TRAGEDY in Norway, conflagration in Britain, sovereign meltdown in Europe, impasse, foreboding, downgrade and a deep sense of decline in the US: welcome to the West’s ‘autumn’? Given the magnitude and scale of the events leading into, and then emanating from, the so-called Great Recession, this is a question that has been seeking an answer for some time.

Global economic developments since 2008 have been narrowly — and very wrongly — characterised as a ‘sub-prime’ or a ‘financial’ crisis. In what has mirrored to a great extent, though arguably with not the same severity yet, the Great Depression of over 70 years ago, the current episode has not just been a financial or even macroeconomic crisis. A ‘financial’ crisis connotes something relatively short and sharp, occurring with regular frequency in some part of the globe, that tends to get fixed after the application of bank recapitalisation, monetary easing and other forms of policy intervention. While a recession is generally an outcome, it is usually typical in that it lasts 18 months to two years on average in the developed world.

However, events since 2008 (and even earlier, starting with what Alan Greenspan called the ‘Great Moderation’) have hardly been ‘typical’. In fact, as underscored by the sovereign credit downgrade of the US, and the huge retrenchment of growth and jobs in Europe, recent events have been seismic and portend to what Mohammed El-Erian of PIMCO, the world’s largest private bond investor, has called ‘the new normal’. Decades of low growth, high unemployment and painful repair of public finances stare at the core of the global economy: US and Europe.

In addition to these events of great magnitude and severity, the confluence of the food and commodity prices super-spike since 2007 has produced a tsunami of social dislocation and discontent around the world. While this has spawned misery on a global scale in its wake, the impact has been hardest felt by countries with high levels of public debt that have constrained their ability to stimulate the economy with anti-cyclical policies, or to insulate the vulnerable with safety nets or other protection mechanisms. Commentators have rightly referred to the aggregation of risks as ‘the perfect storm’, or perhaps more appropriately in the current context, a true ‘black swan’ event.

Hence, since the start of this crisis, over 50 million jobs are estimated to have been lost globally, while initial estimates put the increase in poverty at close to 200 million people in Asia alone. Not entirely coincidental is the fact that roughly one-sixth of humanity, or one billion people, went hungry every day in the world in 2009.

In many ways, this pain is more concentrated and acute in the developed economies which are struggling with unemployment, wealth erosion and a loss of hope while much of the emerging world is still experiencing unprecedented prosperity. The scale of pain in Europe and the US can be gauged not just by the magnitude of deficit reduction required over decades to return to a measure of solvency, much of it in the form of expenditure-cutting, but by statistics relating to the pain of ‘real’ people.

In Europe alone, an estimated 22.5 million people are currently unemployed, roughly 10 per cent of its workforce, with Spain’s unemployment rate at 21 per cent. Many of those seeking jobs are young and educated, with a large swathe who are facing a massive downshifting of their previously affluent lifestyle. In the US alone, close to six million properties are believed to have faced foreclosure action since 2007.

To a great extent, a similar toxic socio-economic environment had spawned widespread disillusionment and the student protest movements and inner-city unrest across Europe in the 1960s and 1970s, while giving birth to anarchist urban guerilla movements such as Baader-Meinhof or the Red Army Faction, the Italian Red Brigades and the Greek 17 November organisation, among others.

While state security apparatuses are much better equipped post-9/11 to snuff out terror activity, and any other geo-politic entity is unlikely to be a ready sponsor for such movements in the West, anarchy could yet be a recurring theme for years to come in Europe, particularly given the jobs outlook and the prospects for huge cutbacks in state entitlements and public services for years on end.

At the heart of the debate on how to deal with what some have come to regard as perhaps an existential crisis of the capitalist system, is essentially the question of who is going to pay for this — i.e. what shape will the burden of adjustment take? As demonstrated in the debates in the US Congress, the ideological dividing line is between those who want to cut expenditure (Republicans), especially entitlement programmes that favour essentially the poor, and those who want to increase the tax incidence on the rich while keeping expenditure levels on key programmes more or less unaffected (Democrats).

A popular variant of the latter argument is that increasing public spending in an economic crisis is the best bet to balance the books later, as it will generate economic activity and therefore more tax revenue down the road. Policymakers, academics and the media are besotted with this notion in Pakistan as well, despite overwhelming evidence in our case, that much like a second marriage, this proposition reflects the triumph of hope over experience. We will explore in the next article the myth of this ‘no cost’, silver bullet ‘solution’ that essentially seeks to replicate what policymakers in the US have achieved: kicking the can down the road.

The writer heads a macroeconomic consultancy based in Islamabad.