Recovery leaves too many big problems unsolved
The economic worst is past. But there are many issues left to worry about.
Start with the good news. GDP is now growing almost everywhere, while the unemployment rate is hardly rising anywhere. Businesses and consumers are less fearful. As much as half of the 20 percent decline in international trade has been erased.
Perhaps the best news is what has not happened. There have been no national defaults, countries dragged into political chaos, bitter divisions among the great powers or, with a few tiny exceptions, massive declines in consumption. The global political-economic-financial system is still in business.
Still, little has been done to address the three underlying and interlocked issues that tripped the world into financial crisis and recession. Their persistence helps explain why the recovery has been frustratingly slow up to now. If anything, they are all looking more intractable than ever. Meanwhile an old problem, unemployment, is rearing its head.
Start with financial dysfunction. At the micro level, there has been some progress. Regulators are becoming more active and banks are building up capital cushions. Risk models are being reconsidered. But viewed globally, the dysfunction has merely changed shape, becoming more threatening in the process.
The private sector has not shed all of its excessive debts, but governments have abandoned all pretence of fiscal discipline. The burgeoning debts of the United States, home of the world’s reserve currency, are particularly worrying. Meanwhile, policy interest rates are too low to help ration capital, and cross-border holdings of government debt continue to increase.
Second, global governance remains painfully weak. Yes, a trade war has been avoided and the G7 has gracefully yielded to the G20 as the talking shop for world leaders who matter. But none of the institutions that helped keep international economic relations fairly friendly over the last half-century — the United Nations, International Monetary Fund, World Bank, the Bank of International Settlement and the World Trade Organisation — were much help. Ad hoc arrangements are better than no arrangements, but competent and respected global institutions are in short supply.
China’s post-crisis behaviour suggests the supply is not likely to increase soon. Beijing has dismissed sensible international calls to revalue the yuan and move towards balanced trade as hostile to its national interests. It may be that as a still-poor country and a newcomer to the circle of global power, China simply doesn’t share the worldview of the traditional global powerbrokers.
Third, the shift of global economic power away from the United States looks messier than it did before the crisis. The shift should be a good thing. A country that accounts for 5 percent of the world’s population cannot expect to dominate global trade forever. But the leaders in Washington and on Wall Street have shown little regard for making the transition easy.
During the good years, Americans consumed and borrowed too much, while neither the government nor the central bank worried about the dollar’s international role. In the bad years, the government has borrowed with abandon, while all but cheering as the bulk of the world’s currency reserves were devalued. The current policy mix is almost exactly what economists would recommend if the goal were to create a dollar crisis a few years from now.
The recession has also brought a very old economic problem back to life. Unemployment has been identified as a threat to industrial prosperity for almost two centuries, but in early years of the last decade it looked like strong growth and the right sort of labour laws could create jobs for all.
Such optimism now looks excessive. True, fast government action has kept reported unemployment rates from skyrocketing in many countries. But the jobs of too many workers now rely on funding from governments that cannot really afford the subsidies they are providing. And where actual unemployment is high, most notably the United States and Spain, the obvious solution of lower jobless benefits and lower wages is politically hard to swallow.
Financial dysfunction, global governance, an epochal power shift, and now a resurgent threat of joblessness — it’s quite a list. These topics may not come into the headlines in 2010, but they will not all stay away forever.