As they have with the Great Depression, economic historians will argue for decades about the origins of our current crisis. But, surely, we can agree that the failure of international economic cooperation in the early 1930s—and worse, the sequential adoption of beggar-thy-neighbor domestic policies—made matters worse at a time when enlightened statesmanship could have made them better for everyone. Similarly, the current crisis is not just a U.S. problem or a European problem; it is a global problem that requires a coordinated global response. “We’re all in this together” is not a moral bromide, in this instance, but a simple statement of fact.
Since the crash of 2008, the entire world has relied on a shared, if tacit, plan to avert all-out catastrophe and a second Great Depression. The United States would do what was necessary to prevent its financial system from collapsing and stem the economic decline with massive fiscal and monetary stimulus. Europe would cauterize its debt crisis, which threatened the integrity of its common currency, by bailing out its small, insolvent countries (Ireland, Portugal, Greece) while relying on German growth and Franco-German leadership to pull it through. Brazil and India would continue to grow briskly, and China would shore up global demand with a huge investment in public sector spending. And the world would muddle through, albeit with below-normal growth and above-normal unemployment for an uncomfortably long time. In the interim, social safety nets of varying strength would shield the hardest-hit workers and families from destitution, maintaining social stability.
Events of recent days, however, have made it clear that this plan has failed. Growth in output and employment in the United States had slowed well before the inconclusive outcome of the debt ceiling debate gave Standard & Poor the occasion to downgrade U.S. public debt. The European debt crisis has morphed beyond its previous bounds to include Spain and Italy, whose obligations far exceed what the European Central Bank can backstop, and even German growth is now showing signs of flagging. The most rapidly growing emerging economies are slowing and, in most cases, they are experiencing rising rates of inflation. In important respects, the Chinese stimulus was misconceived, with massive sums poured into unproductive infrastructure projects and loans that local authorities cannot repay.
Not only has the post-2008 arrangement fallen short; it has left the world economy less able to meet the current challenge. There is a limit to what central banks can do, and they may be uncomfortably close to it. (The Fed’s portfolio has swollen dramatically since the crisis began more than three years ago.) The indebtedness of most major countries has soared relative to their GDP, increasing market and political pressures for long-term fiscal stabilization. Some countries—most notably the United States—have failed to respond adequately, while others—most notably the UK—have implemented austerity programs, only to be met with social disruption. The famous European social model, which stabilized the continent for two generations, is now in danger (or, perhaps, in the early stages) of being rolled back, with political consequences that are unlikely to be benign.
So what’s to be done? Some elements of the response we need are pretty clear:
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