Review by Kevin Baldeosingh
Although we have officially been in a recession for six months now (and unofficially for a few years), it has been difficult, if not impossible, to get any clear policy analysis or recommendations from economists, politicians or, of course, media commentators. In particular regard to the last group, Harford (whose first book The Undercover Economist is one of the best introductions to the discipline) says, "Anyone who insists that running a modern economy is a matter of plain common sense frankly doesn't understand much about running a modern economy."
This book can provide a clear idea of the straits T&T is in, although no clear policy prescriptions. Whereas Harford's first book dealt with microeconomics (individuals and firms) this book, his fourth, deals with macroeconomics, which is how an economy operates as a system from resources to monetary policy. In line with this, nearly two-thirds of the book is devoted to recession-related issues: which brings me to the worst news.
Harford notes that a recession is when a country's Gross Domestic Product (GDP) gets smaller for a few months; a depression is when GDP keeps falling or stagnates for years. And economist Terrence Farrell, who heads the Government's Economic Advisory Board, has been insisting that T&T is not in a recession but is going through a structural adjustment or what he calls a "commodity cycle." This, however, may just be a diplomatic way of avoiding the "D" word.
The discipline of macroeconomics, in fact, was invented after the Great Depression of the 1930s, and Harford gives a good brief history of this. The central figure was British economist John Maynard Keynes, whom Harford quotes as writing: "the master-economist must possess a rare combination of gifts...He must be mathematician, historian, statesman, philosopher–in some degree...No part of man's nature or his institutions must lie entirely outside his regard."
This in itself explains why commentary on T&T's present recession has been so lacking. But Harford also deals with Keynes's highly counter-intuitive prescription, in which he advised that governments should spend money during a depression to stimulate economic activity. But, notes Harford, this prescription is only effective during extreme economic downturns. When the decline is not so bad, such "stimulus packages" have the expected effect of wasting resources.
Moreover, this finding is useless for T&T, since it applies to large economies with a fixed exchange rate and, more importantly, economists only discovered this by econometric and historical analyses. But little such work has been done in the Caribbean or T&T. So we do not know if spending or austerity is the most effective policy response, although Harford's thesis suggests the latter.
Austerity, however, means fewer jobs, and Harford devotes some attention to this since it is not a purely economic issue. "Unemployment hurts people far more than mere loss of income would suggest," he writes "...being unemployed is one of the single most depressing situations any of us is likely to experience." (Although he cites psychology research for this point, what he omits is rather telling: these findings apply far more intensely to men than to women.)
As the recession (or commodity cycle or depression) drags on, commentary will continue. Harford's book is useful for putting such local analyses into a wider perspective.
