Jobs vital to global recovery

In the past ten years Western governments have become used to spending without thinking and the reality of the financial crisis has still not sunk in as the stimulus packages mask the dire state of private and public finances.

Policy-makers are trying to replace one credit bubble with another instead of trying to address the long-term issue of how to produce sustainable growth without borrowing. What is more troubling is the ability of governments to saddle future tax payers with debt for the sake of electoral gain. After the stimulus packages it will be up to consumers to spend again and there are currently no indications that they will be able to do so.

Unemployment continues to rise thereby decreasing purchasing power and we will see a fluctuation in economic growth as governments' struggle with unemployment.

Especially in the industrialised countries, the flaws in the shift from the manufacturing to the services sector has been dangerously exposed because so much was wiped out within a short period of time.

For example, since the financial crisis began Britain has lost more than 25 per cent of its tax revenues and even with the stimulus spending and quantitative easing programmes, they still keep raising both their short- and long-term borrowing projections.

Of course public services will suffer even if taxes increase as governments have to divert resources to repay the debt that has been built up over the past months .

Stable but mild

Therefore, it is highly unlikely that we will see the type of economic growth we experienced in the past 10 years any time soon, which might exactly be what the world economy needs. Stable but mild is far better than high but volatile growth. What many business leaders, politicians and commentators seem to have overlooked are some of the creations of the past decade.

Enron, WorldCom, AIG and Madoff to name a few and the multitude of bubbles operating at the same time in the same economy such as property, stock, investment and borrowing bubbles.

The most important thing that needs to happen now is a return to basic economic fundamentals, the most urgent of which is to create jobs. The North American and European governments defend their agricultural sectors without remorse but when it comes to manufacturing they are willing to give up everything.

Agriculture is important because we need to feed ourselves while most manufacturing is expendable because it can be made cheaper somewhere else. Manufacturing has been declining in Western countries over the past 30 years, except for the arms industry, as the service sector was supposed to replace all the jobs that were lost as a result.

Of course, not all manufacturing jobs must be defended but at the same time they shouldn't be given away wholesale either.

Manufacturing is far easier to understand than businesses making bets on instruments very few people understand let alone the politicians who decide on the laws to regulate them. In theory there is nothing wrong with dealing in derivatives, especially when you have a risk limit that is well within your means in case a major loss is incurred.

Risk management

But when you have companies like AIG making bets that dwarfed the amount of money they actually had, operating seemingly without any risk management team, then you inevitably have government bailouts for companies that do not deserve them.

The traders should have been watched by risk management teams and the finance people should have had an eye on everyone. But while everyone was making money nobody wanted to spoil the party. The Chinese economy is strong because it saved, invested, manufactured and weren't running a casino and calling it an economy.

There should be a healthy balance between the agricultural, manufacturing and service sectors, and the financial sector should be the foundation everything is based on. Anyone who thinks that what happened is not going to happen again, should have his head examined.

The profits that have been made in the past months by banks are again mainly due to speculation. In theory this is fine but not when you expect to be bailed out should things go wrong.

Whatever the reasons that brought us to the state we are in now, governments around the world need to get a grip on unemployment as the higher it goes the less the tax revenues and the more they have to tax, borrow and spend on social services.

 The author is an economist and independent consultant.