The Coming Crisis: we do not have much time

Andrew Gamble - Professorial Fellow at SPERI

Strong deflationary trends are now gripping all the advanced economies. Jonathan Perraton addresses the issue of whether this new secular stagnation is caused by supply or demand factors.  Is it the result of a vanishing of investment opportunities despite the ever increasing pace of technological change, or is it the result of growing distributional inequality and the falling labour share which has depressed wages and boosted returns to capital?  Governments have begun cautiously to move beyond current orthodoxies, and are tentatively intervening again in markets.  Jeremy Green and Jacqueline Best in their blogs explore some of the novel ideas that have been floated for increasing investment and productivity and for overcoming the deficiency of demand.  They involve the blurring of the line between monetary and fiscal policy, using helicopter money to finance expenditure and consumption directly, and increasing wages through direct state credits, an incomes policy in reverse.  Andrew Baker and Richard Murphy advocate an investment state, in which the financial markets would have to agree to fund public investment projects in return for the public backstopping by government which keeps them liquid and solvent.  Yet the adoption of such policies is politically difficult, because they break so radically with the dominant neoliberal understanding of the last thirty years of how the economy works, and how the relationships between private market actors and government agencies should be organised.  As Craig Berry shows, neoliberalism’s survival is in part due to a crisis of imagination.  New ideas and new lenses for understanding the economy are required.

Another political obstacle is that political action has to be international as well as national. But international cooperation as Tony Payne explains is fragile, the main global institutions are weak, and the G20 powers have the capacity but not the political will to replace privatised corporate global governance with public global governance.  The European Union, one of the key structures of the international market order, is under huge pressure from migration, as Nicola Phillips shows, and from its dysfunctional single currency, as Scott Lavery shows.  The EU’s failure to deliver serious economic and political reform and recover the project of social Europe to counterbalance the ordo-liberal project of the single market makes it vulnerable to populist insurgencies.  Failure to devise an effective response to migration and to the problems of growth and debt in the eurozone risks accelerating the disintegration of the Union.

The 2008 financial crisis was contained and managed. The same was true of the second wave of the crisis, affecting the eurozone in 2010-12.  But the problems of excess debt, low growth, regional and global imbalances, which were highlighted by these crisis episodes, have not been resolved, and the world has increasingly been stuck in an impasse.  The austerity which has been imposed on national communities has varied considerably, but very few countries have escaped, and one of the consequences has been declining trust in political elites.  This has the potential to generate new shocks, which can further destabilise the international economy, as is happening with Brexit.  No part of the world economy is immune from such shocks.  Even in China, as Matthew Bishop shows, the extraordinary success of the Chinese growth model is currently under strain, as the government seeks to manage a transition to an economy focused less on exports and more on domestic consumption, while maintaining the legitimacy and political monopoly of the Communist party.  China needs to liquidate or restructure many of its large inefficient state companies which have piled up huge debts, but may need to choose between a radical write-down of debt with all the attendant social and political risks both to China and the international economy, or a sharp slow-down in long-term growth.  Japan, in the same situation twenty five years earlier, chose the latter.

The risks of a new crisis which will tip the world into a deep and prolonged recession have grown, and political shocks like Brexit show how fragile and vulnerable the world economy remains, eight years after the crash. But beyond this financial and economic crisis, there is the other much greater crisis which overshadows it.  Martin Craig shows how capitalism is progressively eroding the ecological conditions which make its survival possible, while Peter Dauvergne argues that so far plans to take action, such as the 2015 Paris Agreement, while welcome, will not be enough.  The gains they secure will not keep pace with rising environmental costs.  Although in the aftermath of the financial crash economic growth has slowed in the more developed parts of the international economy, world economic growth still continues at 3 per cent per annum, and the cumulative impact of two hundred years of industrialisation is having devastating impacts on climate, food, biodiversity, and the pollution of air and water.  In the search for ways forward to overcome the problems of debt, inequality and growth the solutions must also address this other truly existential crisis which looms ever more threateningly ahead.  We do not have much time.