The Global Economy: Just a Trough in the Business Cycle?

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By Maggie Winslow

What should we be thinking about the state of the global economy?  Are we just in the bottom of a very deep business cycle and, once housing asset bubbles clear out of the system and consumers regain confidence and lenders start lending again, all will be well?  Or is the situation more profound than that?   Here are some features of the situation as it stands:

High global unemployment stemming from both the globalization of production, population growth, as well as increased labor productivity.

Environmental degradation due largely to unregulated growth.  This leads to poor health, lower worker productivity, migration, social unrest, and potential disruptions in manufacturing.

Resource depletion, which can lead to manufacturing disruptions, price spikes, migration, food shortages.

Increasing inequality and too much wealth going to a few people.  This results in decreased demand by cash-strapped consumers, bidding up of asset prices by those looking for a place to store their wealth, poor health, social unrest (Occupy Wall Street for example), apathy, and constrained democracy.

Debt and global financial imbalances.  There is large and increasing debt in the US and much of Europe and South America, which can curtail consumer spending and economic growth.  There is excess savings in China and the oil producing nations.  These imbalances can lead to instability in global markets.

Fragility of the financial system. Trillions of dollars flow through the global economy daily, somewhat unmanaged and unregulated.  This situation is ripe for major and sudden shifts in the financial markets, crashing a county’s currency or a stock market for no profound underlying reason.

Obviously, these problems are interrelated.  For example, high unemployment results in less power for workers, which leads to increasing income disparities.   Increased inequality leads to concentrations of wealth that allow for greater swings in the financial system.  Increased concentration of wealth also allows for more investment in capital, reducing the need for labor.

Of greater concern is that the traditional prescribed solutions for some problems hit up against the problem of ecosystem limits.  Can we spend our way out of unemployment?  Not if we are buying consumer goods, the manufacturing of which require increased resource depletion and degradation.  What about the global imbalances? Can China shift to a domestic based economy.  Again, resource shortages could impinge on this solution.

With the ever-growing population, the shrinking availability of resources, and the skewed distribution of income, this is not just a deep business cycle.  Full employment in the US is not going to come about through price adjustments.   Global population in the early 1930’s was one third of what it is today, global trade was a mere fraction of today’s trade, resources were more abundant and climate change was not a pressing issue.  Today’s recession is far more intractable than the recession of the 30s even though that was a deeper recession.

An excellent report titled "The Way Forward" by Daniel Alpert, Robert Hockett, and Noriel Roubini of the New America Foundation presents a three-pronged recovery plan consisting of public investment in infrastructure improvements, debt-restructuring, and a variety of global reforms to rebalance global finances.  These are all valuable and probably necessary strategies.  However, we focus on remedies that ignore resource scarcity, degradation, and climate change at our own peril.

Follow Maggie Winslow on Twitter @logicalecon. Maggie is an Economics professor at the Presidio Graduate School.