E.Every year since 1978, the world’s central bankers have gathered to chew the fat in Jackson Hole in the Grand Tetons. The main attraction this year is the most influential central banker of them all – Jerome Powell – and the financial markets will hang on to every word the Fed chairman says.
Powell isn’t going to reveal much, and for good reason: he doesn’t have much to say. He’s worried about inflation, but there are also signs that the U.S. economy is slowing as coronavirus infection rates rise. The pace of recovery is slowing in the UK, Germany, China and pretty much everywhere else. There is a shortage of material and manpower. In a world of bans, quarantines and travel restrictions, maintaining a model based on the smooth movement of people, parts and finances is proving to be more difficult. Global supply chains are under pressure.
It is too easy to dismiss these problems as temporary headwinds that will fizzle out on their own over time. A more sober assessment would be that the world economy is in the midst of a long crisis – as it was when the first symposium was held in Jackson Hole – and Powell et al. not much can do about it.
Central banks have thrown copious amounts of cheap money into the world economy over the past 12 years, and in some ways they have been successful because there has been no repeat of the Great Depression of the 1930s. But neither has there been a full recovery on par with that produced by the New Deal and military spending in WWII. And that’s because the problems are deeply rooted and structural, rather than temporary and cyclical.
The central bank strategy is not new, but it is now being played out. You’ve been making borrowing easy not just for 18 months, but for 20 years. Many words have been written in the last few weeks about how the long US war in Afghanistan ended in disaster and what initially looked like a success was in fact a failure. In fact, one could assess the development of the global economy in exactly the same way, where the financial crash of 2008 and the pandemic-induced slump of 2020 are part of a long crisis that goes back two decades. In both cases, the cracks only became really visible over time.
When Alan Greenspan, then Fed chairman, gave the opening address in Jackson Hole in August 2001, there wasn’t even a hint of what was to come. It was the height 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 closed and the US took the lead in new digital technologies. The country saw China as less of a threat, which is why the White House was happy to approve Beijing’s application to join the World Trade Organization this year. The feeling that all major problems were solved was reflected in Jackson Hole’s theme: Economic Policy for the Information Economy. Less than two weeks later, 9/11 happened.
The terrorist attacks on the United States led to a premature reassessment of the assumptions made after the end of the Cold War. The talk that liberal democracy was the only game in town and that the benefits of the market economy would spread Western prosperity and values to every corner of the world now sounded a little hollow.
The willingness to use state power, however, only related to the military sector. After 9/11, the White House was much more interested in sending troops to Afghanistan or Iraq than tightening regulations on Wall Street. What was left of the New Deal’s attempts to stem excessive financial speculation was eliminated by Clinton in the late 1990s. Low interest rates, inadequate supervision, the messianic belief that markets are never wrong, and greed proved to be a toxic combination. Greenspan’s tenure at the Fed was essentially bubble-at-bubble history, and it was left to others to clean up the mess when the biggest bubble burst in 2007.
That was the start of the economic equivalent of long Covid: not a complete collapse, but rather a debilitating and persistent malaise that prevented a full recovery. The closest historical parallel is not the Great Depression of the 1930s, but rather the long Depression of the late 19th century, where more than two decades of mediocre economic performance began with a major financial crisis in 1873. There wasn’t a major collapse in the world economy then either, but like now, productivity growth was weak, wages stagnated, and there was a backlash against an earlier manifestation of globalization. It is no accident that US populism originated in the 1890s.
The discipline imposed by the gold standard then meant that central banks had much less leeway than they do today. Nevertheless, the long depression ended for reasons that are relevant today.
Like today, the end of the 19th century was a time of rapid technological innovation. The telephone, moving pictures, vehicles with internal combustion engines were developed. Ultimately, the use of these new products increased productivity and the standard of living.
In the late 1890s, workers flexed their muscles too. Populism had a twofold effect: it led workers to organize in unions and it accelerated the development of welfare states. Otto von Bismarck, Germany’s first Federal Chancellor, was a conservative, but saw the point in pensions for the elderly. Similarly, the industrialists of the late 19th and early 20th centuries understood that the people who worked for them were also consumers and had to earn enough to buy the goods they made. Antitrust laws were introduced to break up monopolies.
The lessons from this period seem obvious. Embrace the new technologies, but make sure they benefit many, not a few. Keep a close eye on the behavior of the market power of large companies in all sectors and take firm action against activities that choke new entrants. Embrace an increasing share of the national income for work rather than fear it. Provide training and a generous social protection net to encourage people to move into growth industries.
The events of the past 18 months could only hasten the end of the long crisis. States have had no choice but to play a more active role in running their economies, labor shortages have led to higher wages, and central banks are no longer seen as the answer to all problems. There is still a long way to go, but if not now then when?