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Economic crisis shakes old paradigms
Publication Date : 22-10-2012
The world will soon enter the 6th Year of the Great Recession, and there is no end in sight. In the United States, stagnation continues to reign and some 23 million Americans remain out of work, are involuntarily employed part time, or have simply dropped out of the work force in frustration. This is a condition that now threatens to result in President Barack Obama’s replacement by a Republican candidate whose programme, if implemented, is likely to worsen the crisis.
In Europe, draconian austerity programmes now blanket the economic landscape, threatening to impact on the continent’s few remaining healthy economies, like Germany’s. The third quarter was reported to be German industry’s worst in the last three years owing to plunging exports to the austerity-ridden countries. Many analysts had been warning that the German government’s insistence on imposing barebones budgets on its neighbours to ensure German banks got repaid would eventually have a blowback effect on the European Union’s largest economy.
The BRICS sputter
The year 2012 marked China and East Asia’s being drawn, definitively, into the global maelstrom, along with India and Brazil. In late 2008 and 2009, the recession in Europe and the US brought down growth rates in East Asia, but this was only for about a year. By 2010, East Asia and the big “newly emerging economies” known as the BRICS (Brazil, Russia, India, China, South Africa) appeared to have recovered. A big reason was China’s US$585 billion stimulus program—the world’s largest relative to the size of the economy–which not only pulled the country but also its neighbours in East Asia from recession.
The BRICS were regarded as bright spots in the global economy, exhibiting resiliency and growth even as the North stagnated. Indeed, to economists like Nobel laureate Michael Spence, “With growth returning to pre-2008 levels, the breakout performance of China, India, and Brazil are important engines of expansion for today’s global economy.” In a decade, the share of global GDP by the emerging economies would pass the 50 per cent mark, he predicted. Much of this growth would stem from “endogenous domestic-growth drivers in emerging economies, anchored by an expanding middle class.”
Moreover, as trade among the BRICS increased, the future of emerging economies is one of reduced dependence on industrial-country demand.” Recent trends, however, appear to show that the idea that the fate of the BRICS had become decoupled from that of the US and Europe was an illusion.
The BRICS’ economies have slowed down, with India’s growth rate this year falling to its level in the early 2000’s. Brazil’s growth on 2011 was under three per cent—lower, as the Economist noted, than sickly Japan’s. China’s second-quarter growth this year plunged to 7.5 per cent, its slowest pace in three years. The main reason for the great BRICS slowdown appears to be the continued great dependence of these economies on Northern markets and their inability to institutionalise domestic demand as the key engine of the economy.
Neoliberalism versus Keynesianism
With the eruption of the financial crisis in 2008, two approaches from the establishment have competed to address the crisis.
In the immediate aftermath of the crisis, the neoliberal University of Chicago Nobel laureate Robert Lucas said, “Every economist is a Keynesian in the foxhole.” By 2010, however, the neoliberals had left the foxhole. But their solution was no solution inasmuch it did not address the issue of ending unemployment and restarting growth. From the neoliberal view, a deepening of the crisis was, in fact, part of the natural order of things, whereby the “excesses” and distortions created by government intervention were wrung out of the system.
What the neoliberals managed to do was to change the narrative or the discourse, playing on the American middle class’ traditional distrust of government, deficit spending, and taxes. Here they were supported by the propaganda machinery of Wall Street, which sought to move the public focus away from financial reform. Instead of unemployment and stagnation in the short and medium term, the “real problem” they said was the debt and the deficit. Massive deficits financed by debt, they warned would ensure a future of debt slavery for coming generations.
Whether in the United States or in Europe, this road offers nothing to the people but more unemployment and stagnation. But with the economic crisis creating an atmosphere of desperation and confusion, the right wing, with its determined attack on government intervention, often succeeded in presenting government rather than unregulated capital as the problem. This was certainly the case in much of Europe in the last three years. Despite initial expectations that the results of the French elections last May would initiate a pro-spending wave, the Socialists recently unveiled an austerity programme.
The Keynesians sought to step in the driver’s seat with the eruption of the crisis in 2009. Keynesians like Paul Krugman saw unemployment as the key problem, and it was to be banished by massive deficit spending, low interest rates, and loose money policies. The high point of Keynesianism came in 2009, when President Obama, supported by a Democratic Party majority in both the Senate and the House of Representatives, passed a $787 billion stimulus programme, while internationally the G20, which brought together the world’s biggest economies, endorsed deficit spending to speed up global recovery.
Obama’s cautiousness, however, proved to be his undoing. To appease the right, the administration proposed a smaller stimulus than what some Keynesians, such as the head of the Council of Economic Advisers, Christina Romer, saw was necessary to ignite a sustained recovery, which she estimated at $1.8 trillion. The $787 stimulus compromise created what would become Obama’s “Bridge too Far”: it was enough to prevent the situation from getting worse but not enough to trigger a healthy recovery. As Krugman has pointed out, this half-measure discredited Keynesianism and prompted a vigorous right-wing offensive that has forced Obama to effectively give the right-wing agenda–sharply reducing the debt and the deficit–a prominent place in his economic programme for reelection.
Disaffection with Obama was further stoked by the failure of serious financial reform, which had been promised after the huge bank bailout “to save the economy,” as its promoters had put it. The Dodd-Frank reform did not have the minimum conditions for a reform with real teeth: the banning of derivatives, a Glass-Steagall provision preventing commercial banks from doubling as investment banks; the imposition of a financial transactions tax or Tobin tax; and a strong lid on executive pay, bonuses, and stock options. As the New York Times saw it, “[N]early four years after the crash, and nearly two years since the passage of the Dodd-Frank law, the multitrillion-dollar derivatives market is still dominated by a handful of big banks, and regulation is a slow work in progress.”
Bur as the neoliberals and the Keynesians battle it out, there are those that say that the intersection of the economic crisis and the ecological crisis means that not only neoliberalism but also Keynesianism, with its focus on restoring rapid and high economic growth, no longer suffices as a viable response.
Climate change, for one, is changing the terms of the discussion around recovery and growth. This transformation has been speeded up by the urgent statements even of establishment figures, such as World Bank President Jim Yong Kim who recently said that the facts about climate change are “far more frightening than what we think they are.”
Progressive environmentalists are steadily making inroads in terms of convincing people that the crisis should be located in the much broader context of a growth-oriented, fossil-fuel addicted mode of production. To analysts like Richard Heinberg, the intersection of the financial collapse, economic stagnation, global warming, the steady depletion of fossil fuel reserves, and agriculture reaching its limits is a fatal one. It represents a far more profound crisis than a temporary setback on the road to growth. It portends not simply the end of a paradigm of global growth driven by the demand of the centre economies. It means the “end of growth” as we knew it. It is, in short, the Malthusian trap, though Heinberg understandably avoids using the term.
The gyrations of the finance economy, he says, do not simply stem from the dynamics of capital accumulation but from an all-encompassing ecological disequilibrium:
Perhaps the meteoric rise of the finance economy in the past couple of decades resulted from semi-conscious strategy on the part of society’s managerial elites to leverage the last possible increments of growth from a physical, resourced based economy that was nearing its capacity. In any case, the implications of the current economic crisis cannot be captured by unemployment statistics and real estate prices.
Attempts to restart growth will inevitably collide with natural limits that simply don’t respond to stimulus packages or bailouts. … Burgeoning environmental problems require rapidly increasing amounts of efforts to fix them. In addition to facing limits on the amount of debt that can be accumulated in order to keep those problems at bay, we also face limits to the amounts of energy and materials we can devote to these purposes. Until now the dynamism of growth has enabled us to stay ahead of accumulating environmental costs. As growth ends, the environmental bills for the last two centuries of manic expansion may come due just as our bank account empties.
The next few decades, Heinberg asserts, will be marked by a transition from expansion to contraction, a process “characterised by an overall contraction of society until we are living within Earth’s replenishable budget of renewable resources, while continually recycling most of the minerals and metals we continue to use.”
The future points in the direction of decentralised eco-communities marked by more manageable participatory decision-making, powered by low-energy systems, reliant on cooperatives for production and other economic functions, dependent on organic farming for food, and using non-debt-based currencies for exchange.
Heinberg’s vision of the future is one that has similarities to those laid out in other related paradigms such as Degrowth, Deglobalisation, and Food Sovereignty. Such approaches still have to gain traction beyond activist and epistemic communities but as the global economy sinks deeper into stagnation and the climate nightmare takes holds, these paradigms may increasingly inspire movements that will make them a reality. Out of sheer necessity.
Walden Bello, who represents the party Akbayan in the House of Representatives of the Philippines, has written extensively on the global economic crisis.