Why recessions, like forest fires, are natural and good

Every country in the world has spent the last half decade battling with varying degrees and flavours of recession. Since the start of the global financial crisis in 2007, tens (possibly hundreds) of millions of people have been forced into unemployment. Millions of homes around the globe have been lost to liquidators and banks. Governments, once rolling in tax revenues, are now forced to make impossibly painful political choices about which social services to cut, and how to manage their enormous debts.

Although the effects of the Great Recession have been skewed towards to rich North, the entire world has suffered. The hardest hit are the poorest of the poor in countries that rely heavily on international aid. With the European Union struggling to bail out its own members, Somalia and Myanmar are not exactly top of the priorities list anymore.

So, how can I be so callous as to suggest that recessions are not only natural but good? It stems partly from my belief in the market - one of humankind's greatest achievements. Right now that's not a very fashionable philosophy. In fact I regularly draw scorn and eye-rolling when I express it in public.

But just stop and think about it: an entire globe's worth of resources are currently being distributed, divided, combined, refined, finished and allocated, all without any meaningful kind of central planning. That's pretty miraculous, given that human beings are notoriously selfish, short-sighted and irrational.

Nasty, brutish and short

We lived for the first 100,000 years of our existence in tiny hunter-gatherer bands - unable to cooperate or share territory with each other, essentially beasts. It's fashionable to paint the modern era as dystopic and soaked in misery, and yet there are more people living comfortable, happy, productive lives right now than the combined total of all the people that lived before the year 1800. Imagine having a rotten tooth in the year 400. Not a pretty thought. But now the worldwide market for dentistry skills and tools means that even quite poor people don't have to suffer through that worst of all pains.

Are the markets sometimes cruel and capricious? Yes. Do they sometimes conflict with the ideas of social justice? Definitely. And are they prone to manipulation, unfairness and given to rewarding the wicked? We all know these things are true.

And yet almost all criticisms of the markets are really criticisms of people and their flaws. We distort our markets with silly rules, short sighted barriers and monopoly power, and then we complain that the outcomes are not what we expected.

Nothing's fair in love or war

Generally, when left alone, markets will allocate resources efficiently. Granted, efficiently doesn't always mean fairly. But that's mainly because "fair" is actually a weasel word beloved of politicians and sales people. Fair by whose standards? Fair in what sense? An entrepreneur will not have the same sense of fairness as an established business person, and neither of them will agree with the guy stuck in long term unemployment.

Do I advocate pure, unadulterated capitalism - go back to laissez-faire and let the chips fall where they may? Definitely not. I believe in social safety nets, and I believe in giving people a hand up (though not a hand out). What I do advocate is allowing markets to take care of everything that they can, and only intervening where necessary.

"But how can you still worship the markets after they have failed so spectacularly?" you might ask. Simple: it was not the markets that failed, but us. Saying the markets failed is like saying the weather failed because you didn't get the sunny day you wanted. It's like saying exercise has failed because it is too hard, and doesn't lead to instant weight-loss after the first 20 minute session.

One of our greatest flaws as a species is our inability to accept reality - particularly when it's uncomfortable or at odds with our own hopes or ideas. This is sometimes a force for incredible power and good. Most great inventions, much great art and many great events are born out a need to confront and overcome suffering.

But more often it's a force for unreality, for avoidance and obstruction. Often what we think of as "bad" or "harmful" is merely personally inconvenient. We would rather take a pill to lose weight than exercise. We would rather pay the minimum on our maxed out credit cards than stop eating in restaurants for a month. We would rather give our constituents free health care before an election than raise their taxes to fix the roads.

Burn baby, burn

And this unwillingness to accept reality extends to every aspect of our dealings with the planet and each other. Few things capture this more succinctly than the way we deal with forest fires.

In many of the world's forests a natural cycle has been playing itself out for millions of years. During prolonged wet periods the vegetation becomes lush and overgrown. Then, when the climate becomes drier for a few seasons, fires sweep through the forest, felling many larger trees and all of the underbrush. This allows for new growth and rejuvenation, and is a vital cleaning system for the whole biosphere.

Then along come humans, convinced of their own power and rightness, and proceed to stamp out "wildfires" and clear underbrush manually. We build our homes closer and closer to the forest edges, and covet the lumber for our furniture and industry. We can't allow the forest to burn! No, we are captains of this planet. We are in charge.

Apply this logic for a decade or five, add some global warming and some La Niña and El Niño effects, and you have wildfires that span entire continents, that burn for months or even years and produce enough smoke to be seen from space.

And why are they so big and uncontrollable? Because we've delayed the inevitable natural cycle, and ended up just exacerbating it. But do we recognise this reality when our houses are burned down? Nope. Instead we say "Someone should take responsibility for this. It must be stopped. It's not fair. It's the governments fault. And big business."

Recessions are very like forest fires. The economy goes through a growth spurt and people are filled with positivity and confidence. All kinds of small businesses spring up and flourish. When the economy inevitably contracts again, confidence falls and fear takes over. People stop spending, and many new businesses (and some old ones) are swept away in the ensuing recession.

Creative obstruction

If this seems Darwinian that's because it is. Capitalism is about creative destruction. If you can do something better, quicker or cheaper, then people will shift to your product or service. If you protect or prop up industries, you ensure that they will never change or innovate and never meet their customers' needs. Just look at Telkom or Air France. By protecting industries, you stop people who could do the job better from entering the market.

Governments and central banks around the rich world have been playing this game with the economy for over two decades now. Unwilling to accept recessions as part of the natural order of things, they have repeatedly blunted their effects and limited them to a few months at most.

How have they done this? By lowering interest rates, pumping stimulus spending into the economy and - when those avenues eventually ran out of juice - quantitative easing. In a fascinating article in the New York Times, Nate Silver points out that the American economy is lagging 40% behind its long term growth rate. By repeatedly putting off the Great Recession, the Fed and the US government only made it much worse.

What's worse, their efforts to prevent two previous recessions have distorted financial markets, and caused the financial sector to balloon into one of the world's largest and most profitable industries. The literally free money created by a prolonged period of near zero interest rates after the dot-com bust led directly to the current crisis. Sub-prime mortgages would not have been palatable if real interest rates were not close to zero.

When the bubble did eventually burst, the financial sector had grown so rich and important to the global economy that the effect of the shock wave was magnified many times in the real economy.

We see a similar dynamic playing itself out in Europe. The EU is unwilling to admit that Greek is bankrupt, and so it keeps propping it up with half-hearted bail outs, all of which only prolong the agony of ordinary Greeks. Greece's growth is unlikely to rise above 2% in the next decade, which makes their debt (which will soon reach 150% of GDP) unsustainable. But, as with forest fires, we don't want to accept the uncomfortable truth: Greece is bust. By plugging their fatal wound, we ensure they will die slowly of septicaemia instead of quickly, from blood loss.

A tourniquet, not a transplant

Does this mean that I think that Obama's administration was wrong to intervene in the markets and prop up the financial sector during the teeth of the crisis? Actually, no. The scale of the crisis threatened to completely overwhelm the global financial sector. That would have threatened every business in the world, and could have turned the Great Recession into a second Great Depression. Putting out the edge of a wildfire that threatens lives and homes is different from dousing a fire in the middle of the wilderness.

What I do object to is the rich world's dogged insistence on stimulating their way out of the recession. Rather than stop once the immediate danger was over, governments continued pumping money into their economies. The results of that strategy are now clear: the "contagion" has spread from the financial sector into sovereign debt.

The best example of this is Ireland. When the Irish government unilaterally agreed to act as a back-stop for all the debt of Irish debt, they didn't understand the magnitude of the task they were agreeing to. Now they are literally at the brink of ruin. And, like the rest of Europe, their generous social transfers - now taken for granted by the recipients - look increasingly unsustainable.

And that's another function of recession: it focuses government spending on the truly needy and away from the merely entitled. Millions of British pensioners enjoy "universal benefits" like cheaper fuel and free bus rides, regardless of whether they are rich or poor. This may be more fair (there's that word again), but it's not more sustainable.

It's fairly likely that the rich world will be in recession again within the next year. But this time, thanks to their frantic efforts to avoid the last one, there is nothing left in their arsenal. Interest rates are at zero, government debt is already too high, and thus the appetite for more quantitative easing is nonexistent. Tax cuts are impossible, and austerity measures are the order of the day. This time the fire is going to sweep unhindered through their economies.

But once the cleansing fire has passed, they have a chance to learn from their mistakes, to clear away the detritus and the useless dead wood, and to encourage new growth that will sustain their next generation. Or they could keep pretending that they're in control, and ordering people not to evacuate from their homes as the fire rushes towards them. Check out the emperor's new clothes everyone, they sure are shiny.