An extra-terrestrial observer would have noticed a global financial and economic crisis on planet Earth. Many earthlings would say this is a mess we humans have put ourselves into. And, although there are wide differences regarding how the situation has affected the countries, the crisis seems deeply rooted and not a short term phenomenon at all. Yet, even with the duration unknown or hard to predict, the situation is unsustainable.

If not tackling the problem with structural reform and other necessary measures, in what way may a government react to the crisis?

One option is waiting for an external miracle. This would mean waiting for the economy of our trading partner to regain the steam to start buying our goods and services at higher prices, in bigger quantities, or at higher margins. The external miracle could also happen if an outside agent decided to lend us at a lower interest rate.

Another option is waiting for an internal miracle. This would mean waiting for undefined, not necessary understood changes to cause an increase in productivity, employment, or accumulation of resources. Miracles are not impossible, but they are unlikely and unpredictable, which is why waiting for one is hardly a foundation one would wish to base our and our children’s future on.

The third option is a verbal path. This approach, which is very popular among the political elites, is undetected by the people who are not skilled in political games. Among the techniques of a verbal path is a slow shift of interpretations of the situation in question, where black becomes dark grey, then not so dark grey, and so on. Based on the dead horse analogy, the ruling elite persuades the people that the horse is not that dead yet, that we have always wanted to ride a dead horse anyway, and that everyone is riding a dead horse anyway. Another technique is using the statistical methodology and measures in order to paint the situation in the economy in a positive way, or just to claim a victory, or that we are safe, or that we are experiencing progress, all without any foundation, of course.

While “waiting for a miracle” approaches are based on hope, the verbal game depends on state’s propaganda and people hiding their heads in the sand. What these three approaches have in common is that they are all very common among political elites. Yet, by using them, they are only putting lipstick on a pig, which will hardly yield anything good for the countries. As such, besides slowly lowering the expectations, the only thing being done is prolonging the status quo, which also means extending political privileges of the elites.

In many countries the situation at this point is beyond repair. In this situation, the shadow economy is once again correcting the errors and misjudgements of the formal sector. Once the shadow economy begins to prosper, with all its shortcomings, we can conclude in what state the formal sector truly is.

Since it is wise to direct resources to a productive and prospective use, our energy should be channelled into the future, instead of prolonging the agony of the failures from the past. That said, it might make sense to create a parallel system; to build institutions from scratch and enable individual agents to switch among individual institutions, if and when they choose. The new and old institutions may coexist, where possible. Nonetheless, this approach is highly unlikely, if not impossible to happen.

This commentary is an updated summary of a presentation given at Svetilnik Liberal Colloquium in 2010. While updating it, we observed that in most cases governments reacted to the financial and economic crisis by increasing suppression of economic freedom, which dealt another blow to the economy and also increased informal (parallel) economy. The government’s reaction was — and is — only putting more lipstick on a pig.