Recovery leaves too many big problems unsolved

January 4, 2010

ed hadas.jpgThe 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.


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i don’t know about the rest of you, but back in the 50s i was raised to understand that high tech would eliminate the need for most of us to work!

since nafta and our government/corporate rulers have eliminated a lot of u.s. based jobs, they must understand this as well.

with the agricultural surpluses the first world runs every year, food could be free. with all of the foreclosed housing, housing (at least group–don’t be so proud–housing) could be free. since the price is dropping so fast on computer hardware, i would think all of us that want one could all have free surplus computers this year! that takes care of entertainment! finally, since all of the coal and oil that comes out of american soil belongs to us, not the corporations, it should stay here and not get speculated on in the spot markets. this should make energy cheap enough for the gov to dole out. (forget cars, use bikes.)

for free medical care, just vote all republicans and joe leiberman and all conservative dems, who had to be bought-off for medical reform, out of congress!

that’s about it, except for a few arcane economic problems the gov can handle (see above). we’re FREE! congrats, you made it to ‘The Future’!

Posted by jborrow | Report as abusive

US housing will continue to fall in 2010 as strategic foreclosures, currently 25% of all foreclosures, rises. Why stay in a mortgage when your neighborhood is renting at 1/3 the monthly cost of your mortgage? Read a wild California forclosure story at

Posted by voomies | Report as abusive

Another well written article by another elitist economist, outlining all the economic problems, without offering even a hint at what should be done to correct the problem…..

Mr. Hadas should move away from being a reminder of the problems and onto a solver of the problems…..

Posted by edgyinchina | Report as abusive

I wanted to respond to the insane comment posted by jborrow above. I would like to ask this person where all of the free goods and services they expect will come from. The government yes? Well where does the government get its money? Me and You. Judging by the intelligence level of jborrow, I expect that he has little income and pays no taxes at all. Why are there food surpluses? Government subsidies. Why are there foreclosed homes? Government social programs (ie forcing, yes forcing, under the community reivestment act of 1977 banks to make loans to all types of people, even those with low income that would never, could never afford a house). Now those people are jobless and guess what, they can’t afford that house after all. But that’s ok because the government just gave an unlimited lifeline of bailout to freddie and fannie, the gse’s that securitize these crappy loans. The government created the housing bubble with social programs to try to force ‘social equity’, low interest rates, shoty regulation and shoty oversight.

About all of that coal and oil coming out of your property. Can’t you go get it yourself? You can’t can you? Guess businesses are good for something. And they employ you or your friends or others in your community and pay taxes to your government. What a bunch of jerks.

And last, free medical care. Nothing in life is free fellow civilian. You might not pay taxes but others do. Ask yourself this question, what does the government do well? What do they do efficiently? Ever been to a post office, DOT, ever heard about the way budgets work in the government? You get XX$ every year and if you don’t spend it, you lose it, so guess what happens at the end of every year? Government contractors work 18 hr days to come up with projects to spend that money so they don’t lose it – even though they didn’t need it. See the government competes with no one, they own the country and the printing press so no one can come in and produce more efficiently. That leads to high costs, poor procedures and high taxes for those who pay taxes. estimates that in 2010 (using IRS/tax foundation/tax policy center research) over 40% of the nation will pay ZERO taxes. This provides overwhelming moral hazard for idiots like jborrow to vote democrat because they pass out the goods to lower income people. Once these people receive these goods they rely on these goods and never look back as they never had to contribute even a fraction of the goods/services they receive. What jborrow doesn’t realize is that the free stuff he wants isn’t free. The people that create jobs and wealth in America (those evil business that have profit) provide efficient goods and services that jborrow uses and more importantly these people run businesses that pay his salary. So, the free things he wants, might end up costing him is job. That is if he even has/wants one.

You might think that sounds fair, they make more, they pay more, and they do. But jborrow should pay taxes as well and judging by this thought process he does not. Social equity aside lets assume the USA gets there in 20-30 years, God forbid. The USA will be handicapped economically by these programs because job and wealth creation is punished by jborrow thinkers. Ask yourself this, who will defend the world, who will look after those than can’t defend themselves, when the USA is weakened militarily since our economy is socialist minded? Do you trust China, Russia, Canada, the UK, WHO? Who will stand up to the next evil empire when the USA is weakened? If you don’t think the USA is a great place that defends the freedoms of others than get the heck out, move to Sweden and find out how much they do for other nations.

You fool, you ask for handouts and fail to look behind the scenes and see what is really going on.

Posted by Andymc7 | Report as abusive

i’m pretty sure jborrow was being satirical.

we’re all just waiting like numbed animals… waiting to see what new housing/currency/energy/equity/liquidity  /other shock hits us next.

Posted by bryanX | Report as abusive