On a general economic malaise

So once again, all the economic indicators around the world show that the economy is slowing down once more. Politicians' moods have switched from stimulus to spending contraction, unemployment keeps going up, and consumer spending keeps going down. Even the Bank of England had to admit that swingeing cuts to public sector spending have prolonged their forecast period of economic depression - and the risk of sliding from depression (a period in which growth is smaller than it used to be) back into a recession (actual economic shrinkage) looms ever-larger.

This post will examine some of the reasons we're in this hole, and a few ways of getting out of it.

Economic Wrong-headedness

The most basic problem is that Governments currently don't seem to understand the concept of public revenue.

For an individual, income is entirely dependent upon assets and employment - or state replacements for employment such as benefits. When the economy tanks, you have to spend less, or you lose your home, car and creature comforts. For a business, income is entirely dependent upon customers buying services or goods from you. If nobody is buying, then you have to trim costs - but there's a point at which costs cannot be lowered anymore - and if you hit that point and still can't sell anything, you go out of business. Both can get by for a while on credit, but after a while the debt will sink them - and credit is expensive when you are poor.

For governments the world over, this equation is somewhat different. Almost all income comes from individuals or businesses, in the form of taxation. If the people and businesses of your country are prospering, then so is the government. If the economy is tanking, so is tax revenue. However, unlike an individual, during hard times costs actually go up. Unemployment benefits, health-care for the suddenly poor (who probably have more health problems due to stress), and other welfare costs spiral upwards at exactly the time governments have the least revenue.
Additionally, there is only so much that a government can trim without damaging prospects for economic recovery. If you don't spend money maintaining basic infrastructure (roads, ports, utilities), then when the world economy picks up - your region is no longer as attractive a target for growth. If you don't spend money on education, then the next generation will be less employable - and subsequently a less attractive target for growth.
Also, unlike the general public, government debt is cheap - especially for large, well-established economies. Right now, a long-term Federal US bond for $20 billion would only cost about $25 billion over 20 years to pay off! Likewise, UK gilts are incredibly cheap right now. Government borrowing is at a very high level right now, but with repayment regimes like that, it's a very different kettle of fish to a credit card that leaps to 22.5% interest when you delay repayment.

Additionally, it's often less expensive to a government in the longer-term to not make someone redundant (directly or indirectly). When employed, they pay taxes. They buy goods (paying VAT/sales tax in the process) from business (who pay taxes). When unemployed, they receive government money to assist them, and can no longer buy as much stuff from businesses, cutting tax revenues all down the chain. Make enough people redundant, and the businesses who rely on them close (causing even more redundancies) - a downward economic spiral of decay.

Taxes

What's really peculiar is the idea that taxes should not rise when governments are out of cash. As an example, extending Bush Jnr.'s tax cuts for the well-off (affecting a mere 2% of the US population) cost the United States $700 billion. That's an enormous amount of money; you could pay off 5% of the total US national debt with that amount (and that's if you were stupid enough to use it as a lump-sum payment on a low-interest long-term debt plan). You could fund the entire stimulus package with it, making it entirely debt-neutral.

Part of the reason for this is that Congressmen want to be re-elected, and raising taxes is generally bad for one's re-election prospects. However, much of this is based around a false premise; since Reagan, it has been popular to cite a chart stating that economic productivity falls as taxes rise. Certainly, at extreme levels this is true - but there is no historical evidence that it is true overall. Indeed, Clinton's record growth period coincided with taxes significantly higher (on the well-off) than we have now - and yet, we aren't even close to Clinton's economic miracle. Does that mean the model is false? No; it simply means that if you take any one economic indicator in isolation and expect it to bring about the changes you desire - you are a blinkered shire-horse of an economist.

Dogma

Accompanying the anti-tax dogma, is an even more insidious dogma: that everything government does is bad, incompetent or inept. Sure, there are plenty of inept bureaucrats, and there is plenty of waste. However, the often-peddled tales of welfare recipients with limousines are the exception rather than the rule (studies show that welfare fraud is less than 1% of the welfare budget, while incorrect payments are only around 2-3%; private enterprises lose that much all the time - HP recently admitted to paying a lady $5k per week to greet people at the door to corporate events!). The reality is, while these tales are great ways to get attention, they mask a far more insidious hatred of government providing services to the bottom end of society - the people who really need them.

It is also dangerous dogma, in that not helping people when they need it - now - inevitably leads to an increase in crime, an increase in permanent under-employment (as people give up and leave the workforce for good), and a more difficult economic recovery.

History

It helps to understand this malaise in terms of history (an admittedly unpopular viewpoint!).

Prior to the early 18th Century, there really wasn't an industrialized world. Agrarian economies were quite simple: you grew enough crops to sustain yourself and sold a small surplus, which didn't have to be very large since there were very few service industries to sustain. Agricultural work was very labor intensive, since very few machines existed to assist with the process - so employment was assured, at least for part of the year. Charities (in particular Churches) were able to pick up the slack and help the hard-cases.

Industrialization changed that forever. Agriculture became increasingly automated, causing massive unemployment. Industries appeared, and labor increasingly switched to cities. Despite this, the plight of the poor became worse and worse - people starved to death, were incarcerated in poor-houses, the Dickensian nightmare was real. It wasn't until the financial collapse of the 1920s/30s that real action was taken - and only then after a horrible death toll.

The safety-net (still opposed by Libertarians) appeared, following the most basic of humanitarian premises: let those who can, help those who cannot. Bad times hit everyone at some point, and society functions better if we try to help those at the bottom get back on their feet. Admittedly, it took the war-time economy of World War II to fix the US economy and industrial base, but between that extraordinary stimulus and a system designed to train workers and help the worst-off, life became much better.

Now, we're standing on a precipice. Much of the safety net has been worn thin, and is being continually eroded. The economy is a mess, and already the nation is going backwards. So I leave you with a basic question: do we want to invest in a future, accepting that some of us may have to pay a little more to achieve it - or do we want to let 2% of the population get richer while the rest of us rapidly approach squalor?