In the shadow of the euro crisis and America’s fiscalcliff, it is easy to ignore the global economy’s long-term problems. But, whilewe focus on immediate concerns, they continue to fester,and we overlook them at our peril.
The most serious is global warming.While the global economy’s weak performance has led to a corresponding slowdownin the increase incarbon emissions, it amounts to only a short respite.And we are far behind the curve: Because we havebeen so slow to respond to climate change, achieving the targeted limit of atwo-degree (centigrade) rise in global temperature, will require sharpreductions in emissions in the future.
Some suggest that, given the economic slowdown, we shouldput global warming on the backburner. On the contrary, retrofittingthe global economy for climate change would help to restore aggregate demandand growth.
At the same time, the pace oftechnological progress and globalization necessitates rapid structuralchanges in both developed and developing countries alike. Such changes can be traumatic, and markets often do not handle them well.
Just as the Great Depression arosein part from the difficulties in moving from a rural, agrarianeconomy to an urban, manufacturing one, so today’s problems arise partly fromthe need to move from manufacturing to services. New firms must be created, andmodern financial markets are better at speculation and exploitation than theyare at providing funds for new enterprises, especially small and medium-size companies.
Moreover, making the transition requires investments inhuman capital that individuals often cannot afford. Among the services thatpeople want are health and education, two sectors in which government naturallyplays an important role (owing to inherent market imperfections in thesesectors and concerns about equity).
Before the 2008 crisis, there was much talk of global imbalances, and the need for the trade-surpluscountries, like Germany and China, to increase their consumption. That issuehas not gone away; indeed, Germany’s failure to address its chronic externalsurplus is part and parcel of the euro crisis.China’s surplus, as a percentage of GDP, has fallen, but the long-termimplications have yet to play out.
America’s overall trade deficit will not disappear withoutan increase in domestic savings and a more fundamental change in globalmonetary arrangements. The former would exacerbatethe country’s slowdown, and neither change is in thecards. As China increases its consumption, it will not necessarily buymore goods from the United States. In fact, it is more likely to increase consumption of non-traded goods – like health careand education – resulting in profound disturbances to the global supply chain,especially in countries that had been supplying the inputs to China’smanufacturing exporters.
Finally, there is a worldwide crisis ininequality. The problem is not only that the top incomegroups are getting a larger share of the economic pie, but also that those inthe middle are not sharing in economic growth, while in many countries povertyis increasing. In the US, equality of opportunity has been exposed as a myth.
While the Great Recession has exacerbated these trends,they were apparent long before its onset. Indeed, I (and others) have argued that growinginequality is one of the reasons for the economic slowdown, and is partly aconsequence of the global economy’s deep, ongoing structural changes.
An economic and political system that does not deliver formost citizens is one that is not sustainable in the long run. Eventually, faithin democracy and the market economy will erode, and the legitimacy of existinginstitutions and arrangements will be called into question.
The good news is that the gap between the emerging andadvanced countries has narrowed greatly in the last three decades. Nonetheless,hundreds of millions of people remain in poverty, and there has been only alittle progress in reducing the gap between the least developed countries andthe rest.
Here, unfair trade agreements – including the persistenceof unjustifiable agricultural subsidies, which depress the prices upon whichthe income of many of the poorest depend – have played a role. The developedcountries have not lived up to their promise in Doha in November 2001 to create apro-development trade regime, or to their pledge at the G-8 summit in Gleneagles in 2005 toprovide significantly more assistance to the poorest countries.
The market will not, on its own, solve any of theseproblems. Global warming is a quintessential “publicgoods” problem. To make the structural transitions that the world needs,we need governments to take a more active role – at a time when demands for cutbacks are increasing in Europe and the US.
As we struggle with today’s crises, we should be askingwhether we are responding in ways that exacerbate our long-term problems. Thepath marked out by the deficit hawks and austerity advocates both weakens theeconomy today and undermines future prospects. The irony is that, withinsufficient aggregate demand the major source of global weakness today, thereis an alternative: invest in our future, in ways that help us to addresssimultaneously the problems of global warming, global inequality and poverty,and the necessity of structural change.