations over how to resolve the sovereign debt crisis that reached a crescendo in the summer of 2012.

This year, however, the authorised version has become much harder to sustain. The German economy, too, has begun to contract, despite Germany’s vaunted current account surplus and unimpeachable public finances. In Italy’s case, the charges never quite stuck anyway. The government there runs a primary surplus. It takes in more revenue than it spends, if interest costs are excluded, and has done for years: a situation that dedicated austerians such as our own government can only dream of. Because of this, the IMF’s gloomy judgement that there is a significant probability that the entire eurozone will slide back into recession this year has been greeted by many with puzzlement. “What exactly,” they ask, “is the problem?”

The right context for an answer is probably to be found in another announcement from the IMF. Christine Lagarde, the organ­isation’s managing director, used its autumn summit to acknowledge that its economic forecasts since the crisis have been consistently overoptimistic for all of the advanced economies. The problem, in other words, is not unique to Italy, nor even just to the eurozone. Something seems to have gone structurally wrong with all of the advanced economies: their ailment is chronic, not acute. It is time, Lagarde suggested, that we reconciled ourselves to a “new mediocre” – the reality that economic growth will not recover to the 2-3 per cent range that developed economies typically enjoyed in the three decades before the crisis.

This saturnine assessment of the world’s economic predicament has been whispered about in worried tones for months now in the world of high finance. The fashionable term for it is “secular stagnation” – a shorthand coined by an American professor of the 1930s and popularised by Larry Summers, the former US treasury secretary and Harvard economist, in a speech last year. But “secular stagnation” is a description of the problem, rather than an analysis of its causes. If it is true that we are not going back to the good old days of 3 per cent growth (let alone the 4 or 5 per cent of the 1950s and 1960s), the important question is: why?

On this, unfortunately, mainstream economics is unilluminating. Indeed, “secular” is code among economists for “unexplained” – meaning that the new mediocre is an anomaly that cannot be accounted for by the factors that mainstream economic models normally consider important.

The most convincing explanations come instead from more heterodox quarters. Lagarde referred to one herself, warning that inequality is casting a “dark shadow” over the global economy. The problem is that the rich tend to save a larger proportion of their income than the poor; so that increasing inequality may be not just socially undesirable but a structural drag on demand.

Another theory is that the vast overhang of public and private debt that the advanced economies have accumulated since 1980 is to blame for their stagnation. This idea makes intuitive sense. Losing your job makes you much more cautious if you have a hefty mortgage than if you are debt-free. It’s easy to see that the same desire to pay down debt rather than to invest and spend might be causing a prolonged “balance-sheet recession” if the economy as a whole is seeking to minimise the financial risks heaped up in more optimistic times.

Nevertheless, even these explanations don’t get to the root of things. They offer plausible hypotheses concerning the mechanics of what has gone wrong. But they prompt still more fundamental questions, especially if we want to know what to do about it. Why has inequality been increasing since the late 1970s – and why was there the giant build-up of debt in the first place?

For an answer to these questions, it is necessary to venture outside the neat reserve of economics into the wild savannah of politics. It was the postwar political settlements that gave us the trente glorieuses in France and “You’ve never had it so good!”. It was Thatcherism and ordoliberalism that gave us the pre-crisis era of debt-fuelled growth. So, how can we engineer a renaissance from secular stagnation? Don’t look to the economists for the answer. Only a new generation of politicians and voters can provide one. 

Mehdi Hasan returns next week

Macroeconomist, bond trader and author of Money

This article first appeared in the 15 October 2014 issue of the New Statesman, Isis can be beaten

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.