Does this economic crisis make the State stronger – or is it another step in the decline of the state?

Larry Kummer, Editor

15 years ago

How will this economic downturn end? I have forecast its economic consequences here:

This cycle will end with a re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive. No more trade deficit, and we can pay our debts.

What of its political consequences? Here is some speculation about the outcome of this cycle, the end of the post-WWII geopolitical regime. This article goes to the heart of the dynamics at work:

“In praise of an explicit number for inflation“, Frederic Mishkin, Financial Times, 11 Janaury 2009 — Mishkin is a Professor of Economics at the Columbia Business School; was on the Board of Governors of the Federal Reserve System from 2006 to 2008. See his Wikipedia entry for more information.

For all his knowledge and experience, Mishkin apparently cannot conceive of the State’s impotence in the face of an economic cycle of great (even historical) magnitude. He sees these things as a matter of technique, correctly marshaling and applying the State’s awesome powers to manage the economy.

This down cycle might shatter Mishkin’s god, the State. This down cycle will not just mean lost income and wealth, but loss of the government’s credibility. Mishkin describes the climax of this era, in which desperate governments attempt to affect the economy by making bold promises which they cannot fulfill. Failure of these promises might initiate fundamental change, in ways we cannot now foresee.

This goes to the question Michael Finley asked at Defense and the National Interest (5 January 2009): “Is the global financial crisis a “bear market rally” in the decline of the state, or its resurgence?”

There are two opposign sides to this debate, both plausible.

(I) The government’s power has grown during this crisis, and will grow far more during the next few years. It is the the opposite of the State’s decline.

Governments has already nationalized much of the financial system, and will absorb more as their capital evaporates from corporate and household loan defaults.
Governments will become the primary source of investment capital as households and businesses remain unwilling to risk their capital.
Government’s regulatory authority will grow beyond anything seen in our history — even during the 1970’s — as free market solutions are discredited by the long deep downturn.

(II) This cycle might bring the State to its climax of power and authority. But growth in power and reach without effectiveness will only undercut people’s loyalty, leading to weakening of the regime. If so the modern State’s overreach might follow that of Philip II of Spain and Louis XIV of France. We can only guess at the speed and timing of this process, and how far it runs along the spectrum from weakness to regime change.

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