Pandemic-induced global slump is just part of a 20-year financial crisis

By Larry Elliott

Every year since 1978 the world’s central bankers have gathered to chew the fat at Jackson Hole in the Grand Tetons. This year’s star attraction is the most influential central banker of them all – Jerome Powell – and financial markets will hang on every word from the chairman of the US Federal Reserve.

Powell won’t reveal much and for good reason: he doesn’t have all that much to say. He is worried about inflation but there are also signs the US economy is slowing as coronavirus infection rates rise. The pace of recovery is moderating in the UK, Germany, China and pretty much everywhere else as well. There are shortages of materials and labour. In a world of lockdowns, quarantines and travel restrictions, it is proving harder to sustain a model built around frictionless movement of people, parts and finance. Global supply chains are under pressure. It is too easy to dismiss these problems as temporary headwinds that will blow themselves out given time. A more sober assessment would be that the global economy is in the middle of a long crisis – as it was when the first Jackson Hole symposium was held – and there’s not a lot Powell et al can do about it.
Central banks have been chucking copious amounts of cheap money at the global economy for the past 12 years, and in one sense they have succeeded because there has been no repeat of the Great Depression of the 1930s. But nor has there been a full recovery to match that generated by the New Deal and military spending in the second world war. And that’s because the problems are deep-seated and structural rather than temporary and cyclical.
The strategy of central banks is not new but is now played out. They have been making it easy to borrow not just for the past 18 months but for the past 20 years. Many words have been written in the past couple of weeks about how the US’s long war in Afghanistan has ended in disaster and what initially looked like success was actually failure. Actually, the same assessment could be made of developments in the global economy, where the financial crash of 2008 and the pandemic-induced slump of 2020 are part of one long crisis stretching back two decades. In both cases, the cracks only really became apparent with time.
There were not even faint hints of what was to come when Alan Greenspan, then Fed chairman, delivered the opening address at Jackson Hole in August 2001. It was the high point of liberal technocracy, the end of a strong decade for the US economy. Under Bill Clinton’s presidency, unemployment was low, the budget deficit was eliminated, and the US took the lead in the new digital technologies. The country saw China as little threat, which was why the White House was happy to accede to Beijing’s application to join the World Trade Organization in that year. The sense that all the big problems had been solved was reflected in the theme of Jackson Hole: economic policy for the information economy. Less than two weeks later, 9/11 happened.
The terrorist attacks on the US led to a hasty reassessment of the assumptions made after the end of the cold war. Talk of how liberal democracy was the only game in town, and that the benefits of market economics would spread western prosperity and values to every corner of the globe, now rang a little hollow.

Even so, the willingness to deploy state power only applied to the military sphere. After 9/11 the White House was a lot keener on sending troops into Afghanistan or Iraq than it was on toughening up regulations on Wall Street. What remained of the New Deal attempts to curb excessive financial speculation had been removed by Clinton in the late 1990s. Low interest rates, inadequate supervision, a messianic belief that markets were never wrong and greed proved to be a toxic combination. Greenspan’s tenure at the Fed was essentially the story of one bubble after another, and it was left to others to clear up the mess when the biggest bubble of the lot popped in 2007.
That was the start of the economic equivalent of long Covid: not a full-on collapse but rather a debilitating and prolonged malaise that has prevented full recovery. The closest parallel from history is not the Great Depression of the 1930s but the long depression of the late 19th century, where more than two decades of mediocre economic performance began with a severe financial crisis in 1873. There was no great collapse in the global economy then either but, as today, productivity growth was weak, wages stagnated and there was a backlash against an earlier manifestation of globalisation. It is no coincidence that US populism had its origins in the 1890s.
Back then, the discipline imposed by the gold standard meant central banks had much less room for manoeuvre than they do today. Even so, the long depression eventually came to an end, for reasons that are relevant today. As is the case now, the late 19th century was a period of rapid technological innovation. The telephone, moving pictures, vehicles powered by internal combustion engines were all being developed. Eventually, the use of these new products raised productivity and boosted living standards.
The late 1890s also saw workers flex their muscles. Populism had a twin effect: it led to workers organising themselves into trade unions and it hastened the development of welfare states. Otto von Bismarck, Germany’s first chancellor, was a conservative but could see the sense of pensions for elderly people. Similarly, the industrialists of the late 19th and early 20th century understood that the people working for them were also consumers, and needed to earn enough to buy the goods they were producing. Antitrust laws were introduced to break up monopolies. The lessons from this period seem obvious. Embrace the new technologies, but make sure they bring benefits to the many, not the few. Keep a close eye on the behaviour of the market power of big companies in all sectors, and clamp down hard on activity that stifles new entrants. Welcome rather than fear a rising share of national income for labour. Provide training and a suitably generous welfare safety net to encourage people to shift to growth industries.
Events of the past 18 months might just hasten the end of the long crisis. States have had no choice but to play a more active role in the running of their economies, labour shortages have resulted in higher wages and central banks are no longer seen as the answer to every problem. There’s still a long way to go, but if not now, when? Larry Elliott is the Guardian’s economics editor (The Guardian)