Some thoughts on the political effects of a long recession

Summary: Third in a series looking at the future of the US and global economy. The earlier chapters are , Hidden truths about the state of the US economy and What lies ahead for the US economy? the global economy?

Consider three scenarios: good, blah, and bad. Here’s the bad.

Slowing US and global economic activity as the stimulus packages fade,
Republican opposition prevents new net government fiscal stimulus before the November elections,
resulting in little net US fiscal stimulus in the first half of 2011, as the current Federal programs are largely offset by State/local cuts; any stimulus voted in early 2011 will take 3+ months to take effect
the Federal Reserve will act promptly as the slowdown becomes visible, taking aggressive and unconventional actions.

What are the political implications of this scenario? Remember two key factors:

Stress distorts our observation-orientation-decision-action (OODA) loops. This is one mechanism by which bad situations become worse, as people make serial errors.
As Hegel said, we don’t learn from history.

(1) Public Opinion

A large fraction of the public will see the long recession as the failure of “Obamaconomics”. That is, the Democratic Party and mainstream economics. The former is rough justice, given Obama’s timidity and failure to confront his opponents. The latter is mistaken, especially given so many economists’ warnings that the fiscal stimulus enacted was far too small.

Under stress the public reaches for Austerian economics (to use the neologism coined by Rob Parenteau, author of The Richebacher Letter), aka liquidationist economics. Much as they did during 1929-30 in the US (Hoover-Mellon) and Weimar Germany. The US story ended well, with FDR running for President opposing Hoover’s stimulus programs (the mini-New Deal). Fortunately FDR did the opposite once in office. The German’s also turned to a gifted charismatic leader offering solutions; their story did not end well.

(2) Politics

The Republicans gain seats in November. Probably taking control of the House; its possible if unlikely that they also take the Senate. If the downturn continues until 2012 AND the Republicans continue their “the worse, the better” tactics (the latter makes the former more likely), then they might make massive gains in 2012.

This puts them in the position similar to that of FDR after the 1932 and 1940 elections, as he ran on platforms of (respectively) austerity and non-involvement. A master politician, FDR successfully danced away from his campaign promises — to the benefit of the American people and the world. Do the Republicans have any leader with equivalent wisdom and skill?

(3) Geopolitical implications

The developed nations (the OECD), with their large debt burdens, will suffer more from a long recession than the emerging nations. The OECD nations’ fiscal stimulus programs will be far less effective than those of the emerging nations, as the marginal elasticity of GDP with respect to debt falls to near zero (aka, how much GDP rises for each dollar of new debt). This inverts the post-WWII pattern, when the emerging nations suffered more during recessions — and is by itself a major historical marker.

So the long dominance of the western nations comes to an end, and the world moves to a more multi-polar order.

Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end? With 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.
A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
A look at the future of the world’s political and economic order, 4 June 2010

We can say little about the new order. Her are some guesses.

China will become a great power, again The Middle Kingdom.
The US will no longer be sending our troops into other nations at the drop of a hat, as we have since the Spanist-American War — and doubly so since WWII. We can no longer afford the necessary military machinery (which we run today only by loans from China, Japan, and OPEC).
More countries will get nukes, which will dampen down regional conflicts (as it did in the Middle East and China-India).
Violent conflict will take new forms, probably intense economic war and 4GW.
Technological change will continue, bringing humanity kicking and screaming into a better world.

Update

Bernard Finel of the American Security Project provides some additional analysis, well worth reading: “The New ‘New World Order’: The Long Recession and International Politics“.

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