What is the 'Road to Recovery'?

A record trade deficit for Japan during the month of July has brought fresh focus on the dire state of the global economy.

While a trade deficit was expected, the fact it came in at double the forecasts has led some analysts to question whether risks to the global economy are translating into a sharper downturn.

China’s economic growth has proven remarkably resilient and has been one of the bright spots in the world, but there are now fears of an economic slowdown, as the European woes and persistent sluggish US growth finally starts to weigh on China.

One of the key industries in China’s growth, and one that is important to Australia’s growth, is the steel industry and there have been reports of price falls and falling demand for steel, particularly as infrastructure construction slows due to a reduction in government funding for such projects.

Output from China’s steel mills has yet to decline but there is an expectation that will happen in coming months.

If China slows more than anticipated, this will have flow-on impacts for commodity exporting countries including Australia, Canada and Brazil, among others.

On the positive side, the slowdown in China has been expected for some time as the nation transitions from export-led growth to increasing domestic demand.

At this stage, there are few if any forecasts of a more severe downturn in China, as there are expectations that the nation’s leadership will find ways to avert such an outcome, particularly out of fear that it may undermine the holy grail of social stability.

The bigger issue that confronts many policy makers is how to reinvigorate the global economy.

A solution to Europe’s ongoing financial and economic crisis has proven elusive, despite the attention of some of the finest economic minds in the world.

The uncertainty about Europe has not been helped in recent days by the increasing conjecture about a possible break-up of the European Union.

Finland’s Foreign Minister has said his government is taking precautionary measures to guard against the impact of a Eurozone breakup, while the Austrian government has raised the possibility of legal triggers that would allow individual countries to exit.

The great powerhouse of the United States is struggling to shake of the economic malaise that has held it back since the 2008 implosion of its housing market.

This week ratings agency Standard and Poor’s has increased its assessment of the likelihood of the US economy falling back into recession, with that assessment now standing at 25 per cent, up from 20 per cent in February.

In the Middle East, the war in Syria has increased nervousness from fears that the conflict could spread resulting in broader sectarian unrest beyond its borders.

Similarly, the ongoing threats of an Israeli and/or US strike against Iran’s nuclear program has raised concerns of retaliation from Iran that could include missile attacks on Saudi oil infrastructure and the closure of the Strait of Hormuz.

Against this background respected Stanford University economic professor John B. Taylor has written recently about the threats to what he describes as “economic freedom”.

While the impact of economic downturns are more easily assessed in terms of the impact of societies and individuals, he defines the freedom to choose how funds are invested, the freedom for business to choose what it produces, the freedom for individuals to choose where and how to work, and the freedom to assist others in society.

In an article titled The Road to Recovery, Taylor draws on the work of legendary economist Friedrich Hayek and particularly his seminal book The Road to Serfdom.

Taylor argues that economic growth is most dynamic when it occurs within a policy framework that is predictable and governed by the rule of law, with minimal intervention from government.

He points out that market interventions helped trigger the Great Depression because it resulted in an unpredictable and volatile investment environment.

According to Taylor, there was a return to a more stable policy environment in the US in the 1980s and 1990s leading to strong economic growth, with interventions in the late 1990s and early 2000s sowing the seeds of the 2008 financial crisis.

Taylor laments the inclination of those in power to succumb to the pressure of public opinion to intervene in markets, when such well-meaning but misguided intervention often worsens the situation.

Not given to hyperbole, Professor Taylor makes a dire warning about the threat to freedom posed by the current range of economic crises, asking: 

Is today’s departure from economic freedom any less serious than the assault on freedom that Hayek wrote about in The Road to Serfdom? Am I exaggerating when I say that the future of American prosperity - or even global prosperity - is at stake?

There will be economic challenges for many nations in coming years and while it is doubtful that anyone has the silver bullet, there is strong logic in the advice of Professor Taylor for policy makers to maintain strong predictable frameworks, governed by the rule of law, and to avoid rapid policy lurches that unsettle markets and the wider community.