Austerity is here to stay and we had better get use to it

In his Guardian column, Martin Kettle argues that austerity and low economic growth are here to stay in the UK (and by implication the EU and US too).

The message is hard to miss. Times have changed. The only thing that is certain is further uncertainty. We may have come out of recession again, but the idea that Britain, let alone the countries of the eurozone, can expect to see any resumption of the kind of growth rates to which we have all been accustomed since the second world war, is increasingly fanciful.  

We are living through not a downturn but an epochal change, and we need to make a more consistent effort to understand what this implies....

An epochal change brought about by the choice to continue to pursue the Japanese Model for handling a bank solvency led financial crisis.

In protecting bank book capital levels and banker bonuses at all costs, the UK, like the EU and US, has condemned its economy to an endless Japan-style economic slump.

The pursuit of austerity is just one of many bad policy choices that have been made as Greece and Spain have shown:  austerity in the face of a recession leads to a worse recession.

During the next 50 years, according to a newly published OECD growth report, the world economy is expected to grow at about 3% a year. Most of that growth, however, will be in Asia and the developing nations. Growth in Europe, including the UK, will be much less robust – and will often actually decline. 

Got that? Growth in Britain will often decline over the coming half-century. It will not resume. ... during the next 50 years, growth is going to be halting and uneven and will sometimes be negative. Just like now, in fact....

The OECD's growth report assumes that policymakers will continue to pursue the failed Japanese Model.  There is no reason that they should make a different assumption given that Japan's leadership has been pursuing this failed set of policies for 2+ decades.

Although the 20th-century social democratic project may have stalled amid economic decline, the financial crisis has undoubtedly opened up a fresh opportunity to redefine the terms on which the rich and poor can coexist without social unrest in times of greater scarcity.

As Iceland has shown by adopting the Swedish Model and requiring the banks to recognize upfront the losses on the excess debt in the financial system, the terms on which rich and poor can coexist does not have to be redefined.

In fact, Iceland expanded its social safety net.

Austerity is only here to stay if the policymakers continue pursuing the Japanese Model.