After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable. And now that it has arrived, the risks are growing even more acute. Unfortunately, even if the Greater Recession leads to a lacklustre U-shaped recovery this year, an L-shaped “Greater Depression” will follow later in this decade, owing to 10 ominous and risky trends.
The first trend concerns deficits and their corollary risks: debts and defaults. The policy response to the Covid-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.
Worse, the loss of income for many households and firms means that private-sector debt levels will become unsustainable, too, potentially leading to mass defaults and bankruptcies. Together with soaring levels of public debt, this all but ensures a more anaemic recovery than the one that followed the Great Recession a decade ago.
A second factor is the demographic timebomb in advanced economies. The Covid-19 crisis shows that much more public spending must be allocated to health systems, and that universal healthcare and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have ageing societies, funding such outlays in the future will make the implicit debts from today’s unfunded healthcare and social security systems even larger.
A third issue is the growing risk of deflation. In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labour markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.
A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetised fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalisation and renewed protectionism will make stagflation all but inevitable.
A fifth issue is the broader digital disruption of the economy. With millions of people losing their jobs or working and earning less, the income and wealth gaps of the 21st-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.
This points to the sixth major factor: deglobalisation. The pandemic is accelerating trends toward balkanisation and fragmentation that were already well underway. The US and China will decouple faster, and most countries will respond by adopting still more protectionist policies to shield domestic firms and workers from global disruptions. The post-pandemic world will be marked by tighter restrictions on the movement of goods, services, capital, labour, technology, data, and information. This is already happening in the pharmaceutical, medical-equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.
The backlash against democracy will reinforce this trend. Populist leaders often benefit from economic weakness, mass unemployment, and rising inequality. Under conditions of heightened economic insecurity, there will be a strong impulse to scapegoat foreigners for the crisis. Blue-collar workers and broad cohorts of the middle class will become more susceptible to populist rhetoric, particularly proposals to restrict migration and trade.
This points to an eighth factor: the geostrategic standoff between the US and China. With the Trump administration making every effort to blame China for the pandemic, Chinese President Xi Jinping’s regime will double down on its claim that the US is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data, and monetary arrangements will intensify.
Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea. With a US presidential election approaching, there is every reason to expect an upsurge in clandestine cyber warfare, potentially leading even to conventional military clashes. And because technology is the key weapon in the fight for control of the industries of the future and in combating pandemics, the US private tech sector will become increasingly integrated into the national-security-industrial complex.
A final risk that cannot be ignored is environmental disruption, which, as the Covid-19 crisis has shown, can wreak far more economic havoc than a financial crisis. Recurring epidemics (HIV since the 1980s, Sars in 2003, H1N1 in 2009, Mers in 2011, Ebola in 2014-16) are, like climate change, essentially manmade disasters, born of poor health and sanitary standards, the abuse of natural systems, and the growing interconnectivity of a globalised world. Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly in the years ahead.
These 10 risks, already looming large before Covid-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimise many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.
• Nouriel Roubini is professor of economics at New York University’s Stern School of Business. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.
Saagar Enjeti asks if populism will rise following the 2020 election.
What better foe for the president than his alter ego?
A Republican friend of mine rolled his eyes (and maybe even licked his chops) at the possibility that Democrats would nominate Bernie Sanders.
“Have they learned nothing from Jeremy Corbyn?” he asked.
“Maybe not,” I acknowledged. “But they’ve learned a lot from Donald Trump.”
Corbyn, of course, led the Labour Party in Britain to a whopping defeat by Boris Johnson and the Conservatives. He lost for many reasons, but his leftist politics were in the mix. He calls himself, well, a democratic socialist.
I needn’t provide such a primer on Trump. But I should point out that while he didn’t initially command broad support within his party, the backers he did have were loud and proud to the point of fanaticism (and remain so).
He described the country as a failing experiment and promised to explode the status quo. He and his followers practiced (and aced) absolutism: You stood with or against them — there was no squishy in between — and America could be sorted neatly into villains and victims. He dispensed with the usual political etiquette, chafed against the ill-fitting political party in which he’d garbed his ambitions and insisted that the system was rigged.
Sound like any senator from Vermont you know?
You can analyze Sanders and assess his prospects in terms of how liberal many of his positions are: the
- end of private health insurance, the
- dismantling of the Immigration and Customs Enforcement agency,
- free tuition at public colleges regardless of a student’s economic circumstances.
By that yardstick he’s Corbyn, and, in my view, a hell of a general-election risk.
Or you can focus on his irascibility, his grandiosity and the bellicosity of his believers. Through this lens he’s Trump. And what better way to topple the current president than with his ideologically inverted alter ego?
That’s a theory of the case — fight fury with fury, one messiah with another — that I hear frequently as Sanders cements his front-runner status in the Democratic primary and as Democrats, desperate to defeat Trump, wrestle with the wisdom or folly of giving Sanders that assignment.
He essentially tied Pete Buttigieg in the Iowa caucuses and is slightly favored to win the primary on Tuesday in New Hampshire, where he trounced Hillary Clinton four years ago. He leads Buttigieg by significant margins in polls in the two states, Nevada and then South Carolina, that follow it. Meanwhile, it’s hard to see how Elizabeth Warren pulls ahead of him, and Joe Biden is struggling to overcome a humiliating fourth-place finish in Iowa. That makes Sanders as strong a bet as any other candidate to nab the Democratic nomination.
The reasons for his success include his similarities to Trump, but don’t get me wrong: There’s no alignment of agendas among the two of them, no common set of political values and no moral equivalence — not remotely. I’ve read too much journalism that comes too close to suggesting that they’re versions of the same old white guy and have the same sloppiness with facts, talent for bullying and instinct for demagogy. Trump is a tyrant all his own.
But Sanders is a populist of the left as surely as Trump is a populist of the right, with a familiar distaste for compromise and a comparable appeal to Americans outraged or disgusted by politics as usual and by the usual politicians.
He, like Trump, breaks the mold and defies the laws of political gravity: He had a heart attack last fall, at the age of 78, and it didn’t scare away voters or slow his stride. While Trump claims leadership of “a movement the likes of which the world has never seen,” Sanders spearheads a “revolution,” to be brought about by “the most unprecedented campaign in the modern history of this country.” And aspects of his pitch — on trade, for example — resonate with the blue-collar workers in the Rust Belt who were important to Trump’s election. While some of Trump’s advisers believe that Sanders would be an easily caricatured foil, others believe that he could be trouble.
Look closely and you see the spirit and lessons of Trump all over the Democratic primary and the Democratic Party. You see it in the Biden campaign’s questioning of the legitimacy of the Iowa results days before The Times discovered and reported on specific irregularities. You see it in Mike Bloomberg’s merciless trolling of Trump with commercials that make him look fat and unhinged, and statements that would be shockingly juvenile but for their mimicry of Trump’s taunts. Julie Wood, a spokeswoman for Bloomberg’s campaign, recently called the president “a pathological liar who lies about everything: his fake hair, his obesity and his spray-on tan.”
You see it Nancy Pelosi’s theatrical ripping up of her copy of Trump’s State of the Union address. And you see it in the dive bar in Iowa where, on the eve of the caucuses, one Sanders supporter led others in a crude call-and-response, as recounted by Shawn McCreesh in Rolling Stone. The supporter would say the F word, and everyone would answer “Biden!” or “Warren!” or such.
Is this the rowdy road to a Democratic victory in November 2020? My brain and gut both say no, and those who think so — and who designate Sanders as the one to lead the stampede — overlook several dynamics, starting with policy. Polling shows that most Americans dislike a “Medicare for all” plan that eliminates private insurance, as Sanders’s signature proposal does. Polling also shows that most Americans wouldn’t want that plan to cover undocumented immigrants. Sanders’s covers them.
And Trump is already testing his attack on that front. “If you believe that we should defend American patients and American seniors, then stand with me and pass legislation to prohibit free government health care for illegal aliens,” he said in the address that Pelosi shredded. He also vowed that he would “never let socialism destroy American health care.”
The idea that Sanders would be the strongest nominee is challenged by the most recent midterms, when the candidates who helped the Democrats gain 40 seats in the House and recapture control of it weren’t ideologically pure soldiers of the revolution. They struck less militant, more nuanced notes, as the veteran Democratic strategist James Carville observed a few days ago in a lament about Sanders’s rise.
He told Vox’s Sean Illing that in 2018, “we did great: We talked about everything we needed to talk about and we won. And now it’s like we’re losing our damn minds.” On MSNBC he said he was “scared to death” that Democrats would blow the 2020 election.
Turnout in the Iowa caucuses was hardly reassuring. It appears that about 170,000 Iowans participated — considerably fewer than in 2008, when 240,000 people took part. That contradicts Sanders’s and his followers’ contention that his candidacy would rouse legions of dormant and first-time voters.
As for the argument that Hillary Clinton’s defeat proves the inefficacy of an establishment or center-left nominee, well, Clinton won the popular vote by about three million ballots and lost the Electoral College by only about 77,000, despite Russia, despite James Comey, despite a relentless focus on her emails and despite her own uniquely heavy political baggage. Subtract all of that and you get a winner — a winner who looks nothing like Bernie Sanders.
But when you go back exactly four years ago, you’re also reminded that Trump was causing utter panic among his party’s standard-bearers, who were convinced that nominating him would be akin to forfeiting the election. He was too idiosyncratic, too provocative — too much. Any responsible political analyst could see it. And almost every responsible political analyst saw it wrong.
Robert Reich is a former U.S. secretary of Labor and the author of many books, most recently Common Good. He is a professor of public policy at the University of California, Berkeley.
Reich’s candid, full interview was conducted with FRONTLINE during the making of the two-part January 2020 documentary series “America’s Great Divide: From Obama to Trump.”
Watch Part One here: https://youtu.be/SnMBYMOTwEs
And Part Two here: https://youtu.be/l5vyDPN19ww