The sum of some global fears

The Fresno Bee (Sunday) - - Opinion - BY PAUL KRUG­MAN The New York Times

The last global eco­nomic cri­sis, for all its com­plex de­tail, 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 tech­nol­ogy stocks and in­vest­ment (re­mem­ber Pets.com?).

But the slump be­fore that, in 1990-91, was a messier story. 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, rather than one big thing. And over the past few months we’ve started to see how it could hap­pen. It’s by no means cer­tain that a re­ces­sion is loom­ing, but some of our fears are be­gin­ning to come true.

Right now, I see four dis­tinct threats to the world econ­omy. (I may be miss­ing oth­ers.)

China: Many peo­ple, my­self in­cluded, have been pre­dict­ing a Chi­nese cri­sis for a long time — but it has not yet hap­pened. 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.

But has the day of reckoning fi­nally ar­rived? Given China’s past re­silience, it’s hard to feel con­fi­dent. Still, re­cent data on Chi­nese man­u­fac­tur­ing look grim.

And 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 slow­mo­tion cri­sis un­der­min­ing con­fi­dence; as with China, re­cent data are ugly.

And like China, Europe is a big player in the world econ­omy, so its stum­bles will 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. You don’t have to be a doc­tri­naire free-trader to be­lieve that this must have a de­press­ing eco­nomic ef­fect.

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 will be cut off if the stale­mate goes on, 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 will im­pose on ev­ery as­pect of life.

As in the case of a trade war, busi­ness lead­ers re­port­edly be­lieve that the shut­down will soon be re­solved. But what will hap­pen to in­vest­ment and hir­ing if and when cor­po­rate Amer­ica con­cludes that Trump has boxed him­self in, and that this could go on for months?

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 when things go wrong.

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