The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.
BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.
The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.
But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.1
Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.
The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.
In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.
As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.
If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.
For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.
To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.
According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster.
This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including
- technological disruption, a
- record-breaking migration crisis,
- anxiety over globalization,
- political polarization, and
- rising nationalism.
All are symptoms of failed policies that could turn out to be trigger points for a future crisis.
.. Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.
Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logicof the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.
At the end of last week, the caravan arrived on the doorstep to Mexico. Under pressure from the U.S., Mexico offered the migrants asylum but said it would only let in groups of 150 to 200 people a day to process their requests. Anyone crossing the border illegally would be deported, Mexican officials warned.
The Honduran government estimates that 2,000 migrants returned home. Mexico says another 1,000 or so have applied for asylum. But the majority—about 5,000, according to the Mexican government—crossed the border illegally, mostly on rickety rafts run by human smugglers.
.. “We can’t get to the northern border all together” said Irineo Mujica, the head of People without Borders, a U.S.-Mexico nonprofit that has backed the caravan since its arrival in Guatemala. Such a huge group moving across Mexico days before the U.S. midterms, he added, would embolden Mr. Trump. “If this full caravan arrives to the U.S. border, it would be like a declaration of war,” Mr. Mujica said.
.. Most migrants say they want to get to the U.S. but generally don’t know what legal options they have ahead. Many said they were determined to abandon Honduras, which has among the world’s highest rates of violence. When they saw news on television that a caravan had left from San Pedro Sula heading north, many thought it was the right moment to leave.
.. She said a criminal gang extorted her family business and demanded a “war tax,” calling it that because “if you don’t pay the gang destroys your business and kills you.”
.. For many would-be migrants, leaving in a caravan is attractive because they can avoid paying some $5,000 in smugglers’ fees and are safer traveling in numbers... “Most Mexicans are sympathetic to the migrants, so politically it becomes very difficult for the government to move against the caravan given it has such visibility,” he said. “On the other hand, you don’t want to anger the U.S. and be seen as just allowing migrants to cross through your country freely.”.. On Sunday, Mr. Trump warned the migrants on Twitter that if they didn’t accept Mexico’s offer of asylum, they would be denied entry to the U.S. He said Monday the caravan included “criminals and unknown Middle Easterners,” without offering evidence... For fiscal year 2019, the U.S. plans to send about
- $70 million in aid to Guatemala,
- $66 million to Honduras and
- $46 million to El Salvador,
according to the State Department. Most of the funds go to
- violence prevention,
- justice and rule-of-law programs, along with
- funding for border and narcotics enforcement.
.. Cutting aid to Central American countries would be a mistake, since U.S. aid dollars fund programs that reduce violence, strengthen the justice system, and encourage investment that make them more attractive places for their citizens, said Marcela Escobari, a senior fellow at the Brookings Institution.
.. Studies have shown that once a country’s GDP per capita reaches between $6,000 and $8,000, the gains from migrating somewhere become less attractive, who served under President Barack Obama as head of Latin America for the U.S. Agency for International Development.
“We need to stop these countries from becoming failed states, because that’s what’s going to cause a tremendous exodus,” she said.
.. Immigrants asking for U.S. asylum either at a legal border crossing or upon being arrested by the Border Patrol for crossing illegally are subjected to a “credible fear” interview to decide if their request should be heard by an immigration judge. More than 75% of immigrants pass the so-called “credible fear bar,” according to U.S. government statistics. Those who don’t pass that initial interview are subject to deportation.
.. Immigration authorities can jail asylum seekers until their case is decided, but bed space is at a premium as the Trump administration steps up immigration enforcement both at the border and in the U.S. interior.
For those released into the U.S., a final decision could take years amid a backlog of more than 764,000 cases pending in federal immigration court. During that time, they can live in the U.S. and apply work permits, something Mr. Trump has repeatedly criticized.
Many of those now climbing over the Democrats’ blue walls were willing to live under the original liberal governance model that existed before 1960 because it recognized the legitimacy of private economic life. The wealthy agreed then to pay their “fair share.”
.. Defenders of the liberal model argue that cities like New York, San Francisco and Los Angeles are changing into sophisticated, cosmopolitan hubs that attract a new class of young professionals who will restore urban America. Instead, many of these urban revivals are producing a phenomenon economists now call “racially concentrated areas of affluence,” or RCAAs.
An area gets RCAAed when the residents who pack themselves into it are mostly white people whose median incomes are unprecedentedly greater than the city’s poverty level. Some of the most RCAAed cities are liberal duchies like Boston, Baltimore, Chicago and Philadelphia.
Today, private economic life, especially that of the urban middle class, is no longer a partner in the liberal model. It’s merely a “revenue source” for a system whose patronage is open-ended welfare and largely uncapped public-employee pensions. I’d describe the liberal-progressive governing strategy as ruin and rule.
.. Not widely noticed is that liberalism’s claimed beneficiaries—black Americans—are also fleeing its failures. Demographers have documented significant black out-migration from New York, Michigan, California and Illinois into Florida, Georgia, Texas and North Carolina. North to south.
.. They are now asking the federal government, meaning taxpayers who live in parts of the U.S. not hostile to capitalism, to give them nearly $15 billion to replace the 100-year-old train tunnel beneath the Hudson River. Why should they? Why send money to a moribund, dysfunctional urban liberal politics that will never—as in, not ever—clean up its act or reform?
Maybe we need a new default solution to the urban crisis: Let internal migration redistribute the U.S. population away from liberalism’s smug but falling-apart plutonomies.