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Economic Crisis Shakes Old Paradigms

The world will soon enter the sixth year of the Great Recession, and there is no end in sight. In the United States, where stagnation continues to reign, some 23 million Americans remain out of work, are underemployed, or have simply dropped out of the labor force owing to frustration—a condition that now threatens to precipitate Barack Obama’s replacement by a Republican candidate whose program would only worsen the crisis.

In Europe, draconian austerity programs now blanket the economic landscape, threatening to impact the continent’s few remaining healthy economies. This past quarter was reported to be the worst for German industry in the last three years, owing to plunging exports to Germany’s austerity-ridden neighbors. Many analysts had been warning that the German government’s insistence on imposing barebones budgets on its neighbors (to ensure that German banks got repaid for the bubbles they helped finance) would eventually have a blowback effect on the European Union’s largest economy.

The BRICS Sputter

The year 2012 marked China and East Asia’s definitive entree into the global maelstrom, along with India and Brazil. In late 2008 and 2009, the recession in Europe and the United States brought down growth rates in East Asia, but only for about a year. By 2010, East Asia and the big “newly emerging economies” known as the BRICS (Brazil, Russia, India, China, South Africa) appeared to have recovered.  A big reason was China’s $585-billion stimulus program—the world’s largest relative to the size of the economy—which not only pulled the country but also its neighbors in East Asia from recession. 

The BRICS were regarded as bright spots in the global economy, exhibiting resiliency and growth even as the North stagnated. Indeed, according to Nobel laureate Michael Spence, “With growth returning to pre-2008 levels, the breakout performance of China, India, and Brazil are important engines of expansion for today’s global economy.” In a decade, Spence predicted, the share of global GDP of the emerging economies would pass the 50-percent mark. Much of this growth would stem from “endogenous domestic-growth drivers in emerging economies, anchored by an expanding middle class.” Moreover, as trade among the BRICS increases, Spence predicted that the future of emerging economies would be “one of reduced dependence on industrial-country demand.”

Recent trends, however, appear to show that the decoupling of the BRICS’ fate from the global North was an illusion. The BRICS’ economies have slowed considerably, with India’s growth rate this year falling back to its level in the early 2000s. Brazil’s growth in 2011 was under 3 percent—lower, as the Economist noted, than sickly Japan’s. China’s second-quarter growth this year plunged to 7.5 percent, its slowest pace in three years. The main reason for the great BRICS slowdown appears to be the continued dependence of these economies on Northern markets and their inability to institutionalize domestic demand as the key engine of their economies. 

Neoliberalism versus Keynesianism

Since the eruption of the financial crisis in 2008, two approaches from the establishment have competed to address the crisis.

In the immediate aftermath of the crisis, the neoliberal University of Chicago Nobel laureate Robert Lucas said, “Every economist is a Keynesian in the foxhole.” By 2010, however, the neoliberals had left the foxhole. But their solution—painful budget cuts and ruthless austerity measures—is no solution at all, since it fails to address the issue of ending unemployment and restarting growth. From the neoliberal view, a deepening of the crisis is, in fact, part of the natural order of things, whereby the “excesses” and distortions created by government intervention are wrung out of the system.

What the neoliberals managed to do was to change the narrative, playing on the American middle class’ traditional distrust of government, deficit spending, and taxes. Here they were supported by the propaganda machinery of Wall Street, which sought to move the public focus away from financial reform. Instead of unemployment and stagnation in the short and medium term, the “real problem,” they said, was the debt and the deficit. Massive deficits financed by debt, they warned, would ensure a future of debt slavery for coming generations.

This road offers nothing to the people but more unemployment and stagnation. But with the economic crisis creating an atmosphere of desperation and confusion, the right wing, with its determined attack on government intervention, has largely succeeded in presenting government rather than unregulated capital as the problem. This was certainly the case in much of Europe in the last three years. Despite initial expectations that the French elections last May would initiate a pro-spending wave, the French Socialists recently unveiled an austerity program of their own.

The Keynesians sought to step into the driver’s seat with the eruption of the crisis in 2009. Keynesians like Paul Krugman, another Nobel laureate, saw unemployment as the key problem, proposing massive deficit spending, low interest rates, and loose money policies to tackle it. The high point of Keynesianism came in 2009, when President Obama, supported by Democratic majorities in both the Senate and the House of Representatives, passed a $787-billion stimulus program. Meanwhile the G20, which brought together the world’s biggest economies, endorsed deficit spending to speed up global recovery. 

Obama’s cautiousness, however, proved to be his undoing. To appease the right, the administration proposed a smaller stimulus than what many Keynesians —such as the head of Obama’s Council of Economic Advisers, Christina Romer—thought was necessary to generate a sustained recovery, which Romer estimated at $1.8 trillion. The stimulus compromise created what would become Obama’s “Bridge Too Far”: it was enough to prevent the situation from getting worse but not enough to trigger a healthy recovery. As Krugman has pointed out, this half-measure discredited Keynesianism and prompted a vigorous right-wing offensive that has forced Obama to effectively give the right-wing agenda of sharply reducing the debt and the deficit a prominent place in his economic program for reelection.

Beyond Keynesianism

But as the neoliberals and the Keynesians battle it out, there are others that say that the intersection of the economic crisis and the ecological crisis means that neither neoliberalism nor Keynesianism, with the latter’s reliance on high economic growth and the former’s growth-killing austerity, suffices as a viable response. Climate change, for one, is changing the terms of the discussion around recovery and growth. This transformation has been speeded up by the urgent statements of even establishment figures such as World Bank President Jim Yong Kim, who recently said that the facts about climate change have become “ever more frightening.”

Progressive environmentalists are steadily making inroads in terms of convincing people that the crisis should be located in the much broader context of a growth-oriented, fossil-fuel addicted mode of production. To analysts like Richard Heinberg, the intersection of the financial collapse, economic stagnation, global warming, the steady depletion of fossil fuel reserves, and agriculture reaching its limits is a fatal one. It represents a far more profound crisis than a temporary setback on the road to growth. It portends not simply the end of a paradigm of global growth driven by the demand of the center economies. It means the “end of growth” as we know it. It is, in short, the Malthusian trap, though Heinberg understandably avoids using the term.

The gyrations of the finance economy, he says, do not simply stem from the dynamics of capital accumulation but from an all-encompassing ecological disequilibrium. “Until now the dynamism of growth has enabled us to stay ahead of accumulating environmental costs,” he writes. But “as growth ends, the environmental bills for the last two centuries of manic expansion may come due just as our bank account empties."

The next few decades, Heinberg asserts, will be marked by a transition from expansion to contraction, a process “characterized by an overall contraction of society until we are living within Earth’s replenishable budget of renewable resources, while continually recycling most of the minerals and metals we continue to use.” The future points in the direction of decentralized eco-communities marked by more manageable participatory decision-making, powered by low-energy systems, reliant on cooperatives for production and other economic functions, dependent on organic farming for food, and using non-debt-based currencies for exchange.

Heinberg’s vision of the future is one that has similarities to those laid out in other related paradigms such as Degrowth, Deglobalization, and Food Sovereignty. Such approaches still have to gain traction beyond activist and epistemic communities, but as the global economy sinks deeper into stagnation and the climate nightmare takes hold, these paradigms may increasingly inspire movements that will make them a reality. Out of sheer necessity.

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