PRINCETON – From the start, policy responses to the 2008 financial crisis were colored by memories and interpretations of the Great Depression. The conventional wisdom now holds that the world avoided a repeat of the interwar catastrophe, largely because policymakers made better decisions this time around. But, while there is plenty of room for self-congratulation, two features of the post-crisis recovery cast a shadow over the celebrations.
First, despite unprecedented monetary expansion and massive fiscal stimulus, recovery has been strikingly weak and fragile. In the eurozone, the debt crisis triggered a sharp turn to fiscal contraction – and, with it, a return to recession. But, even in the United States, where there was plenty of initial stimulus, the long-term growth rate seems likely to remain well below pre-crisis levels for the foreseeable future.
The faltering upswing recalls the 1930’s, when many prominent economists, including John Maynard Keynes and his leading American exponent, Alvin Hansen, decided that the world was entering a phase of secular stagnation. In their view, the Industrial Revolution’s vigor and dynamism had been exhausted, with nothing to replace it to sustain economic growth.
The second caveat about the post-crisis world is even more alarming. Many countries responded to the Great Depression by adopting policies aimed at reducing disparities in wealth and income. As a result, by the middle of the twentieth century, the extreme social and economic inequality that had characterized industrialized countries seemed to be disappearing.
But, since 2008, measured inequality, which was rising even before the financial crisis, has surged, owing largely to the very measures that are so often lauded for preventing another Great Depression. Non-conventional monetary policies fueled an asset boom, with share prices soaring and property prices in economic hubs like New York, London, Paris, Rio de Janeiro, and Shanghai shutting out domestic purchasers.
As the rich became richer, the middle classes were squeezed by near-zero nominal interest rates, which, in real terms, were actually negative. Meanwhile, working-class incomes were hit by rising competition for jobs from countries with lower labor costs.
Some central bankers like to recall Winston Churchill’s paean to the heroism of those who fought the decisive Battle of Britain: “Never in the field of human conflict was so much owed by so many to so few.” But, applied to the modern economy, such praise is awkward at best, because it is literally true: the financial system was stabilized by piling huge volumes of debt into a few central banks.
It is not just monetary policy that is having a polarizing impact. Europeans who are considering Keynesian policies are faced with the costly legacy of past public-investment projects. For example, the 2004 Olympic Games in Athens were supposed to turn Greece into a glittering and dynamic modern economy. But, while the games yielded an underground metro system for the city and a reasonably modern airport, they also produced the abandoned Hellinikon Olympic complex and a mountain of debt.
Moreover, critics rightly point to favoritism and other forms of corruption in awarding contracts for such projects. This is as much the case in developed countries like Greece and Spain as it is in developing and emerging economies.
The seamy side of China’s post-crisis stimulus package was ventilated in the trial of Liu Zhijun, who oversaw the development of China’s showcase high-speed rail network – a position that garnered him 374 properties, 16 cars, and 18 mistresses. When his death sentence appeared likely to be commuted to a prison term, China erupted with protests.
Such outrage over corruption is mirrored in the popular unrest sweeping across other large and apparently successful emerging-market economies. Until last summer, Turkish Prime Minister Recep Tayyip Erdoğan appeared to be the genius behind an unprecedented economic miracle. Then he announced a plan to replace the tree-lined Gezi Park in Istanbul’s Taksim Square with a replica of an Ottoman-era army barracks that would house a shopping mall, sparking massive popular protests.
Major sporting events have been met with particularly powerful backlashes. Poland was wracked by scandal after the foreign firms that won contracts for the 2012 UEFA European soccer championship took the government’s money but did not pay the Polish builders to whom they sub-contracted the work. In Brazil, protests against the upcoming FIFA World Cup continue, while Russia’s lavish Winter Olympic Games in Sochi risk becoming a public-relations catastrophe.
In short, the political economy of Keynesian stimulus projects can be highly problematic, because ordinary citizens often have no access to their benefits. To a world that is still reeling from the aftermath of the 2008 crisis, with its lurid revelations of malfeasance in the financial and real-estate industries, such high-profile projects look like another fix designed to reward a corrupt elite.
But there is a crucial distinction: what is fueling inequality now is not unfettered capitalism, but problematic public-policy efforts to stabilize economies in the wake of the financial crisis. Capitalist competition erodes monopoly profits, whereas public policy risks creating entrenched privilege. Today, with both expansionary monetary policy and increased state spending prompting a powerful backlash from the excluded and the under-privileged, steps taken in the name of avoiding another Great Depression may end up exacerbating social polarization.
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