Reading numbers

Sat, Oct 31 06:08 AM

The numbers tell us the United States is out of recession. According to the US commerce department, America's GDP grew at an annualised rate of 3.5 per cent in this year's third quarter, following four straight quarters in which it shrank. But it may be too soon to beat the drums and bang the gongs of celebration. There are some questions to be asked first.

Does this constitute a broad-based recovery? Is it the case that American enterprises and American capital stand ready, again, to serve as the engines of world growth? Sadly, no. Breaking down the numbers makes it clear whence this growth derives: from the enormous resources that the US government has managed to mobilise to keep its economy from a spiralling free-fall into depression. The other components of growth haven't really bounced back in sufficient degree to constitute a full-scale recovery. Look, for example, at consumer spending. Yes, it went up by over 3 per cent; but a big chunk of that was because of the US government's "cash-for-clunkers" scheme, in which Americans were subsidised to encourage them to trade in older cars for newer ones with better fuel efficiency. Then consider the fact that in real estate, the sector in which the contagion began, residential construction went up rather dramatically, by as much as 23 per cent. But when that is put together with the fact that an $8,000 credit on federal tax for first-time home buyers has just been introduced, it makes more sense. The simple truth, therefore, is that crisis measures seem to be working — but that the crisis isn't over yet. The patient is walking, but on crutches; so it is too soon to declare her leg healed.

Crisis thinking, therefore, should not be abandoned, nor should any form of complacency be allowed to creep in. For one thing, many other major economies around the world are still in the doldrums — indeed, some in the UK economy fear they haven't yet seen the worst. Instead, policy-makers who believe that the government has done its bit should draw the opposite inference: the lesson that should, indeed, be learnt, is that government action can work to stave off the worst. Yes, perhaps big fiscal stimuli can no longer be handed out, given the size of the deficit and the fiscal space now available. But other, more innovative methods of stimulus are available, at least in India. The best of which: reform. Reform now, reform widely, reform unhesitatingly. That is the way to get India back on to the high-growth path that is politically and economically essential.

Inside News

Editor's picks