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.
After all, trade (like racism) is an issue on which Trump has been utterly consistent over the years.
.. his views are based on zero understanding of the issues or even of basic facts, well, Trumpism is all about belligerent ignorance, across the board.
.. The real goal, instead, is to protect us from ourselves: to limit the special-interest politics and outright corruption that used to reign in trade policy.
Trumpocrats, however, don’t see corruption and rule by special interests as problems. You could say that the world trading system is, in large part, specifically designed to prevent people like Trump from having too much influence. Of course he wants to wreck it.
.. a trade war against the European Union would make America as a whole poorer, even if the E.U. didn’t retaliate (which it would). It would, however, benefit some industries that happen to face stiff European competition.
.. The small groups that benefit from protectionism often have more political influence than the much larger groups that are hurt.
.. the infamous Smoot-Hawley Tariff Act of 1930: Enough members of Congress were bought off, one way or another, to enact legislation that almost everyone knew was bad for the nation as a whole.
.. Tariff policy, which used to be one of the dirtiest, most corrupt aspects of politics both in the U.S. and elsewhere, has become remarkably (though not perfectly) clean.
.. the steel and aluminum tariffs, justified with an obviously bogus appeal to national security, clearly don’t pass the test.
.. But that won’t bother Trump. After all, we now basically have an
- Environmental Protection Agency run on behalf of polluters, an
- Interior Department run by people who want to loot federal land, an
- Education Department run by the for-profit schools industry, and so on.
Why should trade policy be different?
Remember, when the Republicans blamed Obama for leading from behind. Is Trump’s leadership what they call leading from in front? Isolationism is leading from in front? Is that what Republicans call leadership?
.. I remember a time when republicans disliked Russia and loved free trade. That was so last election cycle. Now it is the opposite. What changed?
.. Until my late 20s
(in the 1970s) the United States had what is called a “regulated capitalism“. This resulted in a more or less balanced arrangement of economic outcomes for the majority of people. All quintiles rose when the GDP rose. They were two sides of the same coin: when the economy prospered, the American people prospered. This is no longer true.