Global Economic Downturn: A Crisis of Political Economy - 0 views
www.stratfor.com/...nturn-crisis-political-economy
geopolitics criticalthinking politics economics u.s. crisis
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For classical economists, it was impossible to understand politics without economics or economics without politics.
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For classical economists, the political and economic systems were intertwined, each dependent on the other for its existence.
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Moreover, it has to be understood as a global crisis enveloping the United States, Europe and China that has different details but one overriding theme: the relationship between the political order and economic life.
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To be more precise, it originated in a financial system generating paper assets whose value depended on the price of housing.
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From the standpoint of economics, this was essentially a financial crisis: who made or lost money and how much.
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From the standpoint of political economy it raised a different question: the legitimacy of the financial elite.
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Then think of the economic system as being divisible into subsystems — various corporate verticals with their own elites, with one of the verticals being the financial system.
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There was a crisis of confidence in the financial system and a crisis of confidence in the political system. The U.S. government’s actions in September 2008 were designed first to deal with the failures of the financial system. Many expected this would be followed by dealing with the failures of the financial elite, but this is perceived not to have happened.
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The Tea Party movement emerged in part as critics of the political elite, focusing on the measures taken to stabilize the system and arguing that it had created a new financial crisis, this time in excessive sovereign debt.
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Its argument was that the political elite used the financial crisis to dramatically increase the power of the state (health care reform was the poster child for this) while mismanaging the financial system through excessive sovereign debt.
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The sovereign debt question also created both a financial crisis and then a political crisis in Europe.
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The European crisis paralleled the American crisis in that financial institutions were bailed out. But the deeper crisis was that Europe did not act as a single unit to deal with all European banks
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One is the German version, which has become the common explanation. It holds that Greece wound up in a sovereign debt crisis because of the irresponsibility of the Greek government
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The Greek narrative, which is less noted, was that the Germans rigged the European Union in their favor. Germany is the world’s third-largest exporter, after China and the United States (and closing rapidly on the No. 2 spot). By forming a free trade zone, the Germans created captive markets for their goods.
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Moreover, the regulations generated by Brussels so enhanced the German position that Greece was helpless.
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The point is that Europe is facing two political crises generated by economics. One crisis is similar to the American one, which is the belief that Europe’s political elite protected the financial elite. The other is a distinctly European one, a regional crisis in which parts of Europe have come to distrust each other rather vocally. This could become an existential crisis for the European Union.
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The American and European crises struck hard at China, which, as the world’s largest export economy, is a hostage to external demand, particularly from the United States and Europe.
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The first was to keep factories going by encouraging price reductions to the point where profit margins on exports evaporated.
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The second was to provide unprecedented amounts of credit to enterprises facing default on debts in order to keep them in business.
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The response was to increase incomes, which in turn increased the cost of goods exported once again, making China’s wage rates less competitive, for example, than Mexico’s.
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China had previously encouraged entrepreneurs. This was easy when Europe and the United States were booming. Now, the rational move by entrepreneurs was to go offshore or lay off workers, or both.
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In the United States, the first impulse was to regulate the financial sector, stimulate the economy and increase control over sectors of the economy.
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In Europe, where there were already substantial controls over the economy, the political elite started to parse how those controls would work and who would benefit more.
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In China, where the political elite always retained implicit power over the economy, that power was increased.
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In the United States, the Tea Party was simply the most active and effective manifestation of that resistance.
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It also came from political elites of countries like Ireland who were confronting the political elites of other countries.
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Russia went through this crisis years ago and had already tilted toward the political elite’s control over the economy.
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Brazil and India have not experienced the extremes of China, but then they haven’t had the extreme growth rates of China.
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But when the United States, Europe and China go into a crisis of this sort, it can reasonably be said that the center of gravity of the world’s economy and most of its military power is in crisis. It is not a trivial moment.
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Left-wingers opposing globalization and right-wingers opposing immigration are engaged in the same process — challenging the legitimacy of the elites.
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The real problem is that, while the challenge to the elites goes on, the profound differences in the challengers make an alternative political elite difficult to imagine.
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This, then, is the third crisis that can emerge: that the elites become delegitimized and all that there is to replace them is a deeply divided and hostile force, united in hostility to the elites but without any coherent ideology of its own.
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In the United States this would lead to paralysis. In Europe it would lead to a devolution to the nation-state. In China it would lead to regional fragmentation and conflict.
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The first is that the political economic crisis, if not global, is at least widespread, and uprisings elsewhere have their own roots but are linked in some ways to this crisis.
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The second is that the crisis is an economic problem that has triggered a political problem, which in turn is making the economic problem worse.
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The followers of Adam Smith may believe in an autonomous economic sphere disengaged from politics, but Adam Smith was far more subtle. That’s why he called his greatest book the Wealth of Nations. It was about wealth, but it was also about nations. It was a work of political economy that teaches us a great deal about the moment we are in.
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Classical political economists like Adam Smith or David Ricardo never used the term "economy" by itself. They always used the term "political economy." For classical economists, it was impossible to understand politics without economics or economics without politics. The two fields are certainly different but they are also intimately linked.