The US economy is in a better position than other economies to weather this third leg of the global crisis. But in today’s world, no economy is an island. It is unlikely that the United States can avoid a recession if Europe, Japan, and China are all pulled into one, and even more unlikely if there is a major credit crisis centered on emerging markets, energy, and Chinese debt, which would pull down many European banks and some US asset managers. Even as it is, US energy producers—solar and wind as well oil and gas—are being decimated by the wars of oversupply and weaker demand. And US manufacturing is contracting because of a strengthening dollar, which makes US exports more expensive. American consumers will of course benefit from lower energy costs and cheaper goods, but it will be difficult for them to hold up the global economy as they have done in the past, given their sizable debt burden and weak wage growth over the past six years.
The prospect of a global economic slowdown is especially troubling because the world’s central banks, despite extraordinary measures, have not been able to reverse the drift toward deflation and depression. Now they are essentially out of ammunition and are resorting to experimenting with negative interest rates. Worse, fiscal policy in the form of government spending is, for political reasons, off the table in nearly all major economies, including in the United States.
If ever there were a time for US global leadership, it is now. Even if the United States avoids being pulled into recession, one shudders to think about the geopolitical implications of a global slowdown. Even as it is now, divisions and xenophobic populist movements are growing in Europe in response to the flood of refugees and a half-decade of austerity, to take one example. It is of course possible that China will be able to stabilize its descent, that Europe and Japan will be able to eke out some economic growth in the year ahead, that emerging economies will be able to manage their debts, and that the US economy will enjoy something of a deflationary boom as a result of a strong job market and falling prices for energy and consumer goods.
But this would be far from the global prosperity that is needed to lift people out of poverty and grow a bigger global middle class. There are a number of sensible ideas for avoiding a major world economic crisis and for supporting more robust global growth: a massive US infrastructure investment program; debt restructuring and relief for households and students in the United States as well as for sovereign debtors in Europe and other regions; a bigger IMF and World Bank insurance fund for emerging-market debt; a growth program in Europe led by the European Investment Bank; expanded funding for refugee resettlement; new international reconstruction programs in Ukraine, North Africa, the Middle East, and Central Asia; and, if necessary, direct central bank financing of these and other spending programs. The White House could also pressure Berlin and other European capitals more on reversing austerity and less on maintaining sanctions on Russia. All these policy measures would support global demand and create jobs while easing the pressures of debt deflation.
But nearly all of these ideas, except some pale versions like increased spending on infrastructure, are outside the boundaries of current American political discourse. To say that the US political and media establishment is unready for a global economic slowdown, let alone a new financial crisis, would be an understatement. Nearly all the Republican candidates have committed themselves to balanced budgets and reduced spending and, unless the politics change quickly, a Republican Congress would most surely block any recovery program a Democratic president would propose as well as US participation in any international recovery effort. Most of the candidates are full of crackpot ideas on how to stand up to Putin and destroy ISIS, but none have ventured to say a word about how they would save the world economy from another crisis.
As we have argued in other contexts, Senator Sanders is right: we need a political revolution. But looking out at the troubled global economy, we must also see that the revolution must do more than just fix a rigged economy and a rigged political system. It must also seek to transform our international relations to give much greater priority to widely shared global economic prosperity.
*SHERLE R. SCHWENNINGER Sherle R. Schwenninger is director of the Economic Growth Program at the New America Foundation and a senior fellow at the World Policy Institute.