Will the present crisis worsen and engulf almost everyone? If the eurozone collapses, that would obviously be terrible news for its countries, but it would also have a major global impact on trade and investment. It would immediately hit hard the non-eurozone European countries, like the United Kingdom, since they trade with and invest in the eurozone more than anywhere else. The hit would also reach across neighboring countries, from Russia through the Near East and North Africa, as well as to America, a major trading partner of, and investor in, Europe. South America would suffer as well, especially from a collapse in the Spanish economy. If both the EU and America experienced economic contraction then the effect on global trade would be very bad, since they provide almost half of world GDP and the level of economic globalization is now higher than ever. India and especially China would also find their exports decline significantly. That would indicate a systemic crisis of capitalism, worse than the “double-dip” recession predicted by many. Yet even so it would be probably worse in the West than among the developing Rest.
This cascade might actually happen, though the eurozone countries may be able to cobble together a financial fix, since it is the elites, not the masses, who control the EU, and by now the elites have realized that they have common interests in finding a solution, at almost whatever the cost. The problem here (as elsewhere) is that the financial resources now available to bail out or stimulate the economy are less than in 2008. I emphasize, however, that human action and political will matter considerably, which means we cannot actually predict the outcome. However, I will predict that if many more countries take the neoliberal austerity route through this recession, as proposed by American Republicans and actually implemented by the British Conservative government, and if the inflation phobia of Germans reinforces this, then another Great Depression, this time quite likely to be more globally systemic, will follow. If, however, the Europeans realize and act on their collective interests and if countries take the more Keynesian route being advocated by the French government of financing a stimulus (partly by higher taxes on those who are more able to pay), then this might prevent further worsening. In either case, recovery would probably eventually happen, though more slowly in the former case—and this time without the benefit of a world war. Whether recovery would ever restore full employment is something I will discuss later.
Capitalism is subject to cycles, though whether they have a regular patterning through time is another matter. Occasionally the recession phase of the cycle gets much worse, partly through “internal” economic causes, partly through costly wars, stalemated politics, or ideologies generating policies inappropriate to the crisis. In both major cases of Depression/Recession this was an important cause of worsening, the first time because no other plausible macroeconomic ideology had yet emerged, the second time because it came after a long period of market growth ended by the apparent failure of the Keynesian alternative, followed by deregulation, especially of the financial sector. Political and geopolitical relations matter as well, and they seem much less predictable. There do seem to be economic lessons to draw from these crises which in theory might reduce the likelihood of future crises. But it is far from clear that powerful elites have drawn the appropriate lessons. Neoliberal austerity programs inflicted on economies in recession unfortunately recall the unhelpful role of liquidationism at the beginning of the 1930s. Note also that in the 20th century the two terrible wars had absolutely contrary effects, further worsening the problem of prediction. The first war helped intensify a recession into the Great Depression, the second substantially contributed to the biggest boom of all—and to American hegemony.
AMERICAN HEGEMONY AND ITS DISCONTENTS
It is therefore possible that America will suffer the greatest economic decline in the near future. Wallerstein suggests that the period of greatest American strength was 1945–1970, after which there has been continuous decline. I am not so sure. The American share of the world’s total GDP actually declined from 1950 to 1970, because of the recovery of Japan and Europe. It then remained virtually static from 1970 to 2005 as the United States successfully exploited the advantages of having the dollar as the reserve currency of the world. A relative decline has occurred since then, largely a product of the higher growth of India and China, but the dollar remains almighty, America can still borrow unlimited cash at an interest rate of lower than 2%, and in most years it still outperforms Europe and Japan in economic productivity and growth. The IMF and Barry Eichengreen have both guessed that the dollar will remain as the world’s reserve currency until some date soon after 2020. The United States also has 48% of the world’s military expenditure, its highest-ever percentage, and it retains its dominance over patents, Nobel prizes, elite universities, and popular culture. America remains hegemonic, for better or for worse.
It will not last, of course, and there are suspicions that premonitions of decline are just beginning to haunt Americans. Its gigantic military has experienced what are in effect defeats over the last decade. Its political and ideological power relations have reached near-crisis level. Rising divisive inequality has been deliberately encouraged by politicians. The merging of top management and big corporate investors (especially the bosses of insurance and pension funds) so that they are essentially paying themselves exorbitant salaries and bonuses (on which they only have to pay 15% rather than 35% tax rates) also grossly widens inequality. The combination of regressive taxes, corporate plundering, and anemic economic growth has led to economic recession and to ideological alienation.
But American alienation is not currently leading toward a political solution, since it has generated two opposed notions of what should be done. One, led by the Republican Party, blames government for the economic ills of the country and proposes to reduce its size, its regulatory powers, and its taxes in order to restore a market-driven prosperity. Its preference for austerity measures as a way out of recession makes it uncomfortably close to the “liquidationist” strategy which deepened the Great Depression. The other solution, proposed by liberal Democrats, blames big corporations and banks, symbolically labeled as “Wall Street,” and proposes more government regulation, more redistributive taxes, and a more state-sponsored Keynesian path to growth through increased public expenditures. The current political stalemate and especially the deeply reactionary, backward-looking stances of the Republican Party do not augur well for America’s ability to meet these enormous future challenges. America suffers from anomie, an absence of shared norms, as well as alienation—Durkheim as well as Marx. (as Durkheim argued, anomie lessens social cohesion and fosters decline).
Republicans’ proposals of austerity for the masses but prosperity for the rich are seen by them as job-creating measures, but the rich do not consume much. Instead they save, producing capital surpluses and lower interest rates, encouraging the consumer debt which brought on the recession in the first place. This threatens the basis of the mass consumer demand economy on which American wealth has rested during the postwar period. Republican ideology has also turned increasingly against science, which does not bode well for the future of America. The Republicans are more united over economic policies than are the Democrats, whose main problem is internal divisions. This has allowed the Republicans to dictate recent policy agendas. Republican leaders used to be ideological in their rhetoric but pragmatic in their actual policies. But free-market fundamentalism is more resonant in American popular culture than is state interventionism. In the postwar boom period real economic policy took the form of “commercial Keynesianism,” state-steered markets, a compromise between market and state. But the political rhetoric of the time, especially on the Republican side, focused almost entirely on free markets and free enterprise. Americans had actually gotten a large state, but they pretended they had not. So appealing to free markets has a political edge today because it is more ideologically rooted in America than are appeals to a beneficent state. The electorate as well as the politicians may not be able to embrace useful economic policies.