In a new article to be released shortly, Nobel prize-winning economist Joseph Stiglitz paints a stark picture of economic prospects for 2011:
“The global economy ends 2010 more divided than it was at the beginning of the year. On one side, emerging-market countries like India, China, and the Southeast Asian economies are experiencing robust growth. On the other side, Europe and the United States face stagnation – indeed, a Japanese-style malaise – and stubbornly high unemployment. The problem in the advanced countries is not a jobless recovery, but an anemic recovery – or worse, the possibility of a double-dip recession.”
Asia’s economic output is too small to pull up growth in the rest of the world, but it may be just enough to suck all the wind out of the recent effort by the Federal Reserve to stimulate the economy through so-called “quantitative easing” – that is, printing money. In globalized markets, money looks for the best prospects around the world, and these prospects are not the U.S. The money won’t go where it’s needed, and will likely cause further increases in asset and commodity prices, such as food and energy, especially in emerging markets.
Stiglitz argues that, given the high levels of excess capacity and unemployment in Europe and America, printing money is unlikely to trigger a bout of inflation. It could, however, “increase anxieties about future inflation, leading to higher long-term interest rates – precisely the opposite of the Fed’s goal.”
Despite the hysterical ravings of Federal Reserve haters like Rand Paul, this outcome is hardly the gravest threat. That threat comes from the wave of austerity sweeping the world, as governments, first in Europe and now in the U.S. especially with the new Republican House majority, come under tremendous pressure from a group known as “the bond vigilantes.” That is just a new code word for finance capitalists. These forces are panicking, and spreading panic far and wide, over their anxiety about countries’ ability to make their debt payments to these lords of finance. This panic is contributing greatly to financial-market instability.
The outcome of this hysteria is all but certain: Browth will slow, possibly even decline again. Tax revenues will diminish. And employment will not significantly recover – and thus deficit reduction will be disappointing, creating a self-reinforcing downward spiral.
In our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the U.S., and vice versa.
Stiglitz argues it’s clear what we should do: “With the U.S. able to borrow at record-low interest rates, and with the promise of high returns on public investments after a decade of neglect … a large-scale public-investment program would stimulate employment in the short term, and growth in the long term, leading in the end to a lower national debt.”
But the “bond vigilantes” will have none of it, and are exerting their immense and increasingly corrupt power in the opposite direction, applying pressure for spending cuts, even if that implies reducing badly needed public investments.
Political gridlock following the 2010 midterm elections ensures that – barring a big public rebellion and mobilization – little will be done to address the American economy. Mortgage foreclosures will continue unabated; small and medium-sized business will be starved of funds; small and medium-sized banks that provide the latter with credit will struggle to survive.
The European Union, after weeks of procrastination, managed to come to the rescue of Greece and Ireland with loans. But the interest rates on these loans are very high. Political instability is growing rapidly in both countries. In the run up to the crisis, both were governed by right-wing crony capitalism and worse, demonstrating once again that free-market fundamentalist economics doesn’t work in Europe any better than it does in the U.S. Further, the contagion is spreading to Portugal, Spain and Italy. The latter two countries are large enough to ignite an avalanche of defaults and devaluations that could bring the collapse of the European Union and of the global recovery from the current depression.
In both Europe and America, the free-market ideology allowed asset bubbles to grow unfettered – markets always know best, so government must not intervene. “One might have thought,” writes Stiglitz, “that the crisis itself would undermine confidence in that ideology. Instead, it has resurfaced to drag governments and economies down the sinkhole of austerity.”
If politics is the problem in Europe and America, only political changes are the solution. Or else we can wait until excess capacity diminishes, capital goods become obsolete, and the economy’s internal restorative forces work their gradual magic. The 20th century – and previous ones too – teaches that people don’t wait that long. Wars, including world wars – intervene.
Following the recent debates over the tax deal Obama negotiated with Republicans (where the Republicans held unemployment benefit extension and workers’ take-home pay hostage to tax cuts for the rich), some have expressed deep concern that the president has failed to pass the “Lincoln test.” They fear that, in the confrontation with ultra-right forces, he will fail to meet the key challenge of our time, and our democracy: to roll back the power of finance capital in the wake of this devastating depression, and to choose peace and prosperity (Santa Claus) over war and austerity (the Grinch).
I think the tax deal is a bad foundation for making such charges, given the political relationship of forces currently in place.
However, it’s true, I think, that we are at a telling moment. The deficit commission appointed by the president could not issue a majority report. But its co-chairs, former Sen. Alan Simpson, and banker and former Clinton chief of staff Erskine Bowles – the austerity Grinches – have placed a rollback in Social Security and other fundamental rights on the new year agenda. It’s a stinking pile of manure under workers’ Christmas trees, to be sure.
In Lincoln’s time the firmness and depth of the free-labor, free-soil, abolitionist and anti-slavery movements gave the president the strength to persevere, and become perhaps our greatest president. So too here, in our own time, it will be the determination and unity of progressives and the working class movements that will win this emerging and fateful contest – being played for mortal stakes; and that will give President Obama the opportunity to meet the challenge of this century.
Santa goes nowhere without the labors, and leadership, of the reindeer and elves. In times of great upheaval a century’s worth of changes can take place in days. Be prepared. It’s a long night on Dec 24 – and we have to reach everyone in the world.
Image: Dr. Seuss’ “Grinch.” Mykl Roventine CC 2.0