The sum of some global fears

The Charlotte Observer (Sunday) - - Opinion - BY PAUL KRUG­MAN New York Times

The last global eco­nomic cri­sis had one big, sim­ple cause: A huge hous­ing and debt bub­ble had emerged in both the United States and Europe, and it took the world econ­omy down when it de­flated.

The pre­vi­ous, milder re­ces­sion, in 2001, also had a sin­gle cause: the burst­ing of a bub­ble in tech stocks and in­vest­ment (re­mem­ber

But the slump be­fore that, in 1990-91, was messier. It was a smor­gas­bord re­ces­sion – a down­turn with mul­ti­ple causes, rang­ing from the trou­bles of sav­ings and loan in­sti­tu­tions, to a glut of of­fice build­ings, to fall­ing mil­i­tary spend­ing at the end of the Cold War.

The best guess is that the next down­turn will sim­i­larly in­volve a mix of trou­bles. And over the past few months we’ve started to see how it could hap­pen.

I see four dis­tinct threats to the world econ­omy.

China: Many peo­ple, my­self in­cluded, have been pre­dict­ing a Chi­nese cri­sis for a long time – but it has kept not hap- pen­ing. China’s econ­omy is deeply un­bal­anced, with too much in­vest­ment and too lit­tle con­sumer spend­ing; but time and again the govern­ment has been able to steer away from the cliff by ramp­ing up con­struc­tion and or­der­ing banks to make credit ul­tra-easy. Trou­ble in China would have world­wide reper­cus­sions. We tend to think of China only as an ex­port jug­ger­naut, but it’s also a huge buyer of goods, espe­cially com­modi­ties like soy­beans and oil; U.S. farm­ers and en­ergy pro­duc­ers will be very un­happy if the Chi­nese econ­omy stalls. Europe: For some years Europe’s un­der­ly­ing eco­nomic weak­ness, due to an ag­ing pop­u­la­tion and Ger­many’s ob­ses­sion with run­ning bud­get sur­pluses, was masked by re­cov­ery from the euro cri­sis. But the run of good luck seems to be com­ing to an end, with the un­cer­tainty sur­round­ing Brexit and Italy’s slow-mo­tion cri­sis un­der­min­ing con­fi­dence; as with China, re­cent data are ugly. And like China, Europe’s stum­bles would spill over to ev­ery­one, the U.S. very much in­cluded. Trade war: Over the past few decades, busi­nesses around the world in­vested vast sums based on the be­lief that old­fash­ioned pro­tec­tion­ism was a thing of the past. But Don­ald Trump hasn’t just im­posed high tar­iffs, he’s demon­strated a will­ing­ness to vi­o­late the spirit, if not the let­ter, of ex­ist­ing trade agree­ments. For now, cor­po­rate lead­ers re­port­edly be­lieve that things won’t get out of hand, that the U.S. and China in par­tic­u­lar will reach a deal. But this sen­ti­ment could turn sud­denly if and when busi­ness re­al­izes that the hard­lin­ers still seem to be call­ing the shots.

The shut­down: It’s not just the fed­eral work­ers not get­ting paid. It’s also the con­trac­tors, who will never get re­im­bursed for their losses, the food stamp re­cip­i­ents who may yet be cut off, and more. Con­ven­tional es­ti­mates of the cost of the shut­down are al­most surely too low, be­cause they don’t take ac­count of the dis­rup­tion a non­func­tion­ing govern­ment can im­pose on ev­ery as­pect of life.

So there are mul­ti­ple things go­ing wrong, all of which threaten the econ­omy. How bad will it be?

The good news is that even tak­ing all these neg­a­tives to­gether, they don’t come close to the body blow the world econ­omy took from the 2008 fi­nan­cial cri­sis. The bad news is that it’s not clear what pol­i­cy­mak­ers can or will do to re­spond.

Mon­e­tary pol­icy – that is, in­ter­est rate cuts by the Fed­eral Re­serve and its coun­ter­parts abroad – is nor­mally the first line of de­fense against re­ces­sion. But the Fed has lim­ited room to cut, be­cause in­ter­est rates are al­ready low, and in Europe, where rates are neg­a­tive, there’s no room at all.

Fis­cal pol­icy – tem­po­rary hikes in govern­ment spend­ing and aid to vul­ner­a­ble work­ers – is the usual backup to mon­e­tary eas­ing. But would a pres­i­dent who was hold­ing fed­eral work­ers hostage in pur­suit of a point­less wall be will­ing to en­act a sen­si­ble stim­u­lus? And in Europe, any pro­posal for fis­cal ac­tion would prob­a­bly en­counter the usual Ger­man nein.

Fi­nally, deal­ing ef­fec­tively with any kind of global slump re­quires a lot of in­ter­na­tional co­op­er­a­tion. How plau­si­ble is that given who’s cur­rently in charge?

Again, I’m not say­ing that a global re­ces­sion is nec­es­sar­ily about to hap­pen. But the risks are ris­ing: The con­di­tions for such a slump are now in place, in a way they weren’t even a few months ago.

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