In a new article to be released 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 US. 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. But 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 Fed haters like Rand Paul, this outcome is hardly the the gravest threat. That threat comes from the wave of austerity sweeping the world, as governments, first in Europe and now manifest in the Republican House majority in the US, come under tremendous pressure from a group now known as "the bond vigilantes". The latter 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 meet their debt payments to them. This panic is contributing greatly to financial-market instability.
The outcome of this hysteria is all but certain: growth will slow, possibly even decline again. Tax revenues will diminish. But 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 US, and vice versa.
Stiglitz argues its clear what we should do: "With the US 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 mid-terms ensures -- 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 EU, 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 US. Further the contagion is spreading to Portugal, Spain, and Italy. The latter two countries, of course, are large enough to ignite an avalanche of defaults, 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 that 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 they can wait until the overhang of 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 -- teach 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 latter held unemployment benefit termination and workers' take-home pay cuts hostage to tax cuts for the rich), some on the Left have expressed deep concern that the president has failed to pass the "Lincoln Test"; that, in the confrontation with ultra right forces, he will fail to meet the key challenge of our time, and our democracy: to rollback 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, its true, I think, that we are as a telling moment. The Deficit commission appointed by the president could not issue a majority report. But its co-chairs, former Senator 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 win this emerging and fateful contest – being played for mortal stakes; and that 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. Its a long night on Dec 24 – and we have to reach everyone in the world.
