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.
More on this on another day.
About the “decline of the State” theory
All discussions about the possibility of the decline of the nation-state take place in the shadow of Martin van Creveld’s magnum opus Rise and Decline of the State.
- For an brief introduction to his theory see “The Fate of the State“, Parameters, (Spring 1996).
- For a links to his online works see The Essential 4GW reading list: Martin van Creveld.
- His newest book is comes The Culture of War, a must-read for anyone seeking to understand the nature and role of war in the 21st century.
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
These posts discuss our Constitution and government:
- Forecast: Death of the American Constitution, 4 July 2006
- The Constitution: wonderful, if we can keep it, 15 February 2008
- Congress shows us how our new government works, 14 April 2008
- See the last glimmers of the Constitution’s life…, 27 June 2008
- Remembering what we have lost… thoughts while looking at the embers of the Constitution, 29 June 2008
- A report card for the Republic: are we still capable of self-government?, 3 July 2008
- Another step away from our Constitutional system, with applause, 19 September 2008
- What comes after the Consitution? Can we see the outlines of the “Mark 3″ version?, 10 November 2008
I dont think either scenario is likely. 1)Government has not increased its authority at all by its actions so far — in fact, the opposite is true — it appears to have squandered wealth. If the next administration sponsors locally visible, beneficial projects under the stimulus package, that will be to its credit, but it’s unlikely that those projects will significantly lessen the economic distress of the next several years, or ever achieve the stature of a new New Deal.
2)Government authority will not cease, however. The state is always necessary for the protection of property and wealth. In this respect, the state may be either benevolent or repressive, or a bit of both.
3) The importance or scope of national government may wain, however, as international (and non-democratic) bodies expand their charters. In that scenario, national governments may persist mainly to collect taxes for minimal services and civil defense.
We may want to look to Britain to see the future here. Britan has gone much farther down the road of bizarre over-regulation of aspects of daily life that, frankly, the government shouldn’t be regulating at all. If the legitimacy of the British government starts to crumble, we can reasonably suspect the same thing will happen in America a few years down the line.
Certainly right now we are witnessing a remarkable collapse in the credibility and legitimacy of many federal government policies. For instance, Massachusetts now instructs state and local police not to ticket people for possession of small amounts of marijuana, while California finds itself in an outright war with Federal DEA agents trying to shut down medical marijuana dispensaries which the state of CA has ruled legal.
Cases like
* the 15-year-old girl who sent nude pics of herself to her boyfriend via her cellphone and now faces prison and lifetime registration as a kiddy porn violater and sex abuser and
* the case in which the little girl who handed out cough drops at school got accused of selling drugs
suggest that common sense has so completely disappeared from the legal and criminal systems and no one can take the entire system seriously anymore.
There’s an intriguing third alternative to the two Fabius Maximus describes: open source peer production. We’re seeing this with the linux operating system and with kiva.org grameen-bank-style loans.
Bruce Sterling from his State Of the World 2009.
We should consider that people, generally, will “rather bear those ills they have than flee to those they know not of.”
That means that, whatever ails may afflict it, most people will continue to cling to the nationstate until and unless something more credible comes along.
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Fabius Maximus replies: That’s a powerful point, known in many fields. “You cannot beat something with nothing.” It is also much like Thomas Kuhn’s key insight about paradigms in science: they cannot be disproven, only replaced.
Further analysis and explaination of the Minnesota Fed analysis of unemployment: “Comparing Recessions II“, Alex Tabarrok, posted at Marginal Revolution, 15 January 2009.
Apparently you were not the only one concerned about the numbers.
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Fabius Maximus replies: Thanks for posting this link; the chart is well-worth looking at! Two comments.
(1) This is a recession different from any previous in the post-WWII era, which were Fed-induced (“removing the punch bowl” to control inflation) or business inventory corrections. This is debt deflation, an unpleasant form of deleveraging.
(2) How the government calculates unemployment has changed, making past comparisons difficult. Today’s numbers are lower to some unknown degree than they would have been under previous calculation rules.
Here is an article about this issue — grossly overstating it IMO: “Great Depression jobs parallel may not be far flung“, Reuters, 8 January 2008.
Also: how many people were unemployed during the 1930’s? We do not know, as the government did not collect this data during the 1930’s. Estimates vary.
Had you stopped at decline, I would have bought off. I think the US will get more like modern Italy. At one point Italy had more of it’s economic transactions occurring in Black Markets than in legally accepted market venues. That’s generally how an intelligent and resourceful population adapts to being overregulated.
The loyalty goes out the window as people start to obey or disobey laws on an a la carte basis. I mean who really resepects a Sec Treas nominee with over $42K in unpaid back taxes?
They disrespect these people and laugh at their own country, but will generally not burn the capitol down because that involves risk and a lot of hard work. In other words, welcome to an ANglo version of the old, corrupt Brazil.
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Fabius Maximus replies: Thanks for pointing this out! I have changed the text to read:
Government of developed and developing countries should stop the industries for not giving bonuses to top executives for coming one or two years, or they should cut it down upto 80%. As this is the only way to increase the economic funding of any nation. In addition, a ban should be oversized on severance payments for executives. If the industries are not co-operating or those who are not in this favour then the government should legislate to limit executive pay.
-Sandy Chan, JustMeans
I hope you’re right – that the global economy will rebalance itself – restoring a balance of trade for the U.S., but I doubt it. The imbalances are due to gross disparities in population density from one country to the next – especially between the U.S. and so many of our trading partners like Japan, Korea, China, Germany and many others. No amount of currency valuation adjustment will alter this fact, and countries like these, with grossly bloated labor forces, will continue to be dependent upon preying on the American market.
Pete Murphy, Author, “Five Short Blasts”
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Fabius Maximus replies: One of the great oddities of public policy is the distain for managing the currency. It’s astonishing how many problems disappear once the currency is correctly valued. A (bad) medical analogy is hydration for hikers — a wide range of ills are treated with water.
“You cannot beat something with nothing.”
“Nothing can be made out of nothing” – King Lear
Further comment on Minneapolis Fed analysis (comment #4 above)
I agree with you, this is a different recession than we’ve had in the Post WWII era. We now have way too much supply chasing declining demand. E.g. oill; see “Super-contango“, Economists View), see the excess supply of houses, see the excess supply of flat screen TVs at any electronics store.
The time it takes to deleverage the debt and work the excess supply out of the system may well be longer than our four previous bad bears.
One of the advantage the United States have is our ability to reallocate, and there’s a lot of reallocation that won’t be that painful. Like restaurant spending.
However, even if we get double digit unemployment, we will still have 80-85% employment. Their standard of living will relatively increase as the laws of supply and demand cause prices to decrease.
I think it is a question of legitimacy and democracy. Today even radical Islamic societies must put on the mantle of democracy and since democracy is closely linked with the nation state it is still – in many senses – the only viable entity. Hence the constant lack of popularity for the European Union in Europe. Any idea about a world government is doomed to fail in that sense, because democracy couldn’t work on such a large scale and would be resisted. That doesn’t mean that a state can’t destroy itself into smaller pieces, but even in cases like Somalia (the popular example of a failed state) it is interesting to note that a large part of that country – Somaliland – is actually peaceful and for all intents and purposes a state in its own right. Just not recognized by anyone or very few. Somalia has not “disappeared” – just fragmented into smaller pieces and some of them quite workable as new states. Since the borders in Africa have been drawn by Europeans some 150 years ago in many ways this is to be expected.
I suspect the elephant in the living room is going to be “legitimacy”. I can only speak for myself but my perception is that the legitimacy of government at all levels has been progressively squandered for quite a while now.
I am just about to the point where if it does not violate the Decalogue I may take government’s directives as mere suggestions.
Trust works two ways. Things have been pretty one-sided for a long time now. That may not hold for much longer. Which smacks of Hobbes.
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Fabius Maximus replies: Loss of legitimacy is the core concept in the Decline of the State theory.
As FM might say, there are two states — the actual one we have, and the ideal one in our minds. In a democracy, the ideal one is always present as the possibility of change.
Our actual state has obviously lost credibility with everyone on this site, yet most of us would be content if we could just eliminate (or add) a few programs here and there and move the whole in a different direction. Real loss of credibility will only come when the state can’t deliver basic social services and keep us safe.
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Fabius Maximus replies: All good points. What does “real loss of credibility” mean? My guess: when a large fraction of Americans — nothing like a majority — begin to seek an alternative political regime.
Historically recessions, for the most part, have been followed by periods of exponential financial growth. When this happens, governments and politicians will take the credit.
In these days of crisis and travail let us remember our traditions: “The President is Gone – Long Live the President!”
Personally, I don’t believe this is oligarchy or plutocracy – we have Feudalism. The Baron’s sons (and daughters this time around) inherit the elections – oops, titles. Where is a good Monarch when you really need one?